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SEC Proposes Reforms to Rule 12b-1

On Wednesday, July 21, the Securities and Exchange Commission approved publication of proposed rules that will fundamentally transform how it regulates sales and distribution fees under Rule 12b-1.   Notably, the proposed amendments would limit director involvement in distribution fees and the new regime would eliminate the special reviews currently required by Rule 12b-1 for future shareholder purchases.  

Chairman Schapiro and the other Commissioners noted that a primary motivating factor in revising Rule 12b-1 is their belief that, while some portion of 12b-1 fees represent fees for ongoing services provided to investors, a significant portion of 12b-1 fees are effectively deferred loads, and should therefore not be collected indefinitely from individual investors.  Both the staff and several Commissioners commented  that, currently, some shareholders may pay 12b-1 fees as long as they hold the shares, with the result that some investors pay more for distribution fees than other investors in the same fund.

If adopted, the amendments would:

  • Permit funds to pay the 25 basis points portion of the 12b-1 fee that covers shareholder services provided by the selling intermediary.  The proposal permits these "marketing and service fees," to be paid out of fund assets, pursuant to a new rule 12b-2.
  • Cap the amount that individual shareholders pay in substitute load fees.  Under the proposal, funds would be permitted to collect up to 75 basis points annually from new investors until the total percentage collected equals the maximum front end load that the fund charges.  The conversion date, at which point the investor will no longer pay a sales charge, would be fixed at the time of sale.
  • Substantially alter disclosure of 12b-1 fees by requiring the dollar amount of the sales load that each investor pays to be listed on the investor's confirmation.  In addition, the rule would require an explanation of the nature and extent of the services provided to investors paid by the ongoing service fee, in the fund's prospectus and shareholder reports.
  • Authorize funds to issue share classes that permit intermediaries to charge different sales charges directly to their customers.

Though not proposing a specific role for directors, under the proposed rules, directors will, however, continue to have fiduciary obligations under state law and section 36(a) of the Act to consider whether use of the fund's assets to pay ongoing sales charges, within the proposed caps, is in the best interest of the fund and fund investors.  The release further states that the Commission expects "to provide guidance in our adopting release for this proposal, to assist fund directors in satisfying their fiduciary duties."  

Notably, the Commission's rule release states that the proposals were informed by input from fund independent directors via the Forum.  In particular, the release cites a May 2, 2008 letter from the Forum to Andrew J. Donohue, Director of the Division of Investment Management, stating, among other things, that "the quarterly review of expenditures under a fund's 12b-1 plan by directors serves little purpose, particularly since directors can have little impact in the first place on 12b-1 costs incurred by funds."

The release requests specifically comments on the proper role and appropriate level of responsibility of fund directors for asset based distribution fees.  The Forum plans to seek input from its members, and submit comments on the proposal. 

The full text of the proposing release is available at:

The Commission's press release and fact sheet on the rule proposals is available at: