The mutual fund industry's trade association, the Investment Company Institute, recently released a comment letter on the SEC's Proposal to change "Mutual Fund Distribution Fees" and to eliminate 12b-1 fees over 0.25%. Though money market mutual funds are not dramatically impacted by these proposals, since just a fraction of money funds have 12b-1 fees over 0.25%, there are several issues in the proposals that involve them. (Crane Data's Money Fund Intelligence XLS shows less than 15% of taxable money funds with distribution fees over 0.25% representing less than 5% of all assets; most institutional money funds shifted from 12b-1 fees to "shareholder service" fees years ago.) The ICI's "Mutual Fund Distribution Fees; Confirmations" letter says, "The Investment Company Institute appreciates the opportunity to comment on the Securities and Exchange Commission's proposed new rule and rule amendments that would replace Rule 12b-1 under the Investment Company Act of 1940."
The letter explains, "The SEC has a number of legitimate concerns with 12b-1 fees. Rule 12b-1 was adopted in 1980 and is in need of an update. Investors may not have sufficient understanding of what 12b-1 fees are, other than a line in the fund's fee table, or what they pay for. Boards currently feel compelled to make findings pursuant to outdated guidance that is impractical and largely unnecessary. We share many of these concerns and commend the SEC for its attempt to address these issues. Ultimately, however, we believe that the proposal places the agency in the inappropriate role of a ratemaker, and is far more extensive and intrusive than necessary. If adopted as proposed, the revisions could fundamentally alter the way intermediaries use funds in various distribution channels, significantly affect the lineup of share class options currently available to investors, necessitate major systems changes, and require the renegotiation of thousands of dealer agreements. All of this would be done at a great cost that would be reflected in higher expenses borne by shareholders. And the benefits are uncertain and quite possibly illusory. As a result, the significant operational and transitional costs on funds, intermediaries, and investors are simply not warranted."
ICI continues, "We are concerned that, while the SEC did not propose to eliminate C shares, the proposal would have a significant impact on these shares as we know them and disadvantage many small investors. To the extent that, despite our concerns, the SEC moves forward with this part of the proposal, it should distinguish the C share context from other uses of 12b-1 fees, such as for retirement shares and money market funds, where the use of 12b-1 fees is far different from the use of a front-end sales charge."
In its summary on "Money market funds," the letter says, "The use of 12b-1 fees in the money market fund context is clearly not the functional equivalent of a front-end sales charge; money market funds are not sold with a front-end sales charge. The Release does not appear to contemplate the use of 12b-1 fees by money market funds, either with respect to marketing and service fees or ongoing sales charges. Before the SEC goes forward with this rulemaking, it should carefully consider the application of the rules in this context, and in doing so should reject the notion that 12b-1 fees in excess of 25 basis points must in this case be treated as an ongoing sales charge subject to conversion. Requiring systems to be built for money market funds to track and age their shares, including, for example, the daily investment of overnight balances in a sweep account, would be costly and pointless."
The "Money Market Funds" section on page 19 explains, "Money market funds are not sold with front-end sales charges, so in this context the proposal's ongoing sales charge concept -- treating a portion of 12b-1 fees as the functional equivalent of a frontend sales charge -- is wholly inapt. Money market funds with 12b-1 fees higher than 25 basis points often are used in commercial sweep accounts. As in the retirement plan context, the transfer agency systems used to manage the flows into and out of the sweep accounts are not built to track and age investments by share lot, and would have to be built if funds were required to treat the amount of current 12b-1 fees over 25 basis points as an ongoing sales charge -- a needless and wasteful exercise, given that the intended purpose of the funds in this context are for managing overnight cash balances, not long term investments. Moreover, the application of the ongoing sales charge concept seems particularly misplaced here, because 12b-1 fees are used in this context far more like platform fees than an alternative to a front-end sales charge. Put another way, 12b-1 fees in this context are much more like marketing and service fees than ongoing sales charges."
It continues, "It does not appear that the use of 12b-1 fees by money market funds was contemplated in the Release, either with respect to marketing and service fees or ongoing sales charges. Before the SEC goes forward with this rulemaking, it should carefully consider the application of the rule in this context."
Finally, ICI's letter adds, "Ultimately, our recommendation is similar to the retirement share context. To the extent the SEC goes forward with this rulemaking and decides to apply the new framework to money market funds, it should reject the notion that all current 12b-1 fees in excess of 25 basis points must be treated as an ongoing sales charge. The mere fact that money market funds are not sold with front-end sales charges belies the premise that money market funds should be included in this rule. The SEC might direct FINRA to permit the payment of higher marketing and services fees by money market funds. In any event, requiring systems to be built to track and age daily investment of overnight balances for the theoretical conversion to another share class years in the future is clearly pointless, and would fail any cost-benefit analysis the SEC undertook as required by statute. The needless costs associated with such a requirement would serve only to make money market funds less efficient, without providing even theoretical benefits to investors."
