The securities industry is fighting tooth and nail to save 12b-1 fees. Exactly one month after the June 19 SEC roundtable convened to discuss the fate of 12b-1 fees, the securities industry’s lobby group, the Securities Industry and Financial Markets Association (SIFMA), released its comment letter today. The letter says that 12b-1 fees are a necessary part of doing business, and that abolishing them will harm investors and stunt industry competition.
In a letter to Nancy Morris, secretary of the SEC, SIFMA Senior Managing Director and General Counsel Ira Hammerman urged regulators to keep 12b-1 fees. Hammerman wrote that charging fees at the account level (as opposed to the fund level) in order to make them more transparent will only hurt consumers. He also said that 12b-1 fees make it possible for smaller funds to attract larger intermediaries, which ultimately means that clients get a wider choice of funds.
During the 27 years since the 12b-1 rule was created, “mutual fund assets have increased to more than $11 trillion and are held by nearly 100 million investors,” Hammerman wrote. “Also, the scope and nature of administrative and investment services provided to fund shareholders, and the entities providing such services, has dramatically changed during that period. In particular, the need for investment guidance is greater than ever given that mutual funds are the core investment of most retirement accounts, and there has been a wholesale shift from employer defined benefit plans to 401(K) and other defined contribution plans.” In other words, 12b-1 fees pay for services that weren’t available to fund shareholders when the rule was created. In particular, they pay for the kinds of investment advice services that investors really need today.
Critics charge, however, that the fees were meant to be a temporary solution, allowing mutual fund companies to pay for marketing and increase assets when the industry was just getting off the ground. Further, they say, it’s not fair to allow mutual funds to charge shareholders for their compensation to brokers—especially if these fees are not fully disclosed as such. In a 2003 testimony to Congress regarding the fees, publisher of FundAlarm.com, Roy Weitz said, “These companies have turned Rule 12b-1 into a prop that permanently supports their distribution system of multiple share classes (‘A-B-C’). In this context it would be quaint—even ludicrous—to think of 12b-1 fees as a temporary charge designed to benefit shareholders.”
But what would the final impact be if they were taken away? Geoff Bobroff, a mutual fund consultant, says eliminating 12b-1s would be very hard on broker/dealers and their reps, who count on 12b-1 revenues. He echoes Hammerman in the sentiment that it would be especially hard on smaller fund families: “The evolution to the new fees for services allows smaller fund families, with good investment performance, to gain traction in the marketplace.”
But the issue is probably a long way from resolution. Some in the industry say that while Cox is taking the 12b-1 fee subject seriously, it is unlikely that he will try to repeal the rule that created them. What other solutions he will consider is not entirely clear.
For more on this subject, check out these stories:
SEC to Decide Fate of Advisors Revenue Stream, 12B-1
60 Seconds, with Jeffrey Keil, of Keil Fiduciary Strategies