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.
