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March 13, 2015 at 01:31 PM
Consumer advocates are urging Securities and Exchange Commission Chairwoman Mary Jo White to reform a host of regulations that they say are failing to “effectively” serve retail investors’ needs. They called for the securities regulator to act now on a fiduciary rule for brokers, to reform 12b-1 mutual fund fees and to stop the approval of risky ETFs.
In their March 10 letter to White, the Consumer Federation of America, Fund Democracy, AFL-CIO, Americans for Financial Reform, Consumer Action and Public Citizen say their concerns “reflect the fact that it has been some time since a comprehensive agenda of retail priorities has been clearly communicated to (or by) the Commission,” and that the Commission “can no longer afford to relegate … retail investor protection priorities to a back burner.”
As to 12b-1 fees, the groups urged White to ensure the agency “resurrects” the plan that it put forth early in the Obama administration for 12b-1 fee reform.
12b-1 fees are an annual marketing or distribution fee on a mutual fund. The fee is considered an operational expense and, as such, is included in a fund’s expense ratio, and is generally between 0.25%-1% (the maximum allowed) of a fund’s net assets.
But the groups told White that one way brokers “obscure the costs that investors incur for their services is by charging for those services through 12b-1 fees rather than through up-front commissions.”
While there is “nothing inherently wrong with charging for services in incremental payments, this practice suffers from several important short-comings. Because 12b-1 fees are not considered commissions, they are not subject to FINRA commission limits. Because the fees are buried within the administrative fee charged by mutual funds and annuities, investors often fail to understand how much they are paying or what they are paying for through these fees.”
On whether to put brokers under a fiduciary standard, the groups say that despite the agency’s “extensive study” of the matter, and “although investor advocates have consistently identified this as the single most important step the Commission can and should take to improve protections for average investors,” the SEC “has still not taken concrete steps to address the problem.”
The groups told White that it’s time for the agency to adopt one of two “simple solutions”: prohibit broker-dealers from holding themselves out as advisors unless they are regulated accordingly or adopt a uniform fiduciary standard designed to ensure that brokers and advisors alike are required to put the interests of their clients first when offering personalized investment advice.
Adopting a rule, “while an essential first step, is not enough however,” the groups write. The Commission “must also enforce the standard in a way that holds broker-dealers and investment advisors alike accountable, not simply for disclosing conflicts of interest, but also for acting in the best interests of their customers despite any such conflicts.”
The groups also say that the SEC has failed to examine the compensation and other business practices that create conflicts of interest between investors and the broker-dealers and investment advisors they rely on for advice, as required under the Dodd-Frank Act. “Brokerage firms have adopted compensation practices that create significant and unnecessary conflicts between the interests of their sales representatives and the interests of their customers,” the groups write.
