The U.S. Securities and Exchange Commission (SEC) is calling for new limits on use of 12b-1 distribution fee provisions in the mutual funds in variable annuity subaccounts.
Rule 12b-1, a regulation adopted under the Investment Company Act of 1940, lets SEC-registered mutual funds use a portion of fund assets to pay for the cost of promoting sales of fund shares. Fund companies use the provision to eliminate sales load charges.
The SEC decided Wednesday to update Rule 12b-1 and officials say the agency plans to apply the same changes to the funds in VA separate accounts as it applies to ordinary mutual funds.
The conventional wisdom is that mutual fund managers use 12b-1 fees to cover distribution costs and insurers use other types of fees in connection with variable annuities, but many variable annuities now use investment funds that charge 12b-1 fees, officials say.
The proposed regulations would limit fund sales charges and impose tougher disclosure rules.
SEC officials say in a preamble to the new proposed changes that they still want to let funds bear some promotional costs. They also want to let funds continue give investors alternatives to paying sales charges, such as paying charges at the time of purchase, paying at the time of redemption, or paying a continuing fee charged to fund assets.
But money managers would have to hold the ongoing, asset-based sales charges that individual investors pay to the highest fee charged by the fund for shares that have no ongoing sales charge, officials say in a proposal summary.
“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,” officials say. “The fund would keep track of how long investors have been paying ongoing sales charges.”
In addition, funds could charge 0.25% of assets per year for “distribution as ‘marketing and service’ fees, for expenses such as advertising, sales compensation and services,” officials say.