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Regulation and Compliance > Federal Regulation > SEC

SEC to Give 12b-1 Fees a Structural Revamp

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The Securities and Exchange Commission (SEC) said Wednesday, July 21, it planned to do away with 12b-1 fees as they are currently structured.

SEC Chairman Mary Schapiro said Wednesday that the regulator’s proposed rule on 12b-1 fees would “impose limits on the cumulative sales charge–or sales load–that an investor pays,” and “would eliminate the so-called ‘hidden sales charges’ that 12b-1 fees can represent by, for the first time, disclosing and regulating these fees as sales charges.” Broker/dealers under the proposed rule, she said, would also be able to compete for investors by setting their own mutual fund sales loads rather than at a uniform fee set by the fund.

“Rather than sales loads set by the fund in its prospectus, broker/dealers could compete with others–thereby likely leading to lower charges,” Schapiro said. “I believe that mutual fund investors, like all consumers, want the ability to engage in comparative shopping based on price.”

The SEC proposal is out for a 90-day comment period.

Andrew “Buddy” Donohue, director of the SEC’s Office of Investment Management, added that the new 12b-1 rules “would give broker/dealers the option to price the [mutual fund's] sales charge based on the quality of the services the [B/D] is providing.”

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


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