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SEC Fee Rules Are Good, but Could Be Better

Plus, PIMCO plans emerging-markets stock fund, and more.

Morningstar Analysts, 07/26/2010

Two actions by the SEC this week demonstrate the commission's desire to help fund shareholders better understand the fees they're paying and better evaluate the advisor managing their investments.

Last Wednesday, the commission released a proposed rule that would bring changes to funds' marketing and distribution fees, which are known as 12b-1 fees. The proposal aims to curb fees on fund share classes that can be significantly more costly for long-term shareholders, such as C shares, and could lead to changes in the ways fund supermarkets disclose their distribution costs to shareholders.

Brokers would also be allowed to compete on the sales charges they levy clients for the first time if the proposal is enacted. Currently, all brokers are required to charge the same sales fee as specified in a mutual fund's prospectus.

The SEC said Wednesday that it's also making changes to a form that advisors must distribute to clients outlining the advisors' professional qualifications. The disclosure--Form ADV Part 2--will change from a check-the-box questionnaire to a plain-English narrative brochure that describes the advisors' fees, compensation, code of ethics, and professional disciplinary actions.

These new initiatives come on the heels of another proposal that would mandate a change in the required disclosure regarding target-date retirement funds. The initiative would require funds to include graphics that depict a fund's shifts in asset allocation as well as a specific mention--under the fund name--of the fund's asset allocation at the actual target date.

Collectively, these proposals could help fundholders be more successful investors, especially if they lead to lower, easy-to-dissect sales charges and more knowledge of the person managing their investments. Improved transparency on target-date funds, which are quickly becoming the leading choice among retirement-savings plan investments, is also welcome.

But the SEC could have gone further to ensure more transparency when it comes to fund fees. As the SEC has acknowledged in its review of 12b-1 fees, fund accounting is muddy, making it impossible for shareholders to fairly compare the services they receive for each portion of a fund's expense ratio. On the flip side, the SEC's disclosure requirement regarding target-date funds' asset allocation on the target date may be placing too much emphasis on a single point of a decades-long investment.

PIMCO to Launch Emerging-Markets Strategy
PIMCO announced today that it has hired a Goldman Sachs veteran to start an emerging-markets equity group at the Newport Beach, Calif. bond shop.

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