SEC Investment Management Division Director Wants Mutual Funds to Call Their “Distribution Fee” a “Sales Charge”

The director of the Securities and Exchange Commission’s Investment Management Division is calling for mutual funds to rename their 75 basis point “distribution fee” and call it a “sales charge”-regardless of whether the sales charge is deducted right away or over a period of time.

At the Investment Company Institute’s 2007 Securities Law Developments Conference in Washington, Donohue issued a call out for “truth in labeling.” He said that financial advisers should notify investors about the sales charge and the information about the charge should also be in the prospectus and the confirmation.

Last year, the mutual fund industry collected 12b-1 fees totally $11.8 billion. These fees are authorized under the 1940 Investment Company Act Rule 12b-1 in 1980.

12b-1 fees were originally intended to cover marketing and distribution costs. However, they are now used to pay consultants and financial advisers, 401k administrators, and fund supermarkets (such as Fidelity and Charles Schwab). The fees are also used to cover a company’s internal expenses.

The Investment Management Division staff wants Class A, Class B, and Class C investors to be treated fairly, rather than having distribution costs be unfairly divided between the three groups. Donohue said the current discrepancy could lead to conflicts of interests for people charged with selling the funds.

Donohue also wants to the industry to look at whether investors are paying over what the NASD rule has set for 12b-1 fees and beyond the maximum sales load. His SEC division staff will suggest reforms that update the 12B-1 factors, which fund boards evaluate when examining 12b-1 plans.

The division will also look at ICA Section 22(d), which mandates that a fund’s public offering price be included in the prospectus. He and his division want to approach the issues from the point of view of a fund investor.

The stockbroker fraud law firm of Shepherd Smith and Edwards represents investors who have lost money because of the negligence or misconduct of security industry members. Contact Shepherd Smith and Edwards today.

Related Web Resources:

Remarks Before the ICI 2007 Securities Law Developments Conference, by Andrew J. Donohue,, December 6, 2007
Division of Investment Management,

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