New 12(b)-1 plan could hurt investors: FSI's Brown

The Securities and Exchange Commission's proposal this week to revamp 12(b)-1 fees is likely to leave investors with less choice in how they purchase funds, according to Dale Brown, president of the Financial Services Institute Inc.
JUL 28, 2010
The Securities and Exchange Commission's proposal this week to revamp 12(b)-1 fees is likely to leave investors with less choice in how they purchase funds, according to Dale Brown, president of the Financial Services Institute Inc. The SEC proposal, which was introduced yesterday and will be up for public comment for 90 days, would remove the “12(b)-1” rubric for funds. Instead, firms would be allowed to charge a “marketing and service fee.” That fee would be capped at 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 had no such charge. For example, if a fund charged a 4% front-end load, another class couldn't charge more than that amount to investors over time. Separately, funds would be able to create a class of shares by which broker-dealers would determine the pricing. (Click here for an overview of the proposal.) “I am questioning how this helps investors,” Mr. Brown said in an interview. “Our view is that when investors have plenty of choice of where to get advice, and plenty of choices in investment vehicles, that is the kind of environment where investors are going to benefit.” The FSI also has some concerns about the disclosure requirements outlined in the proposal. “We have some concerns about how the confirmation and point-of-sale-disclosure requirements are intended to work. It could pose a cumulative burden on both firms and advisers,” Mr. Brown said. Under the proposal, mutual fund companies would be required to disclose the marketing and service fees, as well as the continuing sales charge, in every prospectus, shareholder report and investor transaction. The goal of the provision is to enhance disclosure for investors and “eliminate the so-called ‘hidden sales charges' that 12(b)-1 fees can represent,” Securities and Exchange Commission chairman Mary Schapiro said yesterday. Last year, 12(b)-1 fees generated $9.5 billion for fund firms. By placing a cap on how much funds can charge through their continuing sales charge, the proposal essentially will result in the demise of Class C shares as they exist today. Currently, firms use C shares to pay intermediaries solely through a 1% 12(b)-1 fee for as long as the investor owns the fund. But if the proposal passes, these firms will pay brokers only 0.25% for as long as the investor holds the fund, and the 0.75% will convert to zero over a period of years. The SEC hasn't yet defined what the time frame would be for that conversion. The FSI intends to review the proposal and submit comments during the 90-day comment period, Mr. Brown added.

Latest News

The 2025 InvestmentNews Awards Excellence Awardees revealed
The 2025 InvestmentNews Awards Excellence Awardees revealed

From outstanding individuals to innovative organizations, find out who made the final shortlist for top honors at the IN awards, now in its second year.

Top RIA Cresset warns of 'inevitable' recession amid tariff uncertainty
Top RIA Cresset warns of 'inevitable' recession amid tariff uncertainty

Cresset's Susie Cranston is expecting an economic recession, but says her $65 billion RIA sees "great opportunity" to keep investing in a down market.

Edward Jones joins the crowd to sell more alternative investments
Edward Jones joins the crowd to sell more alternative investments

“There’s a big pull to alternative investments right now because of volatility of the stock market,” Kevin Gannon, CEO of Robert A. Stanger & Co., said.

Record RIA M&A activity marks strong start to 2025
Record RIA M&A activity marks strong start to 2025

Sellers shift focus: It's not about succession anymore.

IB+ Data Hub offers strategic edge for U.S. wealth advisors and RIAs advising business clients
IB+ Data Hub offers strategic edge for U.S. wealth advisors and RIAs advising business clients

Platform being adopted by independent-minded advisors who see insurance as a core pillar of their business.

SPONSORED Compliance in real time: Technology's expanding role in RIA oversight

RIAs face rising regulatory pressure in 2025. Forward-looking firms are responding with embedded technology, not more paperwork.

SPONSORED Advisory firms confront crossroads amid historic wealth transfer

As inheritances are set to reshape client portfolios and next-gen heirs demand digital-first experiences, firms are retooling their wealth tech stacks and succession models in real time.