SEC to Consider Repeal or Reform of 12b-1 Fees

The U.S. Securities and Exchange Commission (SEC) held a Commissioner's Roundtable Meeting on June 19 to discuss the merits of 12b-1 fees, which are assessed against mutual fund assets and are used to pay for fund distribution expenses as well as to compensate broker/dealers and financial advisors for the services they provide to their mutual fund clients.

These 12b-1 fees have recently become a front-burner issue for the SEC because of concerns about adequate disclosure of the fees to investors and whether investors understand the purpose for the fees. The regulators have also expressed concern that the current use of 12b-1 fees as a replacement for front-end sales loads and to compensate advisors for providing ongoing services has strayed from their original purpose, to assist in the distribution and growth of mutual funds. SEC Chairman Christopher Cox said after the meeting that he expects the SEC to issue a proposal to either repeal or reform the rule within the next few months.

The issue of 12b-1 fees was also raised during an SEC oversight hearing held by the House Financial Services Committee on June 26. Chairman Cox and the four other SEC commissioners testified on current initiatives before the SEC, and committee members discussed the SEC's review of Rule 12b-1 fees several times during the hearing.

During the hearing, both Chairman Cox and Rep. Michael Castle (R-DE) noted that Rule 12b-1 was enacted in 1980 to encourage the development of the mutual fund industry, which the SEC deemed positive for the market and investors. Since then, they noted, the industry has changed -- mutual funds have become pervasive and are no longer in need of marketing assistance. According to his testimony, Cox and the SEC envision a "top-to-bottom" reevaluation to determine whether changes to the existing rule are needed.

Both Cox and Castle seemed supportive of rule changes aimed at increasing fee disclosure for investors, and Cox indicated that information received at the SEC roundtable would be integral to future SEC action. Several other committee members appeared to have a particular interest in Rule 12b-1, including Reps. William Lacy Clay (D-MO) and Gregory Meeks (D-NY).

NAIFA members who market mutual funds earn their 12b-1 fees by providing much-needed service and advice to their clients. At 25 basis points, these fees are a very small amount for clients to pay to have ready access to expert advice. (How small an amount? On a $10,000 investment, 25 basis points equal only $25). Without their advisor, investors would have no one to turn to (except for perhaps a stranger at the end of a 1-800 phone number) when they need some reassurance in a shaky market or assistance in rebalancing their portfolios, understanding their investments and the investment choices available.

NAIFA will closely monitor the SEC's activities on 12b-1 fees and we will make sure the SEC hears from us and our members on this important issue.

Back to July 2, 2007, NAIFA Frontline