SEC Proposes "Reforms" to 12b-1

On July 21, the SEC held an Open Meeting  to propose for public comment significant reforms to Rule 12b-1. The proposal is meant to address concerns that 12b-1 fees no longer serve their intended purpose of supporting fund distribution, represent additional sales compensation, and are poorly disclosed to clients.

Over past few months, we've held meetings with Chairman Schapiro, each of the Commissioners, and members of the Division of Investment Management concerning the substance of the rule proposal. Based on these meetings, and what was presented at today's Open Meeting, we understand that the rule proposal with include the following:

    • Renaming 12b-1 to enhance transparency for investors. 
    • Adopting additional disclosures of 12b-1 fees through confirmation statements, prospectus, and a
      point-of-sale
     of sale documents. 
    • Leaving Class A-share mutual funds largely unchanged by establishing a 25 bps safe harbor for 12b-1 fee
      payments. 
    • Treating additional 12b-1 fee amounts (e.g., 75 bps of the typical Class C-share fund trail) on future sales of
      mutual funds to a cap equal to: 
                  o The maximum Class A-share load for funds with A-shares, or 
                  o The caps established by NASD Rule 2830(d) (i.e., as much as 8.5%) if the fund does not have an
                     A- share. 
    • Creating a new class of mutual funds shares that are issued at net asset value. The compensation paid on
      such mutual fund transactions would be the subject of negotiation.

The Financial Services Institute has long held the position that Rule 12b-1 provides fair compensation to financial advisors for providing middle-class Americans with critical support and guidance in planning to achieve important financial goals ranging from retirement, to college funding for children, to caring for aging parents. FSI has vigorously advocated for the retention of 12b-1 fees as an essential way of aligning the interests of the advisor with the interests of their fund shareholder clients. For this reason, preserving 12b-1 fees for the benefit of small investors has been a top priority advocacy issue for FSI since 2007, when the SEC's initial 12b-1 proposal was introduced.

Once this proposal is made public, FSI will carefully analyze it to determine its impact on investors, independent financial advisors, and independent broker-dealers. We will keep you informed of developments and provide you with the tools to become actively engaged in our advocacy efforts on this critical issue.

Click here  for detailed notes from the SEC open meeting.

Click here for Bingham McCutchen summary of the SEC proposed rule.