SEC to consider putting an end to 12(b)-1 fees

The Securities and Exchange Commission next year will consider whether 12(b)-1 fees paid by investors on their mutual funds should be continued, SEC Chairman Mary Schapiro said today. “We must critically rethink how 12(b)-1 fees are used and whether they continue to be appropriate,” Ms. Schapiro said at the Consumer Federation of America's Annual Financial Services Conference in Washington. She questioned whether the fees, which were first allowed in 1980 to help funds pay for distribution, “result in investors overpaying for services or paying for distribution services that they may not even know they are supposed to be getting.” In 2008, the fees amounted to more than $13 billion. Many brokers use the fees to pay for services to their clients, and they have argued against eliminating them. Investors may have no idea that the fees are being deducted or who they ultimately compensate, Ms. Schapiro said. “That's why I believe there needs to be a better approach,” she said. “There is a need for more fundamental change than merely disclosure reforms and a name change,” she said. She has asked SEC staff for a recommendation on 12(b)-1 fees for the commission to consider in 2010. In addition, Ms. Schapiro called for providing “point of sale” disclosures about securities products to investors at the time they are making investment decisions. Those disclosures should include “comprehensible and comparable information about the securities products and services being offered,” she said. The information should detail the compensation the professional receives for selling the products, and explain conflicts “that may be causing the adviser or salesman to steer the investor to a certain investment,” she said. Such a plan has been discussed for mutual funds, though the fund industry has argued that would put mutual funds at a disadvantage with other products. Ms. Shapiro acknowledged that coming up with point-of-sale disclosures about all securities products will be difficult, and she predicted there would be “significant pushback” from advisers complaining about cost and lack of convenience. “But we will not be deterred by the complexity of the product,” she pledged. The SEC staff is now developing a simplified summary prospectus for variable annuities, which are very complex products, she noted. An investor “just wants to know the facts so he is not taken advantage of by hidden fees or questionable motivations. And he needs this information when it is most meaningful — at the time he is making his investment decision,” she said. The way the information is delivered must take advantage of technology, she said. She gave no timetable for coming up with point-of-sale disclosures.