Mutual Fund 12b-1 Fees: Key Reform Proposals (CRS Report for Congress)
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| Release Date |
Nov. 14, 2007 |
| Report Number |
RL32556 |
| Report Type |
Report |
| Authors |
Gary Shorter, Government and Finance Division |
| Source Agency |
Congressional Research Service |
Summary:
In a February 2004 proposal, the SEC asked for public comment on the need foradditional changes to Rule 12b-1. Among other things, it proposed requiringdistribution-related costs to be directly deducted from individual shareholderaccounts rather than from aggregate fund assets, potentially benefitting investors bygiving them a more direct and thus a better understanding of sales charges. Butcritics say such reform would result in investor's accounts eventually paying smallernominal amounts as they age, giving broker-dealers added incentive to churn theaccounts. There are additional concerns that such changes might result incomplicated record-keeping burdens and added tax liabilities for investors. The 2004proposal, also asked for public comment on whether Rule 12b-1 should be repealed.But some observers have, however, noted that the plans are ingrained in the financialsystem and repeal could mean reduced service for small investors by brokers and ashift to front-end loads, which do have the benefit of greater visibility relative to 12b-1 fees. In the spring of 2007, SEC Chairman Cox announced that due to perceptionsthat 12b-1 fees had strayed beyond their original intent, the agency would bereexamining 12b-1, which it is currently doing. If the agency adopts reforms, itmight possibly involve changes to the way 12b-1 fees are disclosed. H.R. 3225(Castle) would direct the SEC to improve the disclosure of fund fees and expenses.
