SEC seeks fund fee, OKs broker disclosure

NEW YORK (Reuters) - U.S. securities regulators on Wednesday said they will propose a cap on mutual fund marketing fees, a move that could reduce costs for investors and put a dent in brokerage and money manager earnings.

Known as 12(b)-1 fees, they were created 30 years ago to help fund managers defray marketing and administrative costs. Investor groups have long complained that these fees really let brokers who sell shares in the funds quietly get paid without imposing up-front sales charges.

"I think that despite paying billions of dollars many investors do not understand what 12(b)-1 fees are," SEC Chairman Mary Schapiro said at the meeting. "It's likely that some don't even know that these fees are being deducted from their funds or who they are ultimately compensating."

Following a public meeting, the Securities and Exchange Commission unanimously voted to propose rules that would limit fees to 0.25 percent of assets, with any expenses above that amount treated as a sales charge to be paid over time. Following a three-month comment period, members of the commission will decide whether to adopt the rules.

During the same meeting, SEC commissioners unanimously approved rules that mandate more complete disclosures by financial advisers and make the information available on the Internet.

12(b)-1 FEES

Schapiro said investors may not realize they are paying the equivalent of sales commissions at a rate of 0.75 percent a year over the lifetime of an investment.

"Nor do investors realize that 10, 15, 20 or more years down the road, they may still be compensating the sales person who sold the fund," she said.

Last year, investors paid $9.5 billion of 12(b)-1 fees, down from a 2007 peak of $13 billion.

"Consumers would no longer be forced to pay more than a reasonable amount to compensate their broker. They won't be subject to these endless streams of 12(b)-1 fees," said Barbara Roper, investor protection director for the Consumer Federation of America.

The SEC stopped short of eliminating the fees as many investor groups have urged.

Michael Kim, a fund-manager analyst at Sandler O'Neill & Partners, expects the changes may prompt fund firms to drop "C-shares," also known as level-load funds.

Roper said more brokers will likely promote A-shares, which charge an upfront sales load, or else invent a new class that charges the same marketing fees but for a limited time.

"The ultimate economic impact to the asset managers will likely be limited, as most of these fees are passed through to third-party distributors," Kim said.

DISCLOSURES

Under the second set of rules discussed on Wednesday, advisers will have to provide prospective clients "narrative brochures" with plain-language discussion of business practices, fees, conflicts of interest and any disciplinary record.

This will include information about conflicts of interest, including "soft dollar" deals, where money managers pay inflated commissions to get favors such as free research.

These changes are expected to improve the "Form ADV" disclosure documents that advisers have filed with the SEC for the past 21 years.

These forms, which ask brokers to fill out pages of multiple-choice and "check the box" questions, do not always properly describe an adviser's business and, too often, do not provide useful information to investors, the SEC has said.

These changes "will enable investors to better evaluate their current advisers, or comparison shop for a new adviser that best serves an investor's needs," Schapiro said. "This disclosure may result in advisers modifying business practices and compensation policies which might pose conflicts."

The proposal has generated controversy because it would be costly for smaller advisers. Other critics say electronic and paper brochures would be redundant and bombard investors with information.

(Reporting by Joseph A. Giannone. Additional reporting by Ross Kerber and Aaron Pressman in Boston; editing by Robert MacMillan, John Wallace and Leslie Gevirtz)