NASAA Forum Highlights Different Perspectives on 12b-1 Reform
It was an eclectic group: Vanguard founder Jack Bogle, new Investment Company Institute general counsel Elizabeth Krentzman, former Securities Industry Association general counsel Stuart Kaswell, senior Kirkpatrick & Lockhart partner Richard Phillips, and NASAA officials Patricia Struck and Denise Crawford.
Needless to say, they did not see eye-to-eye on what the SEC should do about 12b-1 fees.
While there was general agreement that the rule needed to be reformed, there was substantial disagreement as to how to go about it.
Krentzman said that her group supports the SECís "looking at 12b-1." She noted that the NASD task force, announced by NASD chairman Richard Glauber this past May, will be meeting on the topic of 12b-1 fees this fall. She also said that the ICI is anticipating the SECís new point of sale disclosure requirements, saying the group looked forward to those being adopted this year.
Phillips suggested that the SEC modernize the standards of board review of 12b-1 plans, to recognize that 12b-1 fees are not a temporary subsidy, but rather a permanent substitute for front-end loads. He also suggested that the disclosure requirements be modernized.
Bogle suggested that the fees be moved out of the fund and, instead of being charged as a fund-level expense, be charged directly against individual shareholder accounts either as an asset-based charge or payment on an installment basis on a front-end load. He noted that there would be a tax disadvantage to investors but said it would be "very, very small."
Kaswell disagreed, arguing that charging 12b-1 fees on an account-by-account basis would have significant tax implications for investors. "I think if we took a vote among investors, Iím not sure theyíd all vote in favor of that." He also said that there would have to be a "complete overhaul of the tax law before some of these things become even do-able."
On the other end of the spectrum, NASAA has urged that 12b-1 fees be abolished entirely.
Kaswell and others took issue with arguments that there is insufficient information on 12b-1 fees, saying that "very clear" 12b-1 fee information already is available to investors. "I think you have to read it, but itís there for anyone who cares to bother." Phillips agreed: "12b-1 fees are not hidden." "They are in the prospectus right front and center," added Krentzman.
Kaswell noted that Rule 12b-1 has been adjusted as needed over the years. "The SEC has revisited the rule periodically . . . Itís not like they set this thing in motion in 1980 and forgot about it."