Back in August, Standard & Poor’s released data that indicated that quite a number of mutual funds were still charging 12b-1 fees–those designated for marketing expenses–even though they weren’t recruiting any new investors. While nobody paid much attention during boom market days to such fees, once the bottom fell out, everything was fair game for scrutiny.

Those 12b-1 fees have finally been noticed by, among others, the SEC, which is not only examining how they are allocated, but also questioning whether those fees might be a violation of fiduciary duties by being excessive. And, as one might expect in our litigious society, the obligatory lawsuits have been filed on behalf of investors against some of those funds.

According to S&P, out of its database universe of more than 15,000 domestic mutual funds, 605 funds were shown as being closed to new investors as of December 8, 2003. Out of those 605, 153 were still charging 12b-1 fees averaging 0.64%, and 94 of them were charging the maximum rate allowed by the SEC of 1% of the fund’s net annual assets.

David Guarino, communications manager at Standard & Poor’s, says that while S&P is not examining 12b-1 fees with an eye toward taking any action, “we opened some eyes with our research.” Reaction among fund companies, he points out, has been a declaration that 12b-1 fees are justified because “the funds remain open to existing investors, and [the funds] service brokers who sell those funds; the 12b-1 is a broker fee as well.” The thing is, he adds, “investors just haven’t been looking at expenses that closely, and fund companies need to be clearer in disclosure of the fees they’re sharing, how they allocate them, and where the money is going.”

One way to remedy the problem, he suggests, is that prospectuses could list fees as dollar figures rather than percentages–how much would be charged on an investment of $10,000, perhaps–so that investors can get a better idea of how much they’ll actually be paying on their investment, as well as really understand what the prospectus is saying. Guarino says that such a plan has been proposed by SEC chairman William Donaldson. “Funds with lower-than-average expense ratios,” he reminds, “have outperformed their peers on a one-, five-, and ten-year basis.”