Subject: File No. S7-15-10
From: Jim E. Kay
Affiliation: None

October 21, 2010


On October 20, 2010 the Morningstar Corporation submitted comments on the proposed changes in Mutual Fund distribution fees.

In their comments Morningstar identified four buckets which can be used to identify and quantify mutual fund fees.

Those buckets include the following:
This is the fee charged to actually run the money from an investment standpoint and is agnostic to whether the fund is a retail mutual fund or institutional separate account. It pays for the portfolio managers, research analysts, traders, computer modeling software and equipment, Bloomberg terminals, trading platforms, and outside research. This should also include the research services received from soft dollars.

Sales and Marketing
This fee covers the full cost of selling and distributing the fund, including shelf-space arrangements with broker/dealers, advertising campaigns, and costs to be included on supermarket platforms. Some fund companies employ armies of fund wholesalers to pitch funds to advisors. Others forgo the expensive platforms, making them harder to access, and spend miniscule amounts on sales and marketing. Regardless of the strategy, the costs come out of the fund, so investors should be given a clear rundown of how much is coming out of their assets to participate in these programs and grow the funds they're in.

We've partitioned off an "advice" bucket that is distinct and separate from sales and marketing because there are meaningful differences between the two services. Advice is the fee charged by the fund and passed through to the broker, advisor, and/or wrap manager as compensation for ongoing advice, portfolio management, and service. Advice is sometimes paid for with fund assets and sometimes paid for outside of the fund. Investors should be able to quickly assess how much they are paying for the services of an advisor or broker and should know how it is being deducted. This is a legitimate service that has hid in the coffers of 12b-1 fees in the past, but should have a clear price tag and common-language label associated with it.

Administrative Overhead
This portion of the expense ratio covers the administrative costs of running the operation, transfer agency, record keeping, and board oversight.

As a small investor in mutual funds I applaud and support this proposal by Morningstar. If adopted these defined expenses will go along way to establish transparency about mutal fund fees and will enable the investor to clearly understand the costs and benefits of mutual fund managers decisions.