SEC staff to recommend change for 12(b)-1 fees

Rule governing mutual fund compensation is not well understood by investors, Schapiro says

Jun 2, 2009 @ 3:47 pm

By Sara Hansard

Securities and Exchange Commission Chairman Mary Schapiro has asked SEC staff to prepare a recommendation to change Rule 12(b)-1, she said today at a Senate appropriations subcommittee hearing on the commission’s fiscal 2010 budget request.

Rule 12(b)-1 permits mutual funds to use fund assets to compensate broker-dealers and other intermediaries for distributing funds. Many critics have called for abolishing or changing the rule, while many broker-dealers depend on the $13 billion brought in by the fees to support the ability to monitor their customers’ investments.

“These fees, with their bureaucratic-sounding name and sometimes unclear purpose, are not well understood by investors,” Ms. Schapiro told the Senate Appropriations Committee’s Subcommittee on Financial Services and General Government.

It is essential that the SEC “engage in a comprehensive re-examination of Rule 12(b)-1 and the fees collected pursuant to the rule,” she said. “If issues relating to these fees undermine investor interests, then we at the SEC have an obligation to step in and adjust our regulations.”

In other matters, the administration is requesting about $1 billion for the SEC in the fiscal year that begins Oct. 1, a 7% increase over the fiscal 2009 funding level.

Ms. Schapiro said that the additional resources “are essential if we hope to restore the SEC as a vigorous and effective regulator of our financial markets.”

The budget would cover funding for an additional 50 staff positions over 2008 levels, enhance the agency’s ability to uncover and prosecute fraud, and “begin to build desperately needed technology,” she said.

Ms. Schapiro said that in her tenure as SEC chairman, which began in January, the issue of short selling has “outpaced any other in terms of the number of inquiries, suggestions and expressions of concerns we have received.”

In April, the SEC proposed two approaches to restricting short selling: a permanent, market-wide short-sale price test, and temporary short-selling restrictions on individual securities during periods of severe market price declines.

In May, the SEC held a round table to get the views of investors, issuers, financial service firms, self-regulatory organizations and others on the proposals.

The SEC recognizes “that strong rules and vigorous enforcement are needed to curb abusive short selling and restore confidence in our markets,” Ms. Schapiro said.

The SEC’s focus on abusive naked short selling has led to a significant decline in failures to deliver securities on time following a short sale, and the Division of Enforcement has a number of active investigations involving potentially abusive short selling, she said.

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