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

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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.

At its April 14 meeting, Fleming noted, the SEC’s Investor Advisory Committee recommended that the SEC “explore ways to improve mutual fund cost disclosures” with the goal of enhancing investors’ understanding of the actual costs they bear when investing in mutual funds and the impact of those costs on total accumulations over the life of their investments. Commissioner Michael Piwowar supported investor testing.

In making this recommendation, the IAC suggested that, in the short term, “the best way to make investors more conscious of costs” would be “through standardized disclosure of actual dollar amount costs on customer account statements,” Fleming told Congress.

The IAC also encouraged the Commission, “as part of a longer term effort to improve disclosures,” to “explore ways to provide context for cost information in order to improve investor understanding of the impact of those costs.”

Fleming told Congress that in fiscal 2017, his office will also “explore ways” to improve disclosures to individual investors about “the different types and layers of intermediary fees associated with the management, operation, and custody of their investment or retirement accounts,” which includes management fees, custodial fees, transaction fees, and commissions, “among a whole spectrum of other potential expenses.”

— Check out SEC Creating Stress Test Rule for Large Advisors on ThinkAdvisor.


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