October 27, 2010
Your proposal to limit the availability of "C" shares or at the very least, to require their conversion after a certain number of years will have a devastating impact on small investors. It will lead to "A" shares being the preferred vehicle for registered reps with most broker-dealers. "A" shares may be appropriate but they are not the only logical choice for a relatively small investor. Most clients invest for the long term, as they should. But sometimes their situation changes dramatically and they abandon he investment decision hey made a short time ago. In that case, they are measurably harmed by the lack of "C" share availability. Other clients who maintain an investment for a very long period of time often like the idea that the representaive benefits as the funds grow in value and like the idea that the rep is not there to get a new commission but is there to provide guidance. A specific example might be helpful. Let us assume an investor has $10,000 to invest. Under current rules, they determine which class of fund is most suitable. In the end, if they choose "A" shares, wih most fund families after the first year, the gross dealer concession from the 12b-1 charge is 25 basis points, or in our example $25. The rep gets whatever his or her payout is, so let's say it is 50% or $12.50. If the client used "C" shares the 12b-1 charge is $100 or at 50% payout to the rep a net of $50. Not to put too fine a point on it, but in years seven or nine the client will get better service if they are in "C' shares. It is only human nature.
I know you are rying to do the best for the public interest but I would strongly suggest that the proposal as drafted assumes the the public is not intelligent and that professionals in the financial services industry are less than honorable. Both assumptions are false.
A more appropriate way to deal with the concerns raised by some people there who have less experience and practical knowledge of how we in the financial services industry help clients accomplish their goals would be to have readable disclosure of the 12b-1 charges along with readable explanations of all the other expenses of a fund and let the fully informed consumer make their own decisions. I mention all the other expenses because there should not be undue emphasis on any one expense of the fund. That would also be a misrepresantation of the facts, so I hope regulation does not cause that emphasis on one expense which then becomes misleading by not focusing on all the expense.
41 Silo lane
Middletown, NY 10940