Page 31 - Investment Advisor March 2022
P. 31
THE PLAYING FIELD
By Melanie Waddell
Will the SEC Ban 12b-1 Fees?
Their use is declining as the SEC targets conflicts of interest.
But are they a “lesser evil”?
hen Securities and Exchange I polled regulatory experts on wheth-
Commission Chairman Gary er they see the agency — under Gensler
WGensler appointed consumer and Roper — repealing 12b-1 fees, as
advocate Barbara Roper as his senior advi- well as whether the 12b-1 fee crackdown
sor last year, speculation began to swirl amounts to “regulation by enforcement.”
that the duo may seek to eliminate 12b-1 The movement toward fee-based advice
fees. These are fees paid out of mutual as well as the SEC’s share class crackdown
fund or ETF assets to cover the costs of are two factors prompting the decline in
distribution and sometimes to cover the 12b-1 fees, according to the experts.
costs of providing shareholder services. “The decline of 12b-1 fees reflects the
The SEC has continued to bring cases growing movement toward fee-based
against advisors for 12b-1 fee violations practices, in which clients pay fees direct-
since ending its Share Class Selection ly,” Ron Rhoades, associate professor of
Disclosure Initiative in April 2020. Under finance at Western Kentucky University
the initiative, which the securities reg- and director of its personal financial plan-
“The decline of 12b-1 ulator launched in February 2018, the ning program, said in a recent email. “This
Division of Enforcement instituted a self-
is a positive, because fees can be negoti-
fees reflects the reporting program to protect advisory cli- ated by the client, unlike many 12b-1 fees.”
Another development, Rhoades contin-
growing movement ents from undisclosed conflicts of interest ued, “is the greater transparency achieved
related to 12b-1 fees and return money to
toward fee-based investors. The division agreed not to rec- in 401(k) accounts, and the move toward
practices, in which ommend financial penalties against advi- ‘unbundled’ fee arrangements.”
sors who self-reported violations.
Given the decline in the marketplace
Since ending the share class initiative,
clients pay fees the SEC has levied what industry officials of 12b-1 fees, “there seems to be lit-
tle justification for their continuance,”
directly. This is a call, in some cases, follow-on actions to Rhoades argued. “Consumers are con-
positive, because fees firms that had been under investigation fused by 12b-1 fees.”
during the initiative. At least 10 actions
can be negotiated related to 12b-1 fees have occurred since LESSER EVIL
by the client, unlike the initiative ended, with the most recent Todd Cipperman of Cipperman
taking place in January. Those actions
Compliance Services takes a different view.
many 12b-1 fees.” have centered on firms charging 12b-1 cized 12b-1 fees at least as far back as the
“The SEC has scrutinized and criti-
fees when lower-cost share classes of
—Ron Rhoades, Western those same funds were available, as well early ‘90s,” he said.
“The challenge is that the distribution
Kentucky University as, in some cases, cash sweep products channels will not sell to retail investors
that likewise resulted in revenue sharing.
without compensation, and most retail
DECLINE IN 12B-1 FEES investors won’t pay a load. It’s a bit like
The Investment Company Institute soft dollars. The SEC doesn’t like them,
reported that in 2020, 88% of gross sales but what’s the alternative? If the SEC
of long-term mutual funds went to no- just banned 12b-1 fees, the retail investor
load funds without 12b-1 fees, compared would have access to fewer products,”
with 46% in 2000. Cipperman argued.
MARCH 2022 INVESTMENT ADVISOR 29
