The Fight Against 12(b)-1 Fees Hits a Snag

Includes: BLK, EV, IVZ, OPY
by: Tom Lydon

The SEC has made a point in cracking down on 12(b)-1 fees in mutual funds and ETFs, but the fight against the fees has been dealt a major setback.

The U.S. District Court for the Northern District of California has ruled to dismiss claims made against Franklin Templeton, writes Beagan Wilcox Volz for Ignites. Eaton Vance (NYSE:EV) and Oppenheimer (NYSE:OPY), both with similar cases, are in earlier stages of litigation.

The plaintiffs claim the fund firms’ affiliated distributors are making improper 12(b)-1 payments to broker-dealers, arguing that this violates federal securities law and a 2007 D.C. circuit ruling in Financial Planning Association vs. SEC – the ruling states that asset-based compensation cannot be received by brokers from mutual fund shares placed in non-advisory accounts.

Additionally, plaintiffs are trying to convince the courts that the 12(b)-1 payments are in violation of SEC compliance rules.

Judge Phyllis Hamilton ruled that the section of the Investment Company Act of 1940 provides a “remedy for a violation of ‘any provision of [the ICA], or of any rule, regulation, or order thereunder,’ rather than a distinct cause of action or basis for liability.” He also disagrees with the plaintiff’s interpretation of the Financial Planning casing, arguing that it is “irrelevant” to 12(b)-1 fees.

Other firms that may be affected by the Franklin decision on what law firm Milberg calls “excessive and unlawful” fees include: BlackRock (NYSE:BLK), PIMCO, The Hartford, Ivy, MFS, First Eagle, Davis, Evergreen, Calamos, Van Kampen, Columbia, Lord Abbett, Loomis Sayles, Legg Mason, AllianceBerStein, Thornburg, Transamerica, Putnam, Russell, Allianz and Invesco (NYSE:IVZ).

Max Chen contributed to this article.

Disclosure: None