U.S. Securities & Exchange Commission
SEC Seal
Home | Previous Page
U.S. Securities and Exchange Commission

Speech by SEC Chairman:
Opening Statement on Final Amendments to Rule 12b-1 at Open Commission Meeting


Chairman William H. Donaldson

U.S. Securities and Exchange Commission

Washington, D.C.
August 18, 2004

This is an open meeting of the Securities and Exchange Commission. We have two items on our agenda this morning – both are recommendations from the Division of Investment Management. Last fall, the Commission undertook a series of thirteen rulemaking initiatives to address issues that had arisen in the mutual fund industry. Some of our actions were designed to directly address the conditions that led to the market timing and late trading scandals that came to light last fall – others were designed to address broader issues that had emerged with the growth and evolution of the fund industry. After today’s meeting, only three rule proposals will remain outstanding, and I expect the Commission to act on final recommendations on those proposals before year end.

* * * * *

The first item on our agenda is a recommendation that we adopt amendments to rule 12b-1 to prohibit fund brokerage from being used to compensate broker-dealers for selling fund shares.

Last fall, I asked the staff to re-examine rule 12b-1 and the use of fund assets for distribution. In February of this year, the staff came to the Commission with a recommendation that we propose to prohibit these directed brokerage arrangements and that we put out for comment the question of whether rule 12b-1 should be amended in a more comprehensive way, or perhaps even repealed.

We have received more than 1600 comment letters addressing issues raised in the release. The staff continues to develop its recommendations with respect to rule 12b-1 generally, but recommends that we act, without further delay, to adopt the amendments to rule 12b-1 concerning directed brokerage that were proposed last winter.

The decision to use fund assets for distribution clearly presents a conflict of interest to the fund’s investment adviser. When rule 12b-1 was originally adopted, the Commission did not anticipate that there would be problems with permitting funds to consider distribution when making brokerage allocation decisions. In recent years, however, it has become clear that the practice of directing fund brokerage to a broker-dealer as compensation for distribution of fund shares presents opportunities for abuse that are identical to those that arise when the fund makes direct payments for distribution. These problems are compounded by the difficulty of making effective disclosure to shareholders about the cost of the practice.

After carefully considering the views of commenters, I believe that we should adopt these amendments and I support the staff’s recommendation. Although funds will still be able to use selling brokers to execute portfolio transactions under this rule, the fund must have policies and procedures in place to preclude ‘quid pro quo’ arrangements relative to the sale of fund shares. I believe that this balanced approach achieves the goal of controlling potentially abusive arrangements, while recognizing that fund advisers will often need to use the services of selling brokers to effect fund transactions in order to obtain best execution for those transactions.

Once again, thanks to Paul Roye and the members of the Division staff who developed this recommendation – Bob Plaze, Hunter Jones, Penelope Saltzman, and William Middlebrooks. Congratulations to you all.

Now, Paul, could you please give us the details of your recommendation.


Modified: 8/18/2004