What's New With 12b-1s

Andrew "Buddy" Donohue, director of the SEC Office of Investment Management, revealed some more details about how 12b-1 fees would likely be treated under a new rule during a speech at the NAVA compliance conference in Washington in late May. Donohue said he would like a new rule to treat 12b-1 fees as sales charges. "If 12b-1 fees are functioning similar to a sales charge an investor pays over time, or an 'asset-based sales charge,' to borrow from NASD/FINRA rules, then I believe the staff should recommend that the Commission treat them as a sales charge–and require that they be disclosed as a sales charge that is paid by investors in the fund," Donohue said. Don Phillips, managing director of corporate strategy, research, and communications at Morningstar, told me in an early June interview that he believes the SEC will vote to "simply cap the C shares," that is, capping the compensation that the broker/advisor receives. Under a revamped 12b-1 rule, Phillips says "funds will continue to be able to charge a 25 basis point fee, probably not called a 12b-1 fee anymore, probably called a service fee or something, on A shares or no-load funds, which would mean that mutual funds could use that to pay for recordkeeping on a 401(k) platform or participation in mutual fund supermarkets or as some sort of trails on A shares given to a broker." With C shares, on the other hand, "where in effect you are transferring the sales charge from an upfront charge to an ongoing charge, that would be capped at some point so that the economic reality would be similar to that of having paid the upfront sales charge, which is in effect what the industry has done on B shares on a voluntary basis."

David Bellaire, general counsel and director of government affairs at the Financial Services Institute (FSI), says capping C shares "may result in the elimination of that option for many investors because the financial advisor can obtain the same compensation through an A share as he can from the C, and be paid today rather than over time."