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Compliance November 10, 2007
SEC: Stay Tuned for 12b-1 Changes
While the Securities and Exchange Commission (SEC) is actively considering changes to Rule 12b-1, most of the comments on the subject appear to be opposed to change.
Reported by Nevin E. Adams
In a speech given at the Investment Company Directors Conference this week, Andrew Donahue, Director, Division of Investment Management at the SEC, told attendees that there were concerns that Rule 12b-1 no longer serves the purpose for which it was intended and that the factors that a board considers are not relevant in today’s market. But he also admitted that most of the comments received to date were opposed to any significant changes.
He noted that when the SEC adopted Rule 12b-1 in 1980, the fund industry was in a far different state than exists today; recession, inflation in double digits, and depressed stock values. In fact, Donahue noted that during the worst period — January 11, 1973 to December 6, 1974 — the (non-inflation adjusted) S&P 500 declined almost 46%.
Funds had experienced a period of net redemptions and, according to Donahue, there was serious concern for the viability of the mutual funds market for a variety of reasons. “The Commission adopted Rule 12b-1 which generally makes it unlawful for a fund to act as a distributor of its own securities — which the fund will be deemed to be if it engages directly or indirectly in financing any activity primarily intended to result in the sale of its fund shares — unless the fund adopts a plan of distribution,’ Donahue noted. The adoption and continuation of a 12b-1 plan requires board approval and, in keeping with the release adopting the rules, boards typically consider nine factors when determining whether to approve or continue the plan, he said. However, he noted, many of those urging a repeal or refinement of Rule 12b-1 argue that the rule no longer serves the purpose for which it was intended and that the factors that a board considers are not relevant in today’s market.
The SEC hosted a roundtable discussion on the topic in June, and also solicited public comment on Rule 12b-1. Donahue said that the SEC received more than 1450 comment letters on the topic – but also noted that approximately 1000 of these letters were “…form letters that were sent by financial planners and registered representatives who oppose substantive reform of Rule 12b-1.’ Donahue also noted that an additional 400 or so individualized letters were sent in by financial planners – most of whom also oppose substantive rule reform – and the SEC also received approximately 25 letters from mutual funds, large broker-dealers, insurance companies, industry associations and counsels – and most of these also opposed significant rule reform, according to Donahue.
However, he noted that there were “riddled throughout’ the letters from the mutual fund companies various levels of support for:
- changing the name of the fee,
- requiring additional disclosure and
- revising the role of the fund board in approving the distribution plan.
Donahue did note that the SEC received approximately 10 letters from investors – most of whom supported substantive reform or repeal of the rule. “My staff is currently evaluating the many comments we received,’ Donahue said. “Once that process is complete, we will formulate a recommendation to the Commission. Stay tuned for further developments.’
Stay tuned indeed.
A transcript of the speech is online at http://www.sec.gov/news/speech/2007/spch110607ajd.htm