The Securities and Exchange Commission was well aware that 12b-1 fees would be used to compensate brokers for providing services to mutual fund shareholders when it created the rule in 1980, according to former SEC officials.
Joel Goldberg, a partner in the asset management group of Willkie Farr & Gallagher in New York, and a former director of the SEC’s Division of Investment Management who was one of the architects of the 12b-1 rule, said at a roundtable discussion at the SEC’s headquarters in Washington on June 19 that when the rule was formulated, the SEC did not expect it to be temporary. Nor was the rule intended to address net redemptions, he said.
The amount of 12b-1 fees that shareholders pay through mutual funds reached nearly $12 billion in 2006, according to the Investment Company Institute (ICI)–a huge jump from the few million dollars shareholders paid in the early 1980s.
Critics say use of the 12b-1 fee has been used to pay for a plethora of services that go well beyond its original intended use as a marketing and distribution fee. Andrew “Buddy” Donahue, the current director of the SEC’s Division of Investment Management, said that revising 12b-1 is “a top priority” for the Commission. An SEC spokesperson said that SEC staff will recommend changes that Chairman Christopher Cox and the Commissioners should take on the 12b-1 rule by year end. (An earlier version of this article stated that SEC Chairman Christopher Cox has pledged to either repeal the fees or change the 12b-1 rule by year end.) The roundtable was designed, in part, to give the SEC feedback from the industry on whether the rule needs to be revised. Investors and members of the industry have until July 19 to send their comments to the SEC about the 12b-1 rule.