FundWatch: Fund industry objects to limits on certain fees

By Sam Mamudi, MarketWatch
NEW YORK (MarketWatch) — The mutual-fund industry has come out
firmly against securities regulators' efforts to change and cap
certain fees now charged to some fund investors.

The plans would see an overhaul of 12b-1 fees, renaming them
"marketing and service fees" and limiting their charges to 0.25%
of assets. They would also cap continuing sales charges and allow
brokerage firms to set their own front-end sales charges.

Fund industry reaction has been mostly negative, with firms upset at
what they see as overreach by regulators in attempting to address the

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"There's an economic equilibrium that's been in the marketplace,
and government isn't going to be able to change that by fiat,"
said Paul Stevens, chief executive of fund industry trade group the
Investment Company Institute, in an interview.

"Is government supposed to put price controls on mutual funds?,"
asked Barbara Novick, vice chairman of BlackRock Inc.
, the world's largest asset manager by assets. "I don't
think so; we see a fair number of investors who vote with their

Stevens also took issue with the timing of the proposals, arguing that
the regulatory changes due to new financial legislation, not least the
question of whether brokers should be held to a fiduciary standard,
should be first addressed.

The comments dovetailed with many of the more than 1,000 public
responses the Securities and Exchange Commission has received since it
outlined its plans in July. The period for public comments ended Nov.5.

The criticisms were focused in particular on the proposed limits to
sales charges and plans to let brokers set their own up-front charges.
The SEC plan suggests that rather than have funds set sales charges,
brokerage firms could compete on price.

BlackRock was one of many industry players to argue that letting
brokerages set prices may lead to less competition.

Novick said larger firms would be able to undercut smaller rivals
because they can better absorb the administrative costs that come with
each account. This, she said, would lead to less choice for investors
as the larger firms would dominate the market.

!!Consumer Groups Aligned!!
Not everyone agrees. In a joint letter to the SEC, consumer groups
Fund Democracy and Consumer Federation of America applauded the plan
to introduce price competition, drawing parallels with charges levied
on individual stock traders.

"Since brokerage commissions were unfixed in 1975, they have
steadily declined to a small fraction of earlier levels," wrote the
groups. "Investors have benefited through the lower costs of
investing, which has allowed them to keep a larger percentage of their
market returns."

The consumer groups also welcomed the plans to rename and limit
existing 12b-1 fees, but raised concerns that the SEC hasn't
addressed the issue of revenue-sharing between funds and brokerage

See other critics' complaints about revenue-sharing.

Meanwhile, investment research firm Morningstar Inc. went in a
different direction, arguing for a radical change in how fund fees are

Morningstar called for fees to be broken out into four areas:
management, sales and marketing, advice and administrative overhead.

"The problem is that it's very difficult for investors to know
what price they're paying for which services," said Laura Lutton,
director for editorial research at Morningstar. "We're not trying
to stop funds being paid, but our question is, what are people paying

ICI's Stevens said Morningstar's overhaul "is not a realistic

"Our industry has grown up over 70 years and has a regime for
contracting services and reporting them in certain ways," he said.

Lutton said that she didn't think it would be too difficult for
funds to report agreements in a new way. But she added that she
wasn't surprised to see so much opposition to the SEC's plans.

"This industry has shown in the past they're apprehensive about
new rules that come down — they at first didn't like quarterly
portfolio disclosure or revealing their proxy votes," she said.

"Change is scary, especially in this area which is all about how
they get paid."

With the comment period now closed, SEC staff will work to come up
with recommendations for further actions on the proposals.

Sam Mamudi is a reporter for MarketWatch, based in New York
Source: Marketwatch.Com