SEC moves to require more disclosure and impose limit on mutual fund fees
U.S. regulators, saying mutual funds don’t fully inform customers about the billions of dollars they charge every year to pay for marketing, took a step toward imposing new rules on the practice.
Securities and Exchange Commission members voted 5-0 on Wednesday to seek comment on a proposal that would increase disclosure and cap the cumulative fees investors pay over time. Under the measure, a company couldn’t charge more in so-called 12b-1 fees for a class of fund shares that continue to solicit new investors than they charge for classes that don’t.
“Despite paying billions of dollars, many investors do not understand what 12b-1 fees are,” SEC Chairwoman Mary L. Schapiro said in Washington. “It’s likely that some don’t even know that these fees are being deducted from their funds or who they are ultimately compensating.”
The SEC in 1980 allowed mutual funds to charge clients distribution fees to pay for advertising as the industry struggled to attract new investors. Those payments amounted to $9.5 billion in 2009, and money managers are increasingly using proceeds to pay brokers who sell funds. That has prompted regulators to reexamine the purpose and need for 12b-1 fees.
The proposal would allow mutual funds to continue using 0.25% of their assets every year to pay for advertising and sales compensation.
The agency proposed that investment firms reveal ongoing sales charges and marketing fees in a fund’s prospectus and reports to shareholders. Disclosures would have to include the total percentage of sales charges investors have to pay.
Investment companies would also be required to let brokers set their own sales charges. Brokers now have to market shares under terms established by the mutual fund. The SEC expressed concern that the requirement hurts competition by preventing brokers from charging less than their rivals.
The agency will seek comment from investors and mutual funds on its rule considerations for 90 days before the staff makes any changes. The rules would require a second vote by SEC commissioners to become binding.
