Distribution of ETF products may be in for a shakeup. Buried in a recent prospectus filed by State Street Global Advisers
] for six new ETFs is a 25-basis-point 12b-1 fee, writes Rick Ferri for Forbes
Traditional mutual funds have long used 12b-1 fees to pay fund supermarket platform fees incurred for distribution of the funds. Those fees are not paid by ETFs, which clear through BDs in the same way as regular stocks.
That difference has caused consternation at some BDs that are seeing recurring revenue from mutual funds' platform payments convert into one-time ticket charges.
Sources inside the ETF community have told the MFWire
that BDs, including one major wirehouse, started raising the issue of platform payments for ETFs after the financial crisis. So far, however, no ETF player is known to have agreed to pay these fees, which can run as high as 40 basis points annually for assets raised through a brokerage platform.
The prospectus filed by SSgA raises the possibility that the dam is about to burst.
Written on the prospectus is:
"Each Fund has adopted a Distribution and Service Plan in accordance with Rule 12b-1 under the 1940 Act pursuant to which payments of up to 0.25% of the Fundís average daily net assets may be made for the sale and distribution of its Shares. No payments pursuant to the Distribution and Service Plan will be made through at least the next twelve (12) months of operation. Additionally, the implementation of any such payments would have to be approved by the Board prior to implementation. Because these fees would be paid out of each Fund's assets on an on-going basis, if payments are made in the future, these fees will increase the cost of your investment and may cost you more than paying other types of sales charges."
Ferri said that a representative from SSgA has informed him that this disclosure is the the firm's new policy for all new ETF offerings even though not mandated by the SEC. Its six new ETFs are not charging the 12b-1 fees to investors but the statement prepares them for a future possible expense.
For Ferri, SSgA is sending a clear signal that it is "ready to pay-to-play with ETFs." He further writes that the "willingness of State Street to pay 12b-1 fees is an unwelcome sign and I hope they donít follow through."
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