Behind the scenes, a major upheaval is under way in the mutual fund industry.

The U.S. Securities and Exchange Commission is proposing significant changes to the structure of the annual marketing or distribution fee on mutual funds known as a 12(b)-1 fee. These changes will affect the compensation of brokers and advisers who sell mutual funds.

This annual fee can cost investors anywhere from 0.25 percent to 1 percent, although not all mutual funds charge them.

Fund investors are probably at best vaguely aware of these fees, which were originally allowed by the SEC in 1980. At that time, mutual funds were losing investor assets and the 12(b)-1 fee was devised to help funds pay for marketing and distribution expenses to attract new assets. The total fees collected amounted to just a few million dollars in 1980.

In a display of the law of unintended consequences, however, that amount climbed rapidly. In 2009, investors paid $9.5 billion in 12(b)-1 fees.

SEC Chairman Mary Shapiro in a July news release said, “Despite paying billions of dollars, many investors do not understand what 12(b)-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.”

The SEC proposal has four goals:

1. Protect investors by limiting fund sales charges by capping any ongoing sales charges at the highest fee or front-end load that the fund charges. In other words, if a fund charges a maximum 4-percent front-end sales charge, another class of fund shares could not charge more than a cumulative 4 percent over time to any fund investor.

2. Improve transparency of fees for investors. Funds would have to disclose “ongoing sales charges” and transaction confirmations would have to describe the total sales charges to an investor.

3. Encourage retail price competition. Brokerage firms could establish their own fee arrangements with a fund, thereby creating competition among brokers in hopes of lowering total fees.

4. Revise fund director oversight duties. Instead of directors annually reapproving sales charges, the proposed SEC plan would set limits on fund fees, eliminating the need for directors to reapprove them.

Incidentally, getting elected as a director to a mutual fund has to be one of the best gigs on the planet, even better then the perennial “backup NFL quarterback.” Mutual fund directors at the larger fund complexes earn several hundreds of thousands of dollars a year “representing the interests” of fund investors.

The SEC, which has tried to tackle 12(b)-1 fees before but backed down, expects to enact these changes soon after the 90-day comment period on the proposal ends next month. Brokers and advisers who sell mutual funds are upset about Shapiro’s tinkering with their compensation and are quick to point to the revelation that she received $9 million when she left FINRA, the private self-regulatory organization that regulates the securities industry, to head the SEC.

It’s worth noting that some advisers have moved away from funds that charge 12(b)-1 fees, using institutional class funds that generally have lower fees. Exchange-traded funds have also gained a following among advisers.•

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Skarbeck is managing partner of Indianapolis-based Aldebaran Capital LLC, a money management firm. His column appears every other week. Views expressed are his own. He can be reached at 818-7827 or ken@aldebarancapital.com.