SEC officials signaled this week that the agency is revisiting the rules regarding annual 12b-1 fees in mutual funds.
The fees — generally between 0.25 percent and 1 percent (the maximum allowed) of a fund's net assets – are part of the conflict-of-interest debate that has motivated the universal fiduciary rule in the works at the Department of Labor.
The fees are covered by investors' assets and pay for distribution, including expenses related to marketing to brokers as well as their compensation. The fees also cover the cost of delivering fund prospectuses to investors and the cost of sales literature. In some cases, 12b-1 fees also cover the cost of shareholder services, like call centers that field investors' inquires.
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Critics argue that the fees can incentivize brokers to sell funds that are not in the best interest of clients, an incentive that is a direct affront to a stronger fiduciary standard.
The annual charges on a product investors already own is unfair for investors, the critics say, and unduly lucrative for brokers and advisors.
A sales person with $100 million in assets under management in mutual funds that pay annual 12b-1 fees, who receives a 0.10 percent commission for the fund's shares they sale, would be earning $100,000 annually from their clients' mutual funds, according to one calculation.
In March, a consortium of consumer advocates wrote SEC Chair Mary Jo White to urge her to resurrect an early proposal in the Obama administration to advance reform of 12b-1 fees.
"Because the fees are buried within the administrative fee charged by mutual funds and annuities, investors often fail to understand how much they are paying or what they are paying for through these fees," said the letter, authored by the Consumer Federation of America, the AFL-CIO, and Americans for Financial Reform, among others.
This week, at a panel discussion hosted by the District of Columbia Bar Association, Marc Wyatt, deputy director of the SEC's Office of Compliance Inspections and Examinations, told ThinkAdvisor the agency is "looking at the whole complex" of 12b-1 fees.
Wyatt was joined on the panel by Julie Riewe, co-chief of the Asset Management Unit within the SEC's Enforcement Division.
Noting comments that she made in a recent speech, "Conflicts, Conflicts Everywhere…," Riewe said that "nearly everything we (in the Asset Management unit) look at involves conflicts," whether that be in proprietary investments or products or undisclosed fee arrangements. For instance, "revenue flowing from BD to advisor is not being disclosed," she said. "We see this most frequently in the private fund area."
As she noted in her Feb. 26 speech, conflicts of interest "should be of concern to everyone in this room," adding that the Asset Management unit divides the "vast asset management industry it polices" into three primary categories by investment vehicle: registered investment companies, private funds (both hedge funds and private equity funds), and other accounts (e.g., separately managed accounts/retail accounts).
Her advice to help firms properly assess their conflicts? "Take a step back and look at your firm holistically and principal risks it presents," she said.
Wyatt added that firms should be aware of conflicts that can possibly arise when "you bring on new business lines" and new products. "When you walk into a firm and they say there are no conflicts, (they) haven't considered all the risks in (their) business."
ThinkAdvisor Washington Bureau Chief Melanie Waddell contributed to this article.
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