SEC’s Division of Investment Management to Make 12b-1 Fee and Form ADV Recommendations Soon

According to the director of the Securities and Exchange Commission’s Division of Investment Management Andrew Donohue, its staff is close to recommending that the SEC adopt a proposed rule mandating that mutual funds give clients better information about the uses of Rule 12b-1 distribution fees and their amounts. The fees are automatically taken out of investor mutual fund balances and used as compensation for financial professionals’ expenses, including broker commissions, promotions, and distributions. More than $13 billion in Rule 12b-1 fees were collected in 2008.

Reform of Rule 12b-1 is likely to steer up a lot of controversy between industry participants and consumer interest groups. Adopted under the 1940 Investment Company Act in 1980, 12-b 1 fees’ use has changed significantly since then. At an American Bar Association function last month, Donohue said that the division hopes to recommend a reform proposal that is more investor-oriented, allows clients to have additional knowledge about how much the fees are and how they will be used, and better reflects today’s market environment.

The division is also close to recommending to the SEC that it adopt revisions to Part 2 of Form ADV, which is the main disclosure document that clients get from investment advisors. Under the proposal, registered investment advisers would have to give current and prospective clients a brochure written in plain English that provides important information about the services they are getting and who is representing them.

Donohue noted that the division is also working on a proposal regarding summary prospectus for variable annuities that would also give investors key information in English that is easy to understand, as well access to more information via the Internet. He also noted that because of the increased use of “derivatives (including collateralized debt obligations and credit default swaps) and sophisticated financial products” and the ability of a fund’s manager to put together a portfolio in so many different ways that are not necessary related to how much has been invested or the kinds of instruments in the fund, the division is compelled to examine investment companies derivative activities and what they mean for the “regulatory framework.”

Related Web Resource:
Luncheon Address Before a Meeting of the Business Law Section of the American Bar Association Committee on Federal Regulation of Securities by Andrew J. Donohue,, April 24, 2010
Securities and Exchange Commission’s Division of Investment Management, Securities and Exchange Commission
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