Number: RL32556
Title: Mutual Fund 12b-1 Fees: Key Reform Proposals
Authors: Gary Shorter, Government and Finance Division 
Abstract: In a February 2004 proposal, the SEC asked for public comment on the need for additional changes to Rule 12b-1. Among other things, it proposed requiring distribution-related costs to be directly deducted from individual shareholder accounts rather than from aggregate fund assets, potentially benefitting investors by giving them a more direct and thus a better understanding of sales charges. But critics say such reform would result in investor's accounts eventually paying smaller nominal amounts as they age, giving broker-dealers added incentive to churn the accounts. There are additional concerns that such changes might result in complicated record-keeping burdens and added tax liabilities for investors. The 2004 proposal, also asked for public comment on whether Rule 12b-1 should be repealed. But some observers have, however, noted that the plans are ingrained in the financial system and repeal could mean reduced service for small investors by brokers and a shift to front-end loads, which do have the benefit of greater visibility relative to 12b- 1 fees. In the spring of 2007, SEC Chairman Cox announced that due to perceptions that 12b-1 fees had strayed beyond their original intent, the agency would be reexamining 12b-1, which it is currently doing. If the agency adopts reforms, it might possibly involve changes to the way 12b-1 fees are disclosed. H.R. 3225 (Castle) would direct the SEC to improve the disclosure of fund fees and expenses.
Pages: 14
Date: November 14, 2007