Subject: File No. S7-15-10
From: Guy Cumbie

October 7, 2010

This Comment contains --

Seriously Constructive Policy Prescription with Substantive Supporting Rationale:

12b-2, as proposed, is literally regressive, and unnecessarily so.

12b-1, as it currently exists, is fundamentally flawed.

From a rational regulatory perspective, the proposed new Rule will be unnecessarily net market disclocative and friction inducing if adopted in its proposed form that limits C and R share trails to a max of 25bps.

Please recall relatively modern history. There was a real and actually somewhat legitimate regulatory reason for the promulgation of the original Rule 12b-1. It was a sensible reason that stands in pretty glaringly positive juxtaposition to one of the perhaps ostensible and in fact quite illegitimate, politically motivated reasons of "thinly veiled governmental price control/tampering" as referenced much more delicately by previous comment provider and friend of mine, Curt Weil.

The fundamental, regulatorially legitimate reason for Rule 12b-1 was to provide a reasonable alternative to the long extant and truly pretty irrational if not perverse financial incentive for excess activity, the so-called onetime up-front sales charge structure of the A share.

The aforementioned perverseness derived from the fact that traditional, transactional, A share (sans any trail) pricing inherently creates a situation whereby non-POS or "post-transactional" service (i.e., the bulk of the service associated with investment ownership) can be (outside the RIA realm of special compensation, that is) securely funded/financed only via service providers (i.e., b-d's and/or their reps) creating and funding formal escrow arrangements within their businesses. Absent such an odd and onerous arrangement, future servicing of an existing investment is (again, outside the RIA realm of special compensation and its inherently higher fixed cost structure) practically and definitionally fundable pretty much only by revenues created by "the next sale". This type of arrangement is certainly inconsistent with modern preferences for sustainability.

This "from the next sale" service funding/financing arrangement is curiously reminiscent of the investment return funding mechanism popularized several years ago by Chuck Ponzi (or our Social Security system), in that by blatantly ignoring the accounting world's economically sound and time-honored "matching principle" (that insists on chronologically synchronizing, at least in the books, revenue receipts with their being actually earned), it is fundamentally reliant upon the "the next deal" to support the sevicing needs of all prior deals. Enter express structural financial incentive for that abhorant regulatory phenomenon we clinically refer to as "excess activity" and less formally dub "churning".

The 1995 Tully Commission report was effectively a formal expose' of this very industry issue/problem/"crisis", and especially with respect to mutual funds. Rule 12b-1 addressed the clearly identified problem reasonably effectively, but with an important flaw that appears may now prove near fatal to the otherwise very constructive core essence of initial Rule.

The flaw, perhaps ironically, was that the opening for governmental price control/fixing/structuring had not been as fully exploited by 12b-1's adoption as it might have been. This is because level priced share classes such as A and R and their rather unusual hybrid cousins, D shares, unfortunately did not have breakpoint requirements incorporated into their trail structures. This now painfully obvious "oversight" was most likely a result of industry participants recoiling in horror at the thought of the scope and cost of the programming project involved. Also, regulators probably simultaneously feared the thought of the added layer of complexity this would create with recordkeeping and especially audits thereof.

What was viewed as a daunting-to-the-point-of prohibitive programming task in the 90's though, would be far closer to routine in today's world. All parties now need to accept this and get the work done.

This is the indicated regulatory fix in summary form:

Re-write the proposed new Rule 12b-2 to include requirements for a five year phase-in of assumed minimum or average holding period parity-based (versus a shares) breakpoint pricing structures into level priced and hybrid priced share classes of funds. This would obviate and supplant the need for the problem exacerbating "extra-prospectus" charges provisions that could then be simply removed from the new Rule.

This policy solution would, in one fell swoop

1) Retain the original Rule's strength and legitimate effectiveness in mitigating the effect of structural financial incentives for excess activity. More to the point, it would allow b-d customers, sans any "special compensation" issues, to pay for services on a realtime basis when they require them, rather than having to arbitrarily pre-pay them and hope their rep "escrows" sufficiently so as to be there to provide when the time comes,

2) Bring level-priced share class ownership into a more logical direct cost parity with A shares,

3) Accomplish both of the foregoing without the considerably market dislocative, unintended, and yet inevitable consequences of reducing the availability of level-priced (i.e., logically priced) investment services to the middle market (Note the understandable marketplace reality that far more fee-only/RIA investment services providers employ formal and informal mid-market precluding "minimums" than do other providers, and be aware that there are real world reasons for this that are very unlikely to go away and are in fact more likely to increase),

4) Minimize financial shock to providers who have adopted the non-churning-incentivised compensation modality of C and R shares in good faith and built service organization supporting revenue streams based on that more "technically correct", customer friendly, and logical approach.

Adding regulatory leeway, per the proposed new Rule's current provisions, for additional, inherently improperly timed (i.e., not levelized) upfront "extra-prospectus" commission charges per b-d discretion fully misses the point of logically coordinating the timing of the investment owner's requirements for service with their payment therefore. Why should fund share purchasers have to do so much prepayment if they don't want to? This is actually somewhat comparable to requiring an auto purchaser to pay the dealer upfront at the POS for practically unknowable future service needs.

I sincerely appreciate your serious consideration of this policy formation input from a long time experienced industry participant and professional fiduciary.