Agenda for Rule 12b-1 Roundtable

The Commission adopted Rule 12b-1 in 1980, following a period when mutual funds had been experiencing significant net redemptions. The rule was intended to stimulate fund growth, promote a more stable fund asset base, and create economies of scale that would reduce shareholder expenses. After adoption of Rule 12b-1, the Commission undertook several regulatory initiatives that allowed funds to use Rule 12b-1 for other purposes. What circumstances led to the adoption of Rule 12b-1, what was the purpose of the rule, and how and why did the use of the rule evolve over time?

Moderator
Douglas J. Scheidt
Chief Counsel, Division of Investment Management
U.S. Securities and Exchange Commission

Panelists

Matthew P. Fink
Former President
Investment Company Institute

Joel H. Goldberg
Partner
Willkie Farr & Gallagher LLP

Richard W. Grant
Partner
Morgan, Lewis & Bockius LLP

Kathryn Bradley McGrath
Partner
Mayer, Brown, Rowe & Maw LLP
 

When it adopted Rule 12b-1, the Commission anticipated that the rule would serve a limited purpose: to permit funds to subsidize marketing expenses or to help them contend with temporary problems of net redemptions. Today, however, Rule 12b-1 is an integral part of most mutual fund distribution arrangements. How are 12b-1 plans used today?

Moderator
Robert E. Plaze
Associate Director, Division of Investment Management
U.S. Securities and Exchange Commission

Panelists

Martin G. Byrne
Managing Director
Office of General Counsel
Merrill Lynch & Co., Inc.

Paul G. Haaga, Jr.
Vice Chairman
Capital Research and Management Company

Mellody Hobson
President
Ariel Capital Management, LLC
Chairman
Ariel Mutual Funds Board of Trustees

John R. Morris
Senior Vice President
Charles Schwab & Co., Inc.

Charles Nelson
Senior Vice President
Great-West Retirement Services

Thomas M. Selman
Executive Vice President
NASD

Robert W. Uek
Independent Trustee
MFS Funds
 

Supporters of Rule 12b-1 maintain that the rule continues to benefit shareholders by reducing the total cost of investing in mutual funds. In addition, they assert that the rule increases shareholder choice for paying for distribution and affords valuable services to shareholders. Critics of Rule 12b-1 argue that the rule has outlived its purpose, and that 12b-1 fees are "hidden" fees that represent a deadweight loss for shareholders, who rarely benefit from fund growth. They also assert that 12b-1 fees contribute to a proliferation of share classes that confuse shareholders, and provide incentives for intermediaries to sell funds based on the compensation they receive rather than the needs of the investor. What are the relative merits of these arguments? What are the costs and benefits of Rule 12b-1?

Moderator
Erik R. Sirri
Director, Division of Market Regulation
U.S. Securities and Exchange Commission

Panelists

Brad M. Barber
Professor of Finance
University of California, Davis

John A. Hill
Independent Chairman
Putnam Funds

Jeffrey C. Keil
Principal
Keil Fiduciary Strategies LLC

Joseph R. Russo
Chairman and Chief Executive Officer
Advantage Financial Group, Inc.

Michael J. Sharp
General Counsel
Citi Global Wealth Management

Shannon Zimmerman
Investment Analyst
The Motley Fool
 

Regardless of their assessment of the cost and benefits of Rule 12b-1, most people agree that Rule 12b-1 should be fixed or reformed. The question is how. Several options have been discussed publicly, including: (i) revising the factors for board consideration; (ii) regulating 12b-1 fees in the same way that sales loads are regulated and eliminating board oversight; (iii) requiring more specific or individualized disclosure of 12b 1 fees; (iv) externalizing the distribution and servicing fees that are currently levied under Rule 12b-1 by requiring funds to assess them on shareholder accounts rather than fund assets; or (v) rescinding Rule 12b-1 or capping 12b-1 fees at a specific level, for example, 25 basis points. What are the costs and benefits of each of these options? What additional options are there? If Rule 12b-1 were rescinded, what would happen?

Moderator
Andrew J. Donohue
Director, Division of Investment Management
U.S. Securities and Exchange Commission

Panelists

Mark R. Fetting
Senior Executive Vice President
Legg Mason, Inc.

Avi Nachmany
Director of Research, E.V.P.
Strategic Insight

Don Phillips
Managing Director
Morningstar, Inc.

Richard M. Phillips
Partner
Kirkpatrick & Lockhart Preston Gates Ellis LLP

Barbara Roper
Director of Investor Protection
Consumer Federation of America
 

Modified: 06/15/2007