SEC expected to cap 12(b)-1 fees

The Securities and Exchange Commission on Wednesday is expected to propose revamping the structure of 12(b)-1 fees, according to people familiar with the situation.
The SEC is planning to propose a new framework that would cap at 0.25% of assets the amount that funds can charge on a continuing basis to cover marketing and administration costs, according to sources who asked not to be identified. Any fees above the 0.25% limit would be treated as a load that is paid over time. It’s unclear what the conversion period would be.
“This would limit the amount of time any investor could be charged a large 12(b)-1 fee,” said one person familiar with the proposal.
On its website, the SEC said it will introduce a 12(b)-1 fee proposal on Wednesday — more than a year since SEC staffers first started to examine changes to these fees.
According to a notice about the meeting, the proposal “would provide a new framework for how funds currently use their assets to pay for sales and distribution expenses pursuant to 12(b) under the Investment Company Act, and would revise disclosure requirements for transaction confirmations pursuant to rule 10(b)-10 under the Securities Exchange Act.”
SEC spokesman John Heine declined to comment.
The proposal, which sources said is being called “12(b)-2,” is expected to be similar to an idea the SEC was working on in 2007 before the market crash. By revamping 12(b)-1fees so that firms can’t charge beyond 0.25% for an indefinite period of time, the agency is addressing many critics’ concerns that these fees have shifted in purpose from covering marketing costs to substituting for a deferred sales load. Fund companies often charge 0.25% of assets a year, but sometimes as much as 1%.
If passed into law, the new fee structure is likely to force more fund companies to convert Class C shares, which typically charge 12(b)-1 fees of 1%, into A shares, said one executive at a load fund company. Already many firms have done away with B shares, and C shares may be next, the executive said.
“This is something we have talked about already,” the fund executive said. “I think it’s going to be a competitive issue.”

Related Topics: Securities and Exchange Commission