SEC anticipated use of 12(b)-1 fees

Compensating brokers for servicing mutual fund shareholders was anticipated by the Securities and Exchange Commission when it first adopted12(b)-1 fees in 1980. The fees, which now account for $11 billion paid by investors annually, were expected to be permanent, former SEC officials said at a round table held by the agency. “The commission understood that. The commission expected that,” said Joel Goldberg, a partner with New York Law firm Willkie Farr & Gallagher LLP. He served as director of the division of investment management from 1981 to 1982 and helped write the rules. In contrast, many people have observed that the fees were designed to pay for marketing and distribution expenses. That use of 12(b)-1 fees has come under challenge by many, including SEC Chairman, Christopher Cox. He wants to either repeal the fees, or he wants to change the 12(b)-1 system and has committed to proposing a solution by the end of the year. When they were adopted, the fees were seen as a way of ending front-end sales loads, according to participants at the round table. “The payment of fees over the life of the investment is the way to go,” said Kathryn McGrath, a partner in Mayer, Brown, Rowe & Maw LLP and a former director of the division of investment management. The fees should be better explained to investors, she and others said. Having shareholders pay the fees directly, instead of allowing mutual funds to pay them, was discouraged by the panelists. “Pulling 12(b)-1 out isn’t any more valid than pulling custody out or shareholder accounting or anything else, “ said Robert Uekan, an independent trustee for MFS Investment management Co. in Boston.