SEC Finds 12b-1 Fees Benefit Companies, Not Shareholders

A newly published report by a senior economist at the Securities and Exchange Commission concludes that mutual fund 12b-1 fees have benefited financial services companies far more than individual shareholders, The Wall Street Journal reports.
The SEC report, written by Lori Walsh, an in-house economist, constitutes the regulator's toughest attack on the controversial fee structure embraced by the mutual fund industry. In her report, Walsh spells out a conflict of interest in which shareholders foot the bill for mutual fund providers to accrue assets without sharing the rewards.
The report also highlights internal discussions within the SEC to propose alternative types of marketing fee arrangements for the mutual fund industry. For example, the SEC is reportedly considering alternatives to the current 12b-1 rules that would allow fund companies to deduct distribution costs from individual shareholders rather than fund assets.
These types of fees have sharply risen to more than $9 billion annually from a total of only $2.3 billion collected throughout the 1980's. Roughly 67% of all funds now dock investors for 12b-1 fees, which typically amount to the maximum 1% allowed by the SEC, according to Morningstar. These fees were originally created in 1980 to help fund companies address rising marketing costs. The jump in 12b-1 fees since then is largely attributed to the growing trend of using these expenses for other purposes than marketing.