Time is right to recast 12(b)-1 fees

Nobody ever said the folks at the Securities and Exchange Commission had an easy job, and the degree of difficulty is likely to increase. Besides dealing with the hoopla surrounding the ruling on the broker- dealer exemption, the SEC said that it will hold a round-table discussion June 19 to discuss the controversial topic of 12(b)-1 fees. The SEC clearly needs to make such fees more investor friendly, and disclosure looks like a great place to start. But before it looks to overhaul, or repeal, 12(b)-1 fees sometime this year, the SEC plans to take the proper time and the necessary steps to review the fees, which are charged by mutual funds to compensate underwriters and brokers for sales. “Today’s uses of 12(b)-1 fees have strayed from the original purposes underlying the rule, and it is time for a thorough re-evaluation,” SEC Chairman Christopher Cox said in a published report. Meanwhile, the many proponents of the fees argue that they are indeed necessary, because they compensate brokers and financial advisers for guidance given to investors and for continuing to monitor their portfolios. While many industry observers say a repeal of the fees isn’t realistic, they do admit that the SEC clearly is taking a hard look at the rule. The SEC round-table panel will focus on the fees’ costs and benefits, and how to reform them. A good starting point — and a way to stop all this feuding — would be to provide better fee disclosure to investors. At the very least, industry participants shouldn’t have any problem allowing funds to charge a 12(b)-1 fee, as long as the investor knows that that the fee exists — something that doesn’t happen frequently. Mr. Cox has stated that the fees are “barely recognizable” from their intended form and that they aren’t in the best interests of investors. Those in the financial services industry who defend 12(b)-1 fees need to face certain reality, and be ready and open to their review.