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NAIFA Tells SEC: Keep 12b-1 Fees

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Fees paid to registered representatives for ongoing service to clients are a legitimate use of mutual fund assets and should not be prohibited, says the National Association of Insurance and Financial Advisors.

In comments filed with the Securities and Exchange Commission, NAIFA says elimination of certain brokerage commissions, called 12b-1 fees, would not only have a detrimental effect on the earnings of registered representatives, but would cause funds and their distribution channels to change their ways of doing business to the detriment of fund investors.

The issue involves an SEC proposal to prohibit the payment of 12b-1 fees as a means to combat directed brokerage abuses. 12b-1 fees are paid to registered representatives to finance distribution of mutual fund shares.

But NAIFA Senior Counsel Gary A. Sanders says that while NAIFA supports efforts to eliminate conflicts of interest, 12b-1 fees constitute legitimate and appropriate compensation for providing ongoing services to mutual fund owners.

Sanders notes that more than half of NAIFAs members are registered representatives who service mutual funds. They provide ongoing service to mutual fund investors beyond the commissions paid for the sale of fund shares, he says.

“In exchange for a small annual payment, investors have access to a financial services expert to answer their questions and address their concerns,” Sanders says.

Moreover, he says, these services are provided to investors in both closed and open funds. Thus, Sanders says, even if a fund is not accepting new investors, the services provided by registered representatives are ongoing.

Sanders questions a proposal to pay registered representatives for ongoing services out of the fund managers fee, rather than from fund assets. This proposal, he says, would significantly impact the economic well-being of registered representatives.

“Our concern is that removing fund assets from the equation and leaving it up to fund managers to pay such fees out of their own pockets will lead to reduction or elimination of compensation for ongoing services,” Sanders says.

Moreover, he adds, payment of fees directly by fund managers rather than out of fund assets could lead to the very conflicts of interest the SEC is seeking to eliminate.

In order to encourage registered representatives to sell their funds, Sanders says, fund managers could adjust the fees paid for providing ongoing services based on fund sales. “This could entice registered representatives to recommend one fund over another based on nothing more than the amount of the service fee,” he says.

Rather than eliminating 12b-1 fees, Sanders says, NAIFA believes clearer, more robust disclosure is the best way to ensure that investors fully understand the fees and expenses charged in connection with mutual fund ownership.

Reproduced from National Underwriter Edition, May 14, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.