SEC Proposes Rules on 12b-1 Fees

In particular, the proposed changes would replace existing provisions, including Rule 12b-1, that allow mutual funds to use their assets to compensate securities professionals who sell shares of the fund.  

The SEC’s proposal would: 

• Limit fund sales charges.  
• Improve transparency of fees.  
• Encourage retail price competition.  
• Revise fund director oversight duties. 

SEC Chairman Mary Shapiro called for proposals on 12b-1 fees last year (see “SEC to Make Recommendations on 12b-1 Fees, Target-Date Funds,” “Schapiro Asks Staff to Recommend Changes to 12b-1 Fees“).

The proposal would limit the amount of asset-based sales charges that individual investors pay. A fact sheet said in particular, the proposal would restrict these “ongoing sales charges” to the highest fee charged by the fund for shares that have no ongoing sales charge. For example, if one class of the fund charges a 4% front-end sales charge, another class could not charge more than 4% in total to investors over time. The fund would keep track of how long investors have been paying ongoing sales charges.  

Separately, funds could continue to pay 0.25% per year out of their assets for distribution as “marketing and service” fees, for expenses such as advertising, sales compensation, and services.  

The proposal would require the fund to identify and more clearly disclose distribution fees. In particular, the fund would have to disclose any “ongoing sales charges” and any “marketing and service fees” in the fund’s prospectus, shareholder reports and investor transaction confirmations. Transaction confirmations also would have to describe the total sales charge rate that an investor will have to pay.  

The proposal would enable funds to sell shares through broker-dealers who determine their own sales compensation. As a result, broker-dealers could establish their own sales charges, tailor them to different levels of shareholder service, and charge shareholders directly, similar to how commissions are charged on securities such as common stock.  

The proposal would prevent funds that rely on this exemption from deducting other sales charges from fund assets for that class of shares. This restriction would prevent double-charging.  

The proposed amendments, which would set automatic limits on fund fees and charges, would eliminate the need for fund directors to explicitly approve and reapprove fund distribution financing plans.  

The fact sheet is here.