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Forum Submits Comments on Rule 12b-1 Reform Proposals

Last Friday, the Forum, along with many other industry participants, submitted its comment letter to the SEC on the agency's proposals to reform the manner in which funds pay for distribution and marketing-related expenses.  As we disucussed in our July 26, 2010 post, "SEC Proposes Reforms to Rule 12b-1," 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.

The Forum's comment letter broadly supports the SEC's goals of reexamining and reforming its regulation of these expenses.  The thrust of the Forum's comments, however, focus on the Commission's description of the role of directors under the two new proposed rules. 

With respect to the Commission's proposal to permit funds to charge 25 basis points per year on an ongoing basis as marketing and service fees (new rule 12b-2), the Forum supports the Commission's proposal to eliminate existing written 12b-1 plans and quarterly review of expenses under those plans.  The Forum's letter also states agreement with the Commission that these expenses should be treated as any other fund expense, and that directors have some obligation to oversee these payments, particularly when they pose a potential conflict of interest.  However, the letter also cautions that once directors determine that it is in the interests of the fund they oversee to be distributed on a particular platform, they must pay the cost of doing so, even if they have a limited ability to determine the true costs or quality of the services being provided over the platform.  The Forum's letter therefore reminds the Commission that the nature of directors' oversight responsibilities in this area must take account of these realities.

Regarding the Commission's proposals on ongoing sales charges (proposed amendments to rule 6c-10), the Forum agrees with the Commission that these charges are analogous to front-end loads, and thus should be overseen by directors in a similar matter.  However, the letter also indicates that the Forum disagrees with the Commission's views on how directors should oversee these charges.  In particular, the letter argues that the Commission should not suggest that directors have an obligation to determine whether these charges are "fair and reasonable" (and instead argue that a "best interests of the fund and its shareholders" standard makes more sense) and that it should not provide a list of factors for directors to consider as part of their oversight of these charges.


The Forum's full comment letter can be found here.

The full text of the Commission's proposing release is available at: