SEC Proposes Reform of Rule 12b-1, Mutual Fund Distribution Payment Framework
By Diane E. Ambler, Mark C. Amorosi, Robert J. Zutz, Brian M. Johnson, and Andrea Ottomanelli Magovern
On July 21, 2010, the Securities and Exchange Commission proposed a new rule and rule and form amendments that would restructure the regulatory framework for payments by mutual funds for the marketing and distribution of fund shares (the “Proposal”). The Proposal, which was unanimously approved for public comment, would continue to allow the use of fund assets to pay for distribution expenses, but would implement a new approach to regulating such payments. This new approach would break out the types of asset-based distribution fees currently paid pursuant to Rule 12b-1 under the Investment Company Act of 1940 into two components—fees for marketing and services, and asset-based sales charges—both of which could be used to finance distribution-related activities.
As described in the attached Alert, the Proposal would limit fees for marketing and services to 25 basis points per year and establish cumulative limits for asset-based sales charges imposed in addition to the fees for marketing and services. The Proposal also would substantially reduce the duties placed upon fund boards with respect to the payment of asset-based distribution fees. In addition, the Proposal would require enhanced disclosure of these and other charges in transaction confirmations and would require funds to provide conforming disclosures in their registration statements, among other documents. The Proposal also includes a component that would permit, but not require, funds to establish classes of shares to sell through broker-dealers that would determine their own sales compensation, rather than simply imposing the charges described in the prospectus as required under current law.
To view the complete alert online, click here.
