It has long been clear that the SEC opposes 12b-1 fees, the fees that funds use to compensate investment advisors for their sales and marketing efforts. For the past two decades, the SEC has embarked upon various attempts to repeal Rule 12b-1 or render it meaningless. The SEC, however, has never been able to build the political will to amend or repeal Rule 12b-1 and it remains the law.
The SEC’s latest attack on 12b-1 is a classic example of rule-making by enforcement. On February 12, 2018, the SEC issued a press release announcing its new Share Class Selection Disclosure Initiative (SCSD Initiative). The SCSD Initiative relies on Section 206 of the Investment Advisers Act of 1940 (the “Advisers Act”) which imposes a fiduciary duty on investment advisers to act in their clients’ best interests, including an affirmative duty to disclose all conflicts of interest. When an adviser receives 12b-1 fees from a mutual fund it presents a possible conflict of interest if a less expensive share class is available. Prior to the SCSD Initiative, the industry standard was to disclose this conflict of interest in a straight forward manner.
The SCSD Initiative and subsequent guidance put out through FAQs has effectively amended 12b-1 by requiring disclosure of: