Subject: File No. S7-15-10
From: Warren Ludford, CFP
Affiliation: LPL Financial

October 21, 2010

Below is an article on the recent letter you received from Morningstar regarding the 12(b)-1 proposal:

Morningstar: SEC's 12(b)-1 fee proposal will do no good'
Researcher calls for clear labeling of fund expenses rather than cap on marketing and service charge

By Jessica Toonkel

October 21, 2010 2:25 pm ET

The Securities and Exchange Commission's 12(b)-1 fee proposal will do no good as it stands now, according to a letter to the agency from Morningstar Inc.

Morningstar Inc. ,
Securities and Exchange Commission (SEC)

We urge you to consider a sweeping overhaul of fund expense ratios, from top to bottom, that would break fees into appropriate, easy-to-understand buckets and standardize the accounting, Karen Dolan, director of fund analysis at Morningstar, wrote in the Oct. 20 letter. This is a once-in-a-generation opportunity to clean up a broader problem with fund expense ratios and help investors understand how their money is being spent.

Under the proposal, which is open to comments until Nov. 5, firms could charge a marketing and service fee of up to 0.25%. Anything above that amount would be deemed an ongoing sales charge, which would be limited to the highest fee charged by the fund for shares that have no marketing and service fees.

For example, if the most expensive share class of a fund charges a 4% front-end load, another class couldn't charge investors more than that over time.

But capping 12(b)-1 fees would cause fund companies to merely shift those expenses to another part of the expense ratio, Ms. Dolan said in an interview.

There is clear evidence that these marketing and distribution costs have ways of gaining new life in other ways, she said.

For example, the Supreme Court ruling in Jones v. Harris showed that the management fees for institutional shares of funds are often less than the retail versions of the funds.

Why? Because mutual fund management fees pay for a lot more than just investment management, Ms. Dolan wrote in the letter. When pressed on the differences, fund companies point to service and distribution-related costs, which are unrelated to the research resources needed to manage the money,

Establishing clear labels on which expenses pay for what would also be much easier for the fund industry to comply with than capping 12(b)-1 fees, Ms. Dolan said.

I feel like the mutual fund industry's well-being depends on this because we are already seeing assets go into more transparent vehicles like exchange-traded funds, she said. It's going to take an SEC mandate to get the fund industry to fix this issue.

This is an authoritative source that knows the mutual fund business as much or more than any other firm. This, and other widespread opposition to the recent 12(b)-1 proposal should provide more than ample reason to reconsider the merits of this proposal in light of unintended consequences and whether any extensive reform is either necessary or simply a waste of time and money for the effected firms and advisors who will find other ways to pass on the fees for their services. Further, smaller investors who seek guidance will be turned away or be forced to pay fees from income which, for many, is more difficult than having the cost come out of their investments in a tax-advantaged way.

In short, the benefits to this proposal are few in comparison to the costs and unintended consequences of implementing this reform. For these reasons, I urge the 12(b)-1 proposal be abandonded.