The SEC on Wednesday proposed increasing disclosure of mutual fund fees charged for marketing purposes and capping the cumulative fees investors pay over time.
Under the proposal, a company couldn’t charge more in 12(b)-1 fees for a class of fund shares that continues to solicit new investors than they charge for classes that don’t. But the proposal allows mutual funds to continue to use 0.25% of their assets every year to pay for advertising and sales compensation.
“Despite paying billions of dollars, many investors do not understand what 12(b)-1 fees are,” SEC Chairman Mary Schapiro said at a meeting 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 them to pay brokers who sell funds. That has prompted regulators to re-examine the purpose and need for 12(b)-1 fees.
The SEC also proposed that investment companies reveal ongoing sales charges and marketing fees in a fund’s prospectus and reports sent to shareholders. Disclosures would have to include the total percentage of sales charges investors have to pay.
The proposal also requires investment companies to let brokers set their own sales charges. Brokers now have to market shares under terms established by the mutual fund. The SEC is concerned that the requirement hurts competition by preventing brokers from charging less than rivals.
The SEC will seek comment from investors and mutual funds on its rule considerations for 90 days before staff makes any changes. The rules require a second vote by SEC commissioners to become binding.