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The Hard to Understand "12b-1" Fees May Be Overhauled

12b-1 fees are distribution and/or service fees that are considered an annual marketing expense of a mutual fund. The fees, normally 0.25-1% of a fund's net assets, are named after the 1980 SEC rule that authorized them. Typically, the fee is used to compensate brokers and others who sell fund shares, along with paying for marketing and advertising expenses.This compensation can take place even in funds that market themselves as no-load or no-commission funds, because the 12b-1 fees are considered operating expenses rather than transaction fees. Recently, the SEC has voiced concern that investors may not understand or even be aware of the fees and their potential effect on investor returns.Investors benefit by paying the charges in bulk, proponents of the fees say, because the fees can reduce investors' taxable incomes, according to a July 6 WSJ article by Karen Damato. The real reason, however, may have more to do with charging investors for broker commissions in a way unlikely to produce scrutiny or concern.SEC Chairman Mary Schapiro was quoted in the WSJ article as saying, "We need to critically rethink how 12b-1 fees are used and whether they remain appropriate." According to Damato, the SEC has a long history of concern about 12b-1 fees, yet never seems to make any progress toward overhauling the rule or ensuring better disclosures. Current proposals by the SEC include adjusting the 12b-1 rule by treating any 12b-1 fees over 0.25% as assets that must be paid over time and requiring clearer disclosures of how the fees are charged. At this point, repealing the 12b-1 fees altogether seems unlikely.

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