Because mutual funds are continually evolving—and rapidly—it's hard for regulatory boards to keep up. Recent debate has focused on whether mutual fund boards need an independent chairman and problems surrounding the possible misuse of 12b-1 fees (fund assets to finance the distribution of their shares, which are also used to cover advertising and promotion and for mailing fund prospectuses). And solid pronouncements on behalf of the SEC are often evasive.
But it looks like requirements are stiffening on some fronts. In a press release earlier this week, the SEC announced that it has scheduled a roundtable to discuss 12b-1 fees for June 19th. Final decisions on whether they will adjust or remove the fees will come out later in the year.
According to SEC chairman Christopher Cox, ‘When the Commission adopted Rule 12b-1 more than a quarter century ago, the idea was that 12b-1 fees would be a temporary solution to address specific distribution problems, as they arose.’ The initial purpose was to enable fund advisors to pay for distribution and marketing from fund assets to facilitate growth, benefiting shareholders with fixed costs spread over a larger asset base.
Cox continued, ‘But today's uses of 12b-1 fees have strayed from the original purposes underlying the rule, and it is time for a thorough re-evaluation.’ Presently, fees are being collected after the fund has achieved its financial mass; last year $11 billion was collected. The panel will look into the evolution of the uses of rule 12b-1 as well as its costs and benefits.
‘This roundtable will help us review current uses of 12b-1 fees, how those fees impact retail investors, and the interests and concerns of independent directors, who must approve 12b-1 plans,’ Cox said.
Corporate Secretary magazine