The SEC issued for public comment proposed rule changes to reform the regulation of distribution fees paid by mutual funds.
The measure would replace existing Rule 12b-1 under the Investment Company Act of 1940 with Rule 12b-2. Rule 12b-1 allows distribution fees to be deducted from fund assets. Rule 12b-2 would limit fund sales charges, improve transparency of fees for investors, revise fund director oversight duties, and encourage retail price competition.
The new rule and amendments would continue to allow funds to bear promotional costs within certain limits, and would also preserve the ability of funds to provide investors with alternatives for paying sales charges (e.g., at the time of purchase, at the time of redemption, or through a continuing fee charged to fund assets). Unlike the current Rule 12b-1, the proposed rules would limit the cumulative sales charges each investor pays, no matter how they are imposed. The SEC's proposal also requires additional disclosure about all sales charges in fund prospectuses, annual and semi-annual reports to shareholders, and in investor confirmation statements.
Under the proposal, funds and their underwriters would have the option of offering classes of shares that could be sold by dealers with sales charges set at competitively established rates – rates that could better reflect the services offered by the particular intermediary and the value investors place on those services. For funds electing this option, the proposal would provide relief from restrictions that currently limit retail price competition for distribution services.
The SEC stated that the proposed rule and rule amendments are designed to protect individual investors from paying disproportionate amounts of sales charges in certain share classes, promote investor understanding of fees, eliminate outdated requirements, provide a more appropriate role for fund directors, and allow greater competition among funds and intermediaries in setting sales loads and distribution fees generally.
Click here to access the release proposing the distribution fee reform.