Let’s hope Cox is serious about 12b-1 fees
SEC Chairman Christopher Cox said recently that the commission is taking a hard look at 12b-1 fees, which mutual funds levy for “distribution costs.” Funds collected $11 billion of such fees last year, with most of the money going to brokers through revenue-sharing arrangements.
That’s far different than what the SEC envisioned when it permitted 12b-1 fees back in 1980, Cox points out.
The idea was that 12b-1 fees would be used to solve specific distribution problems, as they arose. And indeed, in the early going, that was our experience. No-load funds used 12b-1 fees of 25 basis points or less to offset the costs of advertising, of printing and mailing prospectuses, and of printing and mailing sales literature.
All of this was consistent with the Commission’s purposes in adopting the rule, at a time when nurturing mutual fund growth was an SEC priority. Specifically, the Commission’s action came at a time of net redemptions. There was a very real concern that if funds were not permitted to use at least a small portion of their assets to facilitate distribution, many of them might not survive.
Now, of course, mutual funds are far from an endangered species. Nor do they need help in growing to a size where investors can benefit from economies of scale. In fact, some funds continue to charge 12b-1 fees even when they’re not accepting money from new investors. Here’s where Cox talks tough about this issue:
For all of these reasons, the original premises of Rule 12b-1 seem highly suspect in today’s world. If ever it was justified to indulge an irrebuttable presumption in favor of using fund assets to compensate brokers for sales of fund shares, that time surely has passed. 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
Cox said the SEC would be “closely examining” the issue this year. The agency could do investors a huge service by banning 12b-1 fees altogether.
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David Nicklaus has covered St. Louis business for more than 25 years. His column appears three days a week on the Post-Dispatch business page. 
I don’t see how “12b-1″ fees are any worse than any other fees, given that they must be disclosed to investors (as they should be). If a mutual fund is able to convince investors that it can meet their financial interests despite the “drag” of various fees, then each party should have the right to do business on that basis.
If government really wants to protect people from stupid financial decisions, it ought to look into banning or requiring more “full disclosure” by state lotteries (a.k.a., taxes on stupidity).