SEC Tackles Fund Fees

The Securities and Exchange Commission has the mutual fund industry in its sights -- again.

SEC Chairman Christopher Cox has been talking tough about fund governance and fees. Addressing the Mutual Fund Directors Forum, an organization for independent fund directors, earlier this month, Cox said the time has come for a thorough re-evaluation of so-called 12b-1 fees, which are used to cover marketing costs.

Many investor-rights advocates consider this expense a hidden broker's commission, or sales load, and Cox told the fund directors that the fees have outlived their original purpose.

Considering that the SEC took the issue up once before, in 2003, only to let it go, some people are dismissing Cox's statements as a case of "been there, done that." However SEC spokesman John Nester says the issue got placed on the back burner four years ago only because the Commission took on a more pressing issue, market timing of mutual funds, that year.

This time, with shareholder rights becoming a big issue, the likelihood for change is greater.

Good Intentions

Created in 1980, the 12b-1 fee arose to solve a specific distribution problem. After the horrible stock market of the 1970s, investors were pulling so much money out of funds that Wall Street feared the industry might not survive.

Assuming the rule would be short lived, the SEC allowed mutual funds to use a percentage of investor assets to offset the cost of advertising and the printing and mailing of prospectuses and other sales literature. The presumption was that this charge would benefit investors in the end. If the advertising worked, more investors would deposit more assets into a fund. By spreading the fixed costs of running the fund over a greater group of investors, the overall expense ratio would fall.