A major U.S. investor protection organization is calling for an end to trailer-type fees, favouring minimum hold periods for U.S. mutual funds.

Ralph Lambiase, president of the Washington, D.C.-based North American Securities Administrators Association, calls for the changes in comment letters to the U.S. Securities and Exchanges Commission. Lambiase wants the SEC to eliminate mutual fund 12b-1 fees, which are similar to trailer fees in Canada. He also suggests that requiring mutual funds to impose a minimum holding period for fund shares would more effectively curtail market-timing abuses than the imposition of a mandatory 2% redemption fee.

“Though well-intentioned, the proposal to impose a 2% redemption fee is not the solution for market-timing abuses. A better way to address the problem would be to impose a minimum holding period for mutual fund purchases,” one letter says. “The minimum holding period should be long enough to prevent market timing, but should not be so long as to impose an undue restriction on transferability or liquidation of an investor’s securities.”

NASAA concedes that a defined holding period may not be popular with the fund industry, but points out: “It was the reluctance of funds to make procedural changes that set the stage for the market-timing abuses that we currently face.”

“On the issue of 12b-1 fees, NASAA recommends a dramatic shift away from the current regulatory structure. “No amount of disclosure can cleanse a system that is inherently conflicted,” it says. “Rule 12b-1 should be rescinded as it has outlived its original purpose. Originated as a means for start-up funds to expense marketing costs equally among fund shareholders, we fear that, in certain instances, the rule has become a mechanism for allowing fund managers to take advantage of fund shareholders.”

Lambiase is critical of the fees’ opaqueness. “Investors do not know what they are being charged, nor do they know what exactly the charges are for,” the letter says. “Enhanced disclosure is not the answer. Elimination may prove to be the best solution,” or to only allow only funds that do not charge any kind of front-end or deferred sales charges to charge these fees.

NASAA says that the commission needs to replace the current system with a process that shifts marketing costs to fund managers.