Interest fee

SEC 12b-1 fees, custody rules likely in effect by year-end

“Fund fees have been on the SEC’s regulatory agenda for some time now,” Lynch told me. “As you know, Rule 12b-1 fees have been dealt with quite harshly via the numerous enforcement actions against the funds. The industry has certainly gotten the message and the use of 12b-1 fees is down .

In February, I reported that the Investment Company Institute had discovered in March 2021 that the majority of gross sales of long-term mutual funds were now going to no-fee mutual funds (i.e. say without entry or exit charges, or any deferred charges). sales charge) free of charge 12b-1.

In 2020, according to ICI, 88% of gross sales of long-term mutual funds went to 12b-1 no-load funds, up from 46% in 2000.

However, Lynch continued, “other fees such as revenue sharing are increasing. The key for funds is to provide clear and consistent information to shareholders about the fees charged. I suspect any rulemaking that focuses on descriptive disclosures.

The SEC said in its review priorities, released in late March, that it will focus its reviews this year on RIAs’ use of 12b-1 fees in global fee accounts where the RIA may be responsible for paying fees. transaction fees, as well as revenue sharing agreements. .

The agency said the RIA reviews will focus on whether advisers are “acting in accordance with their fiduciary duty to clients, examining both duties of care and loyalty, including best execution obligations. , financial conflicts of interest and related impartiality of advice, and any accompanying client disclosures”.

Ron Rhoades, associate professor of finance at Western Kentucky University and director of its personal financial planning program, told me in another email that he would be disappointed if the SEC sought to address the 12b-1 charge” only through rules that only increase fund fee disclosures in one way or another, without severely restricting the use of fund share classes with 12b-1 fees.”

These 12b-1 fees, Rhoades said, “do not benefit shareholders of the fund and rather act to their detriment. Shareholders rarely understand the 12b-1 fee. Outside of the DC space (where R-1, R-2, etc. shares exist), 12b-1 fees are non-negotiable by clients.

Another problem, he says, “is that 12b-1 fees, especially of the 1% variety (often seen in class C shares), are – essentially – ‘drag investment advice fees’. There is no reason for the SEC to allow brokers to charge “asset-based fees” when an investment advisory fee would be more appropriate.