The mutual fund industry is poised to do away with Class C mutual fund shares, even though the Securities and Exchange Commission gave them a reprieve by moving to table reforms.
"There's no question that's going to happen," Burton Greenwald, a Philadelphia-based mutual fund consultant, said about the industry's backing away from C shares. "What is happening is the industry has changed very drastically to a fee-based, rather than a transaction-based environment."
There is little room for C shares in such an environment, Mr. Greenwald said.
In addition, there is a larger trend away from "the ABC nomenclature," driven by the growing popularity of no-load mutual funds, Mr. Greenwald said.
Last year, single no-load mutual funds saw $14.87 billion of net inflows, according to Financial Research Corp. of Boston.
BIG OUTFLOWS
Meanwhile, A shares saw outflows totaling $103.74 billion, B shares shed $49.8 billion, and C shares were down by $17.95 billion, according to FRC.
Of course, 2008 was an unusual year with dramatic market volatility.
At least since 2002, however, shares of no-load funds have been outselling shares of load funds, particularly B shares.
Class A shares charge a one-time front-end load, B shares charge a back-end load, and C shares charge a level load applied annually as a fixed percentage of a fund's average net assets.
No-load funds, which have no sales charge, can carry a 12(b)-l fee up to 0.25% and still be considered no-loads.
Class C shares were in the spotlight last year when, as part of an overall effort to reform Rule 12(b)-1, the SEC considered capping the 12(b)-1 fees that investors in such shares pay annually. Those plans have been put on hold while the commission faces other regulatory reform issues in the wake of the market meltdown.
Of the share classes, B shares are considered the least investor- friendly.
"We have been leery of them because they present opportunities for advisers to do bad things," said John Coumarianos, a fund analyst with Morningstar Inc. in Chicago. "An adviser can present a client with a B share and say it has no load."
Starting tomorrow, American Funds will no longer sell B and 529-B shares of its mutual funds.The reason for the move is that the arrangement that American Funds had with a third party to front commissions to brokers who sold its B shares — essentially providing the financing for their sale — has ended, said Chuck Freadhoff, a spokesman for the fund group. American Funds is advised by Capital Research and Management Co. of Los Angeles.
But cash had already been leaving B shares for a number of years.
And some industry experts think that it is a trend that could eventually befall C shares.
Conceptually, C shares are viewed as "the poor man's wrap account," said Geoff Bobroff, a mutual fund consultant in East Greenwich, R.I. But because more and more brokers are going into wrap accounts that include no-load funds, "there doesn't seem to be as much need for C shares," he said.
That is the case at least among the bigger brokerage firms, said Eric Jacobson, a fixed-income specialist with Morningstar Inc. of Chicago.
For the moment, smaller firms are the ones keeping C shares alive.
"A lot of the regional and independent firms are doing things they always have been," said Mr. Jacobson, a former senior fund analyst with Morningstar.
C-SHARE REVIEW ON HOLD
Although the SEC has postponed a C-share review, few firms are going to take the chance that the agency has lost interest.
"The scrutiny on C shares has discouraged some people from using them as frequently as they once did," said David Bellaire, general counsel and director of government affairs for the Financial Services Institute Inc. The Atlanta-based trade group represents independent broker-dealers.
On the other hand, the SEC's decision to postpone action on Rule 12(b)-1 adds to the confusion and leaves the fates of B and C shares unresolved, said Ben Poor, a senior research analyst at Cerulli Associates Inc. in Boston.
"From a regulatory perspective, the marketplace has been unsure at times what to expect," he said. "For example, lawsuits in the 1990s accused broker-dealers of inappropriate sales of B shares, though at least one lawsuit last year argued that selling clients A shares was actually inappropriate, and the plaintiffs claiming that B shares would have been more suitable."
MANY CHOICES
As a result, it is difficult to "categorically argue" that one share class is universally superior, Mr. Poor said.
That makes it difficult for the fund industry to drop, or advocate for, a particular share class.
"One bright note: Between institutional share classes, R shares, B shares, C shares, [exchange traded funds], separate accounts and model portfolios, we live in a world where brokers and advisers have the luxury to choose the fee structure and vehicle that best matches their clients' needs," Mr. Poor said.
E-mail David Hoffman at [email protected].
