Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Wednesday, July 21, 2010

SEC Proposes New Regulation of Mutual Fund Distribution Fees

Will the SEC finally take action to get rid of 12b-1 fees?  The SEC today voted unanimously to propose measures aimed to improve the regulation of mutual fund distribution fees and provide better disclosure for investors.  The marketing and selling costs involved with running a mutual fund are commonly referred to as a fund's distribution costs. To cover these costs, the companies that run mutual funds are permitted to charge fees known as 12b-1 fees. These fees are deducted from a mutual fund to compensate securities professionals for sales efforts and services provided to the fund's investors.

12b-1 fees were developed in the late 1970s when funds were losing investor assets faster than they were attracting new assets, and self-distributed funds were emerging in search of ways to pay for necessary marketing expenses. These fees amounted to an aggregate of just a few million dollars in 1980 when they were first permitted, but that total has ballooned as the use of 12b-1 fees has evolved. These fees amounted to $9.5 billion in 2009.

The SEC's proposal would:

  • Protect investors by limiting fund sales charges.
  • Improve transparency of fees for investors.
  • Encourage retail price competition.
  • Revise fund director oversight duties.

There will be a 90-day public comment period after the SEC's proposal is published in the Federal Register.  Stay tuned ....

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