SEC likely to take hammer to 12(b)-1 proposal, says John Hancock Funds boss

Fund executives and financial advisers have been up in arms ever since the Securities and Exchange Commission floated a dramatic plan to revamp 12(b)-1 fees. But Keith Hartstein, president and CEO of John Hancock Funds LLC, says fears about the proposal are overblown. “The one thing I can guarantee every financial adviser is that the final rule will be substantially different than the current proposal out there,” Mr. Hartstein said. “A final rule is so out into the future that it's pointless to react.” According to the proposal, which is up for public comment until Nov. 5, firms would be allowed to charge a “marketing and service fee” of up to 0.25%. Anything above that amount would be deemed a continuing sales charge, which would be limited to the highest fee charged by the fund for shares that have no such sales charge. One reason the proposal won't go through as planned, Mr. Hartstein said, is that is going to be met with serious opposition from fund companies — who are concerned about operational issues — and financial advisers, who are worried about how they will get compensated. Specifically, fund companies are worried about what would be involved in tracking how individual investors pay sales charges. Given the amount of industry push-back, Mr. Hartstein said he wouldn't be surprised if the SEC scrapped the proposal and tried again. “There has been plenty of history of the SEC putting things out for comment and not doing anything or making substantial changes to it when it comes out in the final rule,” Mr. Hartstein said. The SEC has been wrestling with the 12(b)-1 issue for some time. In 1988, it released a proposal that would have severely restricted the use of 12(b)-1s, but then dropped it. In 2007, the SEC held a round table on the issue, but then dropped it to address the financial crisis. Another factor that could impact what the final rule looks like: the departure of Andrew “Buddy” Donohue, the SEC's director of the Division of Investment Management, who is leaving the agency in November. “The proposal represented Buddy Donahue's way of thinking,” said Joel Goldberg, a partner at the law firm of Stroock & Stroock & Lavan LLP. “Depending on his replacement's views, the staff may be more or less persuaded by the industry's objections to the rules.” Nevertheless, Mr. Goldberg and other attorneys said they would be surprised if the SEC makes dramatic changes to the proposal. “A lot of thought went into this proposal,” said Jay G. Baris, a partner at Kramer Levin Naftalis & Frankel LLP, “as is evidenced by the 575 footnotes.”