WASHINGTON BUREAU – Proposed changes in 12b-1 fund sales fee rules could push advisors away from helping consumers reach long-term financial goals, life agents and other financial advisors are telling the U.S. Securities and Exchange Commission (SEC).
Rule 12b-1, an SEC regulation adopted under the Investment Company Act of 1940, lets a fund charge an ongoing fee to cover promotion, distribution and marketing expenses, and, in some cases, producer commissions.
The SEC wants fund managers to limit total payments made in connection with ongoing, asset-based sales charges to the highest fee charged by the fund for shares that have no ongoing sales charge, according to a 12b-1 update that the SEC proposed in July.
If, for example one class of a fund charged a 4% front-end sales charge, a fund that charged an annual, asset-based fee could collect a total of no more than 4% of account assets over time. In the simplest case, for example, a fund that imposed an ongoing fee of 1% might have turn off the fee requirement after an investor had held the same amount of assets in the fund for more than about 4 years.
The cap for funds that have no classes with loads might be 6.25%, officials say.
A fund also could charge 0.25% of assets per year to cover expenses such as advertising, sales compensation and services, officials say.
SEC officials say they would like to apply the same fee rules to variable annuity separate accounts that they apply to mutual funds.
SEC officials say they believe annual 12b-1 charges at variable annuities rarely exceed 0.25%.
The SEC also calls for detailed fund cost disclosures in shareholder reports and transaction statements.
Comments are due Nov. 5. Most of the 12b-1 comments now posted on the SEC site are from individuals or small financial services firms, rather than from professional groups.
Supporters of the SEC approach say the current fee structure hurts individual investors.
Niels Holch, executive director of the Coalition of Mutual Fund Investors, Washington, says large broker-dealers are gaming the system in a way that imposes $2.2 billion in account maintenance charges on individual investors,
about $4.2 billion in shareholder servicing payments, and about $2.1 billion in revenue-sharing payments.