Market Watch : NASD Wants a Cap on Fees for Mutual Funds : Investments: If the SEC approves the proposal, charges to buyers could total no more than 8.5% of gross sales.

The National Assn. of Securities Dealers within a few weeks will seek federal approval to cap the fees a mutual fund can charge investors.

The $1.2-trillion mutual fund industry, entrusted with the savings of one in every four American families, has drawn sharp criticism from investors who are confused and angered by a complex array of fees.

In letters to the SEC, individual investors called aspects of the current fee structure “a joke” and “a monster.”

The NASD rules, if approved by the SEC, would cover the vast majority of mutual funds--those sold by the 4,000 securities dealers who are members of the organization.

Mutual funds can charge three types of fees to cover sales-related expenses. Many funds employ various combinations of these fees.

Because each type is assessed in a different way, it can be tough for investors to calculate their true cost and then to comparison-shop among funds, said John Taylor, NASD’s director of investment companies.

In its rule to be filed with the Securities and Exchange Commission, NASD is proposing that fees never exceed the equivalent of 8.5% of a fund’s gross sales. When that cap is reached, no additional fees would be charged.

SEC approval is required for the rule to take effect. It has won the backing of members of the NASD.

But the SEC may decide to include the proposal as part of its overhaul of the 50-year-old law that governs the fast-growing mutual fund industry, said SEC Assistant Director Matthew Chambers.

The agency completed gathering comments last month on how to update the 1940 Investment Company Act. It now has folders several feet high packed with recommendations. SEC officials expect to complete their proposals by early next year, Chambers said.

Now NASD is only permitted to impose an 8.5% cap on front-end sales charges, a fee that an investor pays on buying into a fund. Broker-sold funds, which account for about half of all sales, usually charge such front-end loads, said the Investment Company Institute.

Directly marketed funds that often employ toll-free telephone numbers and solicit investors through media advertisements generally prefer contingent deferred sales loads, also known as back-end loads, and 12b-1 fees, known as asset-based fees.

The former are levied on withdrawals and use a sliding scale that disappears after an investment has been held for a certain period. The latter are annual charges of about 0.1% to 0.2% of net assets.

NASD said it is “anomalous” that it can place limits only on front-end sales. It also wants to prohibit funds from stating they are “no load” or have “no sales charge” if they include asset-based fees.

The rule would delight some investors. K. C. Gupta of Skokie, Ill., in a letter to the SEC, called “no load” a joke. “The term has an obvious literal meaning, but the lawyers and greedy fund promoters have so far gotten the best of it.”

R. Bruce Oliver, retired chairman of the John Hancock family of mutual funds, called 12b-1 fees “a monster” that should be abolished or strictly limited.

“A Pandora’s box has been opened that truly has provided an unanticipated increase in adviser profits” without any concomitant increase in the advisers’ fiduciary responsibilities, Oliver told the SEC.