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Federated CEO: Trust law offers way to defend 12b-1 fees as 'reasonable' under DOL fiduciary rule


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Federated CEO: Trust law offers way to defend 12b-1 fees as 'reasonable' under DOL fiduciary rule

InFederated InvestorsInc.'s view, certain fees most firms expect to be disallowed underthe new fiduciary standard are legally defensible.

Duringa conference call to discuss earnings, Chairman, President and CEO J.Christopher Donahue said his view of the Department of Labor's final version ofthe fiduciary rule is informed by his experience as a lawyer working on trustapartments. Fiduciary law hinges on two components, he said: the duties ofloyalty and prudence. Those have been a part of Federated's ethos since thebeginning, he said.

Ananalyst noted that one common interpretation of the final rule is that 12b-1fees, which are marketing commissions paid to distributors and salespeople,will be prohibited, whereas Federated seems to believe that the fees couldstill be permissible.

"Whenyou get into basic, fundamental trust law, you have to look at the duty ofloyalty, and that means not that you go simply to the lowest fee," Donahuesaid, adding that the rule states that compensation has to be defended asreasonable.

"Whether12b-1 fees can be defended as reasonable will depend on the facts andcircumstances as these things evolve out over time at the plaintiff's bar andhow much work distributors do on justifying and saying that these things arereasonable," he said.

Thefirm's separately managed accounts business is a model for meeting fiduciaryrequirements, Donahue noted. The funds use transparent disclosures that clearlyexplain "who's getting what," which satisfies the duty of loyalty,and they are prudently managed because the products are research based andclient profiles are thorough and honest. Even so, R6 class shares,which do not charge 12b-1 fees, will become more important to mutual fundmanagers including Federated, he explained.

"We'llprobably have 18 of them by the end of this summer," he said.