The U.S. Securities and Exchange Commission is proposing changes to the regulation of mutual fund distribution fees to limit the amount of fees paid, and encourage price competition by brokers, among other things.

The SEC voted unanimously Wednesday to propose measures aimed to improve the regulation and disclosure of 12b-1 fees, which are similar to trailer fees. The proposal would limit these sorts of “ongoing sales charges” to the highest fee charged by the fund for shares that have no ongoing sales charge.

“For example, if one class of the fund charges a 4% front-end sales charge, another class could not charge more than 4% in total to investors over time. The fund would keep track of how long investors have been paying ongoing sales charges,” it explains. However, funds could continue to pay 0.25% per year out of their assets for distribution as “marketing and service” fees, for expenses such as advertising, sales compensation and services.

The SEC is also seeking to encourage price competition by allowing broker-dealers to establish their own sales charges, tailor them to different levels of service, and charge unitholders directly, similar to how commissions are charged on securities such as common stock. Funds that rely on this exemption would not be able to deduct other sales charges from fund assets for that class of shares to prevent double-charging.

The proposal would also require more disclosure about these fees. Funds would have to disclose any “ongoing sales charges” and any “marketing and service fees” in the fund’s prospectus, shareholder reports and trade confirmations. Trade confirmations also would have to describe the total sales charge rate that an investor will have to pay.

“Despite paying billions of dollars, many investors do not understand what 12b-1 fees are, and it’s likely that some don’t even know that these fees are being deducted from their funds or who they are ultimately compensating,” said SEC chairman, Mary Schapiro. “Our proposals would replace rule 12b-1 with new rules designed to enhance clarity, fairness and competition when investors buy mutual funds.”

There will be a 90-day public comment period after publication of the proposal. There will also be a transition period for the new rules before they take effect.

IE