In Rule 12b-1 overhaul, SEC proposes dramatic changes to mutual fund distribution arrangements

ISSN： 1528-5812

Source： Journal of Investment Compliance, Vol.11, Iss.4, 2010-11, pp. : 51-55

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Abstract

Purpose - The purpose of this paper is to explain the SEC's proposal to establish a new framework for mutual fund distribution charges by replacing Rule 12b-1 with a new Rule 12b-2 combined with an amended Rule 6c-10. Design/methodology/approach - The paper discusses the background of ongoing distribution charges permitted under Rule 12b-1; explains the SEC's proposal to establish a hard cap to the percentage rate of the charges that can be deducted from funds over time and to require fund boards of directors to make annual determinations of the reasonableness, fairness, and effectiveness of front-end sales loads and ongoing sales charges; provides a summary of the new cap; explains the proposed disclosure changes, fee externalization alternative, and timetable and compliance dates; discusses various commercial and legal issues to consider in light of the proposal. Findings - Long uncomfortable with a registered mutual fund's use of its own assets to pay for the distribution of its shares, the SEC is proposing a completely new approach. Originality/value - The paper provides expert guidance from experienced financial services lawyers.