SEC to Put Investors’ Understanding of 12b-1 Fees to the Test

SEC Investor Advocate Rick Fleming told Congress in late June that his office and other agency divisions will be “actively involved” in an investor testing program next year examining the efficacy of various mutual fund cost disclosures, including 12b-1 fees.

Fleming told Congress in a June 30 report that the SEC guidance published in January on distribution and subaccounting fees charged by registered open-end investment companies, which was more directly geared toward mutual fund boards of directors, was “relevant to individual investors as well.”

For example, the guidance recognizes that “[m]utual fund fees have a direct impact on investor returns” and that “because investors may evaluate funds based on the specific level of 12b-1, management, and other fees, potential mischaracterization of fees may lead them to invest in funds that they would not otherwise have selected,” Fleming said. “This is no less true for individual investors than it is for institutional investors.”

The guidance zeros in on Rule 12b-1 under the Investment Company Act of 1940, which prohibits mutual funds from engaging, directly or indirectly, in financing any activity primarily intended to result in the sale of fund shares, except pursuant to a so-called “12b-1 plan.”

The guidance, Fleming notes, addresses the possibility of “potential mischaracterization” of 12b-1 and other fund fees, as well as the potential for the inappropriate use of fund assets to pay for distribution-related activities outside of a 12b-1 plan.

“We share this concern and believe that investors should be able to rely on the accuracy of 12b-1 and other fund fee disclosures associated with any funds they own or are evaluating,” Fleming added.