12b-1 Fees, Target-Date Funds to Get SEC Attention

In her speech, Schapiro said “Rule 12b-1 is an area in need of re-consideration, and the SEC will pursue that re-consideration with the interests of investors first and foremost in our minds.”

The timing of the review of the 12b-1 rule will have to be prioritized among other items on the SEC’s reform agenda, she noted, and therefore, while it might not be in the next month, “12b-1 reform is an issue that deserves and will receive SEC attention.’

Earlier this year, at the Investment Company Institute’s 2009 Mutual Funds and Investment Management Conference, Andrew J. Donohue, director of the Division of Investment Management at the SEC, said the change in the market over the past two years necessitates a change in the Commission’s regulatory agenda and that the SEC is deferring “wholesale reconsideration of rule 12b-1’ (see “SEC Says Market Condition Changes 12b-1 Reform Plans’).

Target-Date Funds

Another area Schapiro said the SEC is examining is target-date funds, saying the SEC “will consider whether additional measures are needed to better align target date funds’ glide paths and asset allocations with investor expectations.’ She also said that the SEC staff has been working with the Department of Labor.

Schapiro touched on the growth in target-date funds and their popularity as default options in 401(k) plans. However, she called the returns of the 2010 target-date funds “troubling,’ noting that returns of 2010 target-date funds ranged from – 3.6% to – 41%.

While acknowledging that the varying glide path assumptions might lead to those outcomes, she said those assumptions built into the glide path must be disclosed. The SEC is reviewing target date funds’ disclosure about their glide paths and asset allocations, she said, and is also looking at whether the same target-date funds underlie both retirement and college savings plans, noting that those using such a fund in a 529 plan, for example, would need access to their investment at or near the fund’s target date, unlike some of the glide path assumptions for retirement. Schapiro challenged target-date fund directors to review the asset allocations and investments in their funds, and to consider “whether your target date funds’ asset allocations and investments are consistent with investor expectations.’

“Among other issues, we will consider whether the use of a particular target date in a fund’s name may be misleading or confusing to investors and whether there are additional controls the SEC should impose to govern the use of a target date in a fund’s name,’ she said.