SEC to Give 12b-1 Fees a Structural Revamp

But Dale Brown, president and CEO of the Financial Services Institute (FSI), questions allowing brokers to set the sales charge. FSI is “puzzled as to why the SEC feels the need to foster more competition in a marketplace where investors can choose from more than 8,000 mutual funds and seek service and advice from more than 4,500 broker/dealers and tens of thousands of advisors.”

Although a 12b-1 fee would still, in essence, be charged, the term 12b-1 fee would no longer exist. Fund companies would be allowed to charge a 25 basis point (0.25%) “sales and marketing” fee, and anything above that amount would be called an “ongoing sales charge.” The proposed rule, the SEC says, “would limit the amount of asset-based sales charges that individual investors pay. In particular, the proposal would restrict these ‘ongoing sales charges’ to the highest fee charged by the fund for shares that have no ongoing sales charge. For example, if one class of the fund charges a 4% front-end sales charge, another class could not charge more than 4% in total to investors over time. The fund would keep track of how long investors have been paying ongoing sales charges.”

Laura Lutton, editorial director in the Fund Research Group at Morningstar, says that “Morningstar has long been on the record saying that there’s not enough transparency in fund accounting, and the 12b-1 fee is a great example of that [because] the fee is used to offset various kinds of costs.” Whatever “the SEC could do to make it easy for fund shareholders to know where their fees are being spent would make for a much more transparent shareholder experience.”

Read a story about how fund managers at the Morningstar Conference viewed disclosure rules from the archives of InvestmentAdvisor.com.