Page 35 - Investment Advisor October 2022

THE PLAYING FIELD
SEC 12b-1 Fee, Custody Rules Likely Out
by Year-End
Both rules “are currently in the works,” says compliance consultant Amy Lynch.
“Fund fees have been
on the SEC’s regulatory
agenda for quite some
time now. … Rule 12b-1
fees have been dealt with
rather harshly via the
numerous enforcement
actions against funds.
The industry has
certainly received the
message and the use of
12b-1 fees is declining.”
—Amy Lynch
By Melanie Waddell
ndustry watchers are keeping a tody] are currently in the works,” Lynch
close eye on likely rulemakings told me Friday in an email. The “cus-
I this year by the Securities and tody rule may come out first, but fund
Exchange Commission that seek to rein fees are also important to [the SEC’s
in 12b-1 fees as well as custody rule Investment Management Division] right
infractions. In its Regulatory Flexibility now. Both rules could come out before
agenda, released in June, that agency year-end.”
said it plans to review five rules this year Melissa Harke, senior special counsel
affecting registered investment advisors. in the SEC’s IM division, said Sept. 8 at
The SEC said its Division of the annual SEC Speaks conference, held
Investment Management is consider- in Washington, that “custody is on the
ing recommending that the SEC pro- SEC’s rulemaking agenda; we are aware
pose amendments this year to existing of the questions” that the industry has.
rules and/or propose new rules under The agency’s regulation agenda states
the Investment Advisers Act of 1940 to that it is considering recommending
improve and modernize the regulations proposed changes to regulatory require-
around the custody of funds or invest- ments relating to registered investment
companies’ fees and fee disclosure.
ments of clients by RIAs.
On Sept. 9, the securities regulator “Fund fees have been on the SEC’s
brought charges against eight advi- regulatory agenda for quite some time
sory firms for custody rule violations
now,” Lynch told me. “As you know, Rule
that relate to the audit requirements 12b-1 fees have been dealt with rather
of the custody rule. “The custody rule harshly via the numerous enforcement
process is well underway,” Karen Barr, actions against funds. The industry has
certainly received the message and the
president and CEO of the Investment
Adviser Association in Washington, told use of 12b-1 fees is declining.”
In February, I reported that the
me Friday in an interview. “It’s not unre- Investment Company Institute found
alistic” that the agency could put forth a
rule in late October or November. in March 2021 that the majority of long-
Commenting on the custody rule term mutual fund gross sales now go
actions taken by the SEC on Friday, to no-load mutual funds (i.e., no front-
end or back-end load, nor a contingent
Barr said an exam sweep is often “a sign
they’re [the SEC is] focusing closely on deferred sales charge) without 12b-1
fees. In 2020, according to ICI, 88% of
a rule.” IAA has urged the agency to take
a “holistic look” at the custody rule, as gross sales of long-term mutual funds
there are lots of aspects that are hard to went to no-load funds without 12b-1
comply with. fees, compared with 46% in 2000.
Amy Lynch, founder and principal of However, Lynch continued, “other
FrontLine Compliance, sees the agency fees such as revenue sharing are increas-
tackling 12b-1 fees via a rulemaking on ing. The key for funds is to provide clear
its agenda dubbed fund fee disclosure and consistent disclosure to sharehold-
and reform. “Both rules [fees and cus- ers regarding the fees charged. I suspect
OCTOBER 2022 INVESTMENT ADVISOR 33