By James Hamilton, J.D., LL.M.
Echoing earlier remarks by the Director of the Division of Investment Management, SEC Chairman Christopher Cox said that the Commission will conduct a thorough review of 1940 Act Rule 12b-1. The tenor of the chair’s remarks to the Mutual Fund Directors Forum was that whatever merit the rule had during the infancy of the modern fund industry that is no longer the case. In fact, he said that collecting an annual fee from mutual fund investors that is supposed to be used for marketing is no more consumer friendly than forcing cable TV subscribers to pay a special fee of $250 a year so the cable company can advertise HBO and Showtime to lure potential new customers. He promised that the Commission would take a hard look at current Rule 12b-1 practices.
These remarks dovetail with remarks by Andrew Donahue, the Investment Management director, who recently called for a review of Rule 12b-1 fees. Taken together, these twin remarks presage a complete review of the rule and raise the possibility of substantive changes. The SEC plans to revisit the original intent of Rule 12b-1, and consider its meaning in light of today's market realities and current practice.
Given that the Commission has so thoroughly bound the decision to charge 12b-1 fees to the independent judgment of the fund's disinterested directors, noted Chairman Cox, both the independent directors and the SEC must together tackle head-on the problem of brokers' sales commissions masquerading as fund marketing costs.