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U.S. Securities and Exchange Commission

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


Commissioner Troy A. Paredes

U.S. Securities and Exchange Commission

Washington, D.C.
July 21, 2010

Thank you, Chairman Schapiro.

I support the recommendation before us concerning Rule 12b-1 fees. If adopted, the proposed amendments can be expected to have far-reaching effects for the distribution of mutual fund shares and the fees paid for distribution and other services.

While the release asks a range of important questions, I am particularly interested in hearing from commenters on the following two topics.

First, what are the potential consequences if Rule 6c-10 operates as a binding price cap? The current FINRA sales charge rule limits charges at the fund level on an aggregate basis. Because it is calculated at the fund level, the FINRA rule does not limit the actual sales charges an individual shareholder may pay. As the release explains, "it is possible for a long-term shareholder in a fund with an asset-based sales charge to pay more in total sales charges than would have been the case if that investor had paid a traditional front-end load."

In contrast to the FINRA rule, Rule 6c-10, if amended, would limit the cumulative sales charges each shareholder may pay. The charges a fund shareholder may pay over time could not exceed the fund's front-end load or, if there is no front-end load, the appropriate FINRA limit. Accordingly, Rule 6c-10, in that it would be applied on a shareholder account-level basis, could bind in a way that the FINRA rule does not.

  • In light of this, if the proposed Rule 6c-10 cap were in place, might a fund increase the front-end load it charges to increase the cap on the fund's ongoing sales charges?
  • How might funds reconsider the share classes they offer or the features of different share classes?
  • Might revenues that are lost as a result of the Rule 6c-10 cap be captured from investors in other ways?
  • How might the services that investors receive change if ongoing sales charges are limited as the proposal contemplates?

Second, the Commission also proposes to allow funds a new option for distributing fund shares. Under the proposal, a fund could issue shares without a sales load at net asset value, deferring to intermediaries to impose their own sales charges, subject to the constraints of competition.

I welcome the effort to instill competition, but do have questions.

  • What factors will influence the extent to which funds will adopt this new distribution model if it is permitted?
  • What are the likely competitive dynamics if funds adopt this new distribution model? Will competition be vigorous? If so, why? If not, why not?
  • Will sales charges become more transparent and salient to shareholders, empowering shareholders to make more informed choices?
  • For any given fund, should we expect to see different sales charges that correspond to different services, thus providing more choice?
  • How might the quality of services provided to investors be impacted?

I look forward to considering all the comments, and I hope that they will address these topics.

Let me conclude by joining my colleagues in thanking the many members of the staff — especially those from the Division of Investment Management — for all of your hard work and persistence in bringing this proposal before the Commission.


Modified: 07/21/2010