A recent Securities and Exchange Commission exam sweep of investment advisor and mutual fund complexes' distribution fees, including 12b-1 fees, has prompted SEC staff to issue guidance warning advisors and boards to pay closer attention to such fees.
Staff within the SEC's Division of Investment Management warn in their January guidance that mutual fund fees "have a direct impact on investor returns," noting that, for example, "because investors may evaluate funds based on the specific levels of 12b-1, management, and other fees, potential mischaracterization of fees may lead them to invest in funds that they would not otherwise have selected."
Susan Ferris Wyderko, president and CEO of The Mutual Fund Directors Forum, told ThinkAdvisor on Friday that the SEC's "detailed document will provide guidance for boards and for advisors struggling to apply the previous decades-old staff guidance to today's vastly different distribution environment."
The exam sweep was part of the SEC's "distribution-in-guise" initiative, which is designed to protect investors from improperly paying mutual fund distribution fees. The initiative resulted in the SEC levying its first enforcement action in this area last September against First Eagle Investment Management and FEF Distributors.
In that case, the SEC fined both firms almost $40 million for using fund assets, belonging to shareholders, rather than their own assets to pay distribution costs from January 2008 to March 2014. Once collected, those funds will be distributed to the affected shareholders, according to the SEC.
SEC enforcement director Andrew Ceresney said when the First Eagle action was taken that "First Eagle and FEF [Distributors] inappropriately used money belonging to the shareholders of the funds to pay for services clearly intended to market and distribute the shares." Unless part of a 12b-1 plan, he said, "the firm should bear those costs, not the shareholders." FEF is an affiliated distributor of First Eagle funds.
