SEC Chairman Andrew Donohue recently said that an examination of the 12b-1 rule, written 27 years ago, is a big priority for 2007. Registered Rep. spoke on the subject with Jeffrey Keil, principal at Keil Fiduciary Strategies, who did extensive research on 12b-1 fees as an analyst at Lipper.
Registered Rep.: The SEC has talked about reconsidering the 12b-1 rule for years. Any reason to think it will happen this year?
Jeffrey Keil: Well, Donohue seems determined to finally address it. Obviously, the mutual fund governance rule has taken the stage for the last several years. Some of the compliance stuff is behind us. Now might be a good window to address the issue. I also got the sense that it was something that personally annoyed Mr. Donohue.
RR: What is the crux of the problem?
JK: The rule was written in a period that bears virtually no resemblance to today. It was envisioned as a temporary measure to allow the no-load fund groups that had just emerged to compete with the large loaded complexes. The idea was that each of these no-load groups would pay a few basis points to do some direct marketing and advertising. But nothing like the 1 percent that you see today.
RR: What are some of the alternatives regulators might consider?
JK: One of the issues is, do you leave 12b-1 sales charges as part of the expense ratio, paid for with fund assets, or are they totally separate? If you compare a no-load fund complex to a loaded complex, on one side you have just operating expenses, and on the other side you have a blending of operating expenses and sales charges. So it's not apples to apples. If you pulled that asset-based sales charge piece out, then shareholders would pay the distributor directly, and the comparison would be more valid.
The other issue is that, originally, fund trustees were supposed to look at a 12b-1 plan each year and say, OK, has the problem been solved? Can we cut the expenditures of the plan off now? Today, in most cases, continuation of a 12b-1 plan is virtually a given. Because it wouldn't be fair for the distributor to front the B-share sales commission to the intermediary and not be able to get that money back.
RR: What kind of solutions do you think Donohue will consider?
JK: It appears he's going into it with a very open mind, including possible repeal of rule 12b-1. But I don't think anyone honestly believes he will repeal.