SEC plans to revamp 12(b)-1 fees

Commission wants marketing and service fees clearly labeled as such; fees would be capped at 25 basis points

Jul 21, 2010 @ 12:13 pm

By Jessica Toonkel

The Securities and Exchange Commission has proposed eliminating 12(b)-1 fees as they currently exist.

Under the proposal, funds would be able to create a class of shares by which broker-dealers would determine the pricing. “Mutual funds currently set the sales charge under a 70-year-old provision,” said Andrew “Buddy” Donohue, director of the SEC's Division of Investment Management,during a meeting this morning. “This new approach is intended to increase competition of the sale of mutual fund shares.”

As reported by InvestmentNews on Tuesday, the SEC proposal would allow firms to charge a “marketing and service fee” of up to 0.25%. Anything above that amount would be deemed “an ongoing sales charge,” which would be limited to the highest fee charged by the fund for shares that have no ongoing fund sales charge. For example, if a fund charges a 4% front-end load, another class couldn't charge more than that amount to investors over time. [Read the full fact sheet on proposed 12(b)-1 fee changes distributed by the SEC this morning.]

In 2009, 12(b)-1 fees generated $9.5 billion for fund firms.

The term “12(b)-1” would no longer exist, said Mary Schapiro, chairman of the SEC, during the meeting this morning. Additionally, mutual fund companies would be required to disclose the marketing and service fees, and the ongoing sales charge in every prospectus, shareholder report and investor transaction.

The SEC's proposal comes on the same day that President Barack Obama signed the most sweeping set of financial rules since the Great Depression.

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