FSI girds for battle over 12(b)-1 fees

NEW YORK — The Financial Services Institute Inc. is gearing up for a fracas with regulators over the highly contentious issue of 12(b)-1 fees, an embedded annual charge in almost all mutual funds.
The 12(b)-1 fees are “critically important to the industry. If they go away, the industry would have to change the way it does business,” said one attorney at an independent- contractor broker-dealer, who asked not to be identified.
“This is a real issue for [the FSI’s] constituents,” the attorney said. “Some independent broker-dealers get a fair portion of revenue off those fees.”
And top securities regulators clearly are focusing on the fee issue.
Last month, Securities and Exchange Commission Chairman Christopher Cox indicated that it might consider ways for advisers to recoup expenses for servicing their clients’ accounts if 12(b)-1 fees are abolished (InvestmentNews Daily, May 10).
In the wake of those comments, Joseph Borg, the Alabama securities commissioner and president of the North American Securities Administrators Association Inc. in Washington, said that it was “about time” that the SEC reviewed the fees (InvestmentNews, May 14).
Now, the Atlanta-based FSI, the trade group for independent-contractor broker-dealers and their affiliated advisers, is ready to do battle to protect those fees for registered representatives.
“While we acknowledge that the uses of 12(b)-1 fees have changed since the SEC approved the original rule more than 20 years ago, we will not stand on the sidelines while regulators attack and undermine the ability of financial advisers to receive fair compensation for the ongoing service and advice that clients need and deserve,” the FSI said in a statement on its website that alerted its members to regulators’ recent statements.
Round-table discussion
And the issue of 12(b)-1 fees will continue to be prominent in the coming weeks.
The SEC said that it will hold a round-table discussion of the fees June 19. Although the SEC hasn’t announced the participants, FSI president and chief executive Dale Brown said that the group will take part.
The fees make it possible for reps and advisers to offer continuing service and advice for small investors, he said. “That’s one of the main perspectives we can bring to that dialogue,” Mr. Brown said.
The 12(b)-1 fees help advisers provide service to middle-American investors, he said. Mr. Brown also downplayed the FSI’s rhetoric over the issue.
“We’re going to pursue our strategy of constructive engagement,” he said. To that end, the FSI already has had a handful of meetings with individuals from the SEC, Mr. Brown said.
Elevating the FSI’s “level of engagement” with the SEC was one of the trade organization’s goals for this year, he said.
“They’ve been pretty positive first meetings,” Mr. Brown said. Some SEC officials “haven’t heard of the FSI,” he said.
Next stop, Congress?
“Most are introductory meetings and leaving the groundwork for
follow-up meetings,” Mr. Brown said. “There’s no meeting with Chairman Cox on the schedule, but we recently met with his staff.”
And the FSI also is trying to schedule a meeting with Andrew “Buddy” Donahue, director of the SEC’s division of investment management, Mr. Brown said.
Beyond the SEC, there is the possibility that the issue of 12(b)-1 fees could be taken up by Congress, he said.
Mr. Brown said that he hasn’t heard of any members of Congress showing an interest in the issue, but that could change.
“It wouldn’t surprise me if someone on Capitol Hill takes up the issue, as well,” he said.
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