From: Charles Haas []
Sent: Tuesday, June 01, 2004 6:04 PM
Subject: File No. S7 09-04

I am the principal of our branch office and our small family based firm has been serving clients with modest assets for the past 28 years. I am also an elected official familiar with policy-making decisions.

My reading of the proposed regulations (and the many comments on your website) suggests there are two main areas of regulatory concern. One is the use of 12b1 fees in compensation arrangements between mutual fund companies and the brokerage firms that distribute their products. The second is the use of 12b1 fees as a means of providing compensation to financial service professionals for on-going customer service. I believe each area requires its own special consideration. I also believe your proposed regulation do not recognize that distinction.

A proper regulatory function is to ensure proper disclosure. I doubt whether the average investor would have much interest in the compensation arrangements between funds and brokerage firms, but the disclosure of those arrangements can do the investor no harm. Regulations pertaining to full disclosure of distribution costs between the mutual fund industry and brokerage firms can be helpful and will have no adverse effect upon the average investor.

But it's crucial for regulators to recognize and validate how the role of 12b1 fees has evolved over time. Small investors benefit from the common practice which uses the annual 12b1 fee as the payment to the investor's financial advisor to provide ongoing financial advice and service. I disagree with your staff's interpretation that the current practice is to consider 12b1 fees as a substitue for sales loads. I remember when the rule was instituted and ever since have considered the initial sales load as compensation for all the activities necessary to acquire a new client and the suitablilty requirements associated with establishing a new client's account. I considered the 12b1 fee as compensation in exchange for annual service over the years.

I would hasten to add that the cost of compliance with additional regulatory requirements has grown over time and regulators must acknowledge that cost as well as that all advisory costs have to be paid by the client. The essential questions are how the client pays for financial advisory costs and how the cost are disclosed to the client. I suggest the current practice to use 12b1 fees to compensate advisors for on-going client service and advice is entirely appropriate and superior to any suggested regualory changes.

Staff suggestion to eliminate 12b1 fees and deduct distribution related costs directly from shareholder accounts fails to recognize two essential facts. First, from the client's perpecitve, the 12b1 fee is not a distribution cost (the sales load was), but more properly considered an annual fee established to insure that a professional advisor is willing by virture of adequate compensation to provide ongoing advice and service. Second, the shareholder account-based approach is a distinction without a difference because not only does the client pay in either case, but similar disclosure is provided in either case.

Eliminating 12b1 fees in favor of a shareholder account-based approach seeks to replace an arguably functional and efficient system that provides financial advisors with adequate financial incentive to service the accounts of the average investor with a system designed only towards disclosing distribution costs. Disclosure is important and needs to be encouraged in its own right, but it is also important to protect the average investors ability to access affordable investment advice.

If 12b1 fees were eliminated the small investor would suffer the most unfortunate consequences. Those less affluent investors would likely be forced into compensation arrangements that may not be as suitable for them as are current systems. Also, it's likely that many small investors would be left without any access to professional financial advice.

Please remember that our free enterprise system is based upon the ability to make choices. Eliminating the 12b1 fees will limit investor's choices. Currently any investor who wants to can choose to pay an advisor for financial advice and service by selecting funds that impose an initial sales charge and annual 12b1 fee, while any investor who does not want to pay for advice can choose a fund that does not impose an initial sales charge or 12b1 fee. Please don't interfere with or limit an individual's right to exercise free choice or to violate the basic principals of our free enterprise system.

Lastly, the current 12b1 fee provides a very cost effective way for the average investor to pay for their financial advice. I provide each of our new clients our financial planner disclosure form (as required by Minnesota Statute) which allows them to choose either the transaction based arrangement (initial sales charge and ongoing 12b1 fees) or a percentage asset based management fee. There is no question that the former is more cost efficient over time than the latter. Not recognizing the cost effective benefits of the current systems and eliminating them in a well intentioned but misdirected effort at more complete disclosure does the investing public more harm than good.

Charles Haas
3570 N. Lexington Ave Ste 202
Shoreview, MN 55126

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