Industry Group Wants to “Reform” – Not End – Abuse Prone B-Shares

The Independent Directors Council (IDC) recently provided the Securities and Exchange Commission with a list of “reforms” regarding 12b-1 mutual funds, including that mutual fund directors should oversee the fees. The group claims that the fees are used to pay for advice and shareholder servicing, when the true use is to pay high comissions that can be hidden or obfuscated from investors.

In 2006, the mutual fund industry collected $11.8 billion in 12b-1 fees. The SEC sponsored a roundtable discussion on B-shares in June to discuss whether to do away with such shares. Seeking compromise, The IDC now suggests “clarification” of 12b-1 plans, improved disclosures to investors and send-it-to-committee type delay tactics – all intended to avoid the proposed end to the issuance of such shares.

Three decades ago Wall Street sought to compete with “no-load” mutual funds being sold directly by mutual fund companies. In 1980, it got help from Washington to create “B shares,” so-called because these are authorized under section 12-b of the Investment Advisors Act. While no front end load is paid to buy such shares, sellers are paid up front to sell the shares. Buyers are then charged fees each year for 5 years and, if they try to get our earlier, are charged a penalty for early withdrawal.

Such shares have been the subject of constant concern for more than 25 years. Salespersons often misrepresent the shares as “no load” and seek to avoid volume discounts available on old-fashion front end load A-shares to make higher commissions on the B-shares. While the industry does not want to end this $12 billion per year gravy train, the time has come to simply end the sale of such shares in order to stop the abuse.

Shepherd Smith and Edwards represents investors nationwide in claims against the securities industry. We represent clients who have been victims of wrongdoing by brokers and their firms, including in the sale of B-shares and other mutual funds. To learn whether we can also assist you to recover, contact us to arrange a free consultation with one of our attorneys.