SEC Considering Substantial 12b-1 Fee Reform

The Securities and Exchange Commission is working on considerable 12b-1 reform for 2010 that could go beyond mere disclosure or a more appropriate name for the fees, Chairman Mary Schapiro told the Consumer Federation of America’s 21^st Annual Financial Services Conference. One recent suggestion for reforming the fees was to rename them “marketing and fund promotion fees.”

“When it comes to these fees, there is a need for more fundamental change than merely disclosure reforms and a name change,” Schapiro said. “We must critically rethink how 12b-1 fees are used and whether they continue to be appropriate.”

Schapiro noted that 12b-1 fees amounted to $13 billion in 2008, up from just a few million dollars in 1980 when they were first permitted.

“After 30 years of growth and change in the mutual fund market, it is past the time to reassess their need and their effectiveness,” she said. “The problem is that our investor may have no idea these fees are being deducted or who they are ultimately compensating.” Thus, she has asked the SEC staff to present comprehensive 12b-1 reform in 2010, including the possibility that the fees be eliminated.

Schapiro also said the SEC wants to ensure that investors are supplied with “relevant, simple and comparable information at the point of sale [rather than] only after the sale has occurred, if at all.” Furthermore, the SEC must ensure investors understand the different fiduciary responsibilities of brokers and financial advisers by subjecting all sales personnel to the same fiduciary duty--enforced by an “effective oversight regime,” she said.

The SEC is still working on a systemic risk regulator and considering requiring hedge funds to register, she said.