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By Christine Benz | 07-22-2010 05:27 PM

Proposal Could Change the Way You Pay for Funds

Morningstar's Karen Dolan and Russ Kinnel on what the SEC's recent fund fee proposal may mean for investors, and what still needs to be done.

Christine Benz: Hi, I'm Christine Benz for Morningstar.com.

On Wednesday, the Securities and Exchange Commission issued a proposal that could change the way fund investors pay for their mutual funds. Here to discuss the proposal and its possible implications for investors are Russ Kinnel, director of fund research for Morningstar, and Karen Dolan, director of fund analysis.

Guys thanks for being here.

Karen Dolan: Thank you.

Russel Kinnel: Thanks.

Benz: So there is a lot in the proposal. Russ, you've got it there, it's is hefty booklet.

Kinnel: 100 pages or so.

Benz: And we're still sifting through it, but the proposal really centers around Rule 12b-1, which is this opaque rule, and it has really shifted forms over the years. What is the SEC trying to accomplish with the proposal do you think?

Dolan: Well, we've been waiting a long time for it. This rule came into existence when the mutual fund industry was much, much smaller, and it offered funds a way to try to grow because funds have incredible economies of scale as they get larger.

And so, if they were able to spend some money of the fund assets to market and advertise and sell the funds, the thinking was those funds could grow, they could gain economies of scale and that actual expense ratios could come down as a result of that. So that's how the 12b-1 fee started, that was their original intent.

Benz: But it hasn't happened, right?

Dolan: Well, yeah. Russ had some great data on that actually.

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