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News February 28, 2005 Issue

12b-1 Rulemaking on SEC Backburner

"Not this year."

So said SEC associate director Robert Plaze when asked when the SEC might move forward with any rulemaking in the 12b-1 area. "We are summarizing the ideas we received and are talking among ourselves," said Plaze at the Mutual Fund Directors Forum earlier this month. However, he said that the staff would not pursue the project until the SEC had completed the rulemaking that arose out of the fund scandals, such as the redemption fee and the hard 4 close rulemakings. Those rulemakings, he said, are "our highest priority."

Back in December 2003, when the SEC proposed to ban funds from entering into directed brokerage for distribution arrangements, the SEC asked for comment on 12b-1 fee reform, it hinted that one option on the table might be to deduct 12b-1 fees directly out of shareholder accounts. That idea quickly met with criticism. The Investment Company Institute asserted that deducting 12b-1 fees at the shareholder account level would have negative tax consequences for fund shareholders and create recordkeeping burdens for shareholders and fund service providers alike.

SEC Division of Investment Management director Paul Roye acknowledged that that the idea of directly deducting 12b-1 fees out of shareholder accounts was not welcomed by some in the industry. "There are people who donít like that approach, so weíll see where we are," said Roye. He noted that the NASDís Mutual Fund Task Force is currently working on its recommendations on 12b-1 fees. After issuing its soft dollar recommendations this past fall, the group has moved on to focus on distribution arrangements, including 12b-1 fees and revenue sharing. "Weíre anxious to see what comes out of that effort," said Roye.

In other 12b-1 news:

The ICI recently released the results of a survey that found that 92 percent of the $10 billion in 12b-1 fees collected by funds in 2004 were allocated to "financial advisers or other intermediaries" to compensate them for "assisting shareholders before and after purchasing funds."

In a similar ICI report issued in 1999, the group found that 64 percent of 12b-1 fees were used to for "payments made to broker-dealers for sale of fund shares; reimbursements to the fundís distributor for financing charges arising from advances made to broker-dealers for the sale of fund shares; and compensation of in-house personnel." The ICIís 1999 study found that 32 percent of the 12b-1 fees paid in 1999 were attributed to compensation to third parties for recordkeeping and other services provided to fund shareholders.

Both ICI reports clearly indicate that 12b-1 fees arenít being used for marketing. Both the 2005 and the 1999 studies found that only a small percentage of 12b-1 fees are used for advertising and promotion.