SEC to examine mutual fund distribution fees starting next week

After decade of industry evolution, agency hopes to get up to speed

By Mark Schoeff Jr.

Mar 8, 2013 @ 12:27 pm (Updated 4:59 pm) EST

mutual funds, 12b-1, fees, SEC, securities and exchange commission

Next week, the Securities and Exchange Commission will launch a nationwide initiative to review mutual fund distribution fees.

Andrew Bowden, deputy director of the SEC's Office of Compliance Examinations and Inspections, today said that the fees have evolved as the financial industry has changed over the last 10 years, and so the agency is trying to get its arms around trends in the area.

“As a commission, what we're trying to do is understand … what are [the payments] for, what are the services being provided, what's the level of oversight of those arrangements by the board?” Mr. Bowden said at the Investment Adviser Association's compliance conference in Arlington, Va. “What is going on in the industry today?”

The SEC has made reviewing fees — including revenue sharing, sub-transfer-agent, 12(b)-1 and conference support — an examination priority this year. Regulators are concerned that the payments could be used to give certain mutual funds preferential treatment and raise costs for investors.

The information will be collected over the next several months and used to evaluate current distribution fee rules.

“The goal is to bring it back and share it with colleagues in policymaking, share it with [SEC] commissioners and try to understand whether or not the current regulatory construct is operating as best as it can to the benefit of investors and markets,” Mr. Bowden said.

He also said that the SEC this year will launch examinations focusing on the use of alternative investments in mutual funds. These reviews will be designed to determine whether the strategies and products comply with regulations that require the funds to have daily valuations and liquidity, and limit the use of leverage.

Mr. Bowden did not reveal how sweep exams would be conducted on distribution fees.

“We have a number of firms we could look at,” Mr. Bowden told reporters on the sidelines of the IAA conference. “We'll just start. To the extent we keep finding the same thing, we'll stop.”

Observers said that the results of the exams could be used to revise a proposal on 12(b)-1 fees that was released in 2010 but has since been dormant.

Amy Lynch, president of FrontLine Compliance LLC, said the SEC is making fund distribution fees a priority in order to generate grist for the regulatory mill.

“That's presumably its primary purpose — to see if there's market abuse to warrant a modification to the rule,” Ms. Lynch said.

One result of the increased emphasis on the distribution schemes is that fund companies will have to provide more details about the payments.

“There's going to be more work to be done in validating these numbers against the contract, against the books and records of the firm,” said Chris John, chief executive of Bonaire Software Solutions LLC.

  @IN Wire

Apr 24 07:08PM
New LinkedIn program offers compliance with SEC and Finra regs http://t.co/GDA5HGmQ57 via @joycehanson
Apr 24 07:07PM
State securities regulators say brokers bury fee disclosures, levy questionable charges. http://t.co/bscBTpmIwo @newsfromIN @NASAA_News

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