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U.S. Securities and Exchange Commission

Speech by SEC Commissioner:
Statement at SEC Open Meeting — Mutual Fund Distribution Fees (Rule 12b-1 Fees)


Commissioner Kathleen L. Casey

U.S. Securities and Exchange Commission

Washington, D.C.
July 21, 2010

I’d like to join the Chairman in thanking the Staff of the Division of Investment Management for its work in developing this Proposing Release, as well as all the other Divisions that participated in the process.

This Release is, I know, the culmination of years of work by the Staff. Rule 12b-1 was first adopted in 1980, and over the years, the Commission has revisited the rule in various contexts, such as during consideration of related NASD sales charge rules, and through our own rules enhancing disclosures of Rule 12b-1 plans. Most recently, in 2007, a Roundtable was held here at the Commission to discuss the history of Rule 12b-1, and to develop possible ideas for changing the Rule.

As discussed at that Roundtable and described in the Release, Rule 12b-1 has evolved from its original, more limited purpose to a large and integral part of the mutual fund market. These fees were initially intended to allow fund directors to use fund assets for distribution purposes that would benefit the fund and its shareholders. Over time, however, the 12b-1 fees have become more fundamental to pricing and compensation structures for fund intermediaries, such as broker-dealers, financial planners, and retirement plans. Eventually, these 12b-1 fees were transformed into a substitute for sales loads. Thus, rather than charge a front-end sales load, a fund could use these 12b-1 fees as part of various “spread load” arrangements, in which an investor paid sales charges over time, through charges against fund assets.

A persistent issue surrounding 12b-1 fees, however, is a fear that investors are not always aware that these 12b-1 fees are a form of an ongoing sales charge. Although such fees are disclosed in fund prospectuses, it remains an open question whether investors fully understand the significance of the fees, or the impact those fees can have on their investments. For example, in certain share classes, these fees are paid over the lifespan of the investment, resulting in those investors paying more in sales fees than an individual who had invested in a different share class and paid a front-end sales load. While some investors may rationally choose such an option, concerns remain that other investors may not fully appreciate the impact of the fees they are paying. The proposed rule changes seek to address these concerns in two primary ways. One, by imposing caps; and two, by enhancing the clarity of the disclosures of such fees, in order to help investors better understand the costs of their investments and, in turn, make better-educated choices.

I believe the proposed rules have attempted, at least in part, to incorporate and reflect the realities of how the market currently relies on Rule 12b-1 fees. Given the significance of the 12b-1 fees to the mutual fund market, it is vital that the Commission fully understand the potential impact of changes in this area.

As we consider proceeding with such rules, I hope that we will receive robust feedback on whether and how these proposed rule changes will affect the various mutual fund offerings in existence today, and whether the rule changes will have their intended beneficial effects on investors. We need to hear from investors and others as to the consequences—either positive or negative—of these rule changes. For example, some commenters have stated that it is in part due to Rule 12b-1 fees that mutual funds now offer a variety of share classes, giving investors the ability to choose what types of investments best fit their needs. The Proposing Release requests comment as to the effects the proposed rules may have on the variety of share classes mutual funds now typically offer, including those developed particularly for retirement plans. It is important for the Commission to fully appreciate whether its proposed rules have the potential to negatively impact investor choice.

Moreover, others have stated that 12b-1 fees are a central part of the smooth functioning of fund “supermarkets.” These supermarkets offer investors one-stop shopping for a variety of mutual funds and provide smaller funds the opportunity to compete on a more level playing field. Thus, we must have a clear understanding here as well of the effects these changes will have on smaller funds.

I am pleased with the care that the Staff has taken in developing this rule, and the attention it has paid to the effects these proposed rules may have on all market participants. And so I very much look forward to reviewing the comments submitted.



Modified: 07/21/2010