ICI Outlines Benefits Provided Through 12b-1 Fees

Washington, DC, June 4, 2004 - Rule 12b-1 fees are used as a substitute for front-end sales loads and/or to pay for administrative and shareholder services that benefit existing shareholders, the Institute stated in a recent letter to SEC Chairman William Donaldson.

Background
A recent article in the Wall Street Journal that discussed an academic paper by an SEC staff economist regarding 12b-1 fees erroneously claims that the purpose of 12b-1 fees is to produce lower overall expense ratios through asset growth and economies of scale.

ICI Position
In its letter to Chairman Donaldson regarding the article, the Institute states that in discussing the paper's findings, the article left a negative impression about the impact of 12b-1 fees on fund shareholders. The Institute's letter explains that by disregarding how 12b-1 fees are currently used, the paper has little bearing on whether investors benefit from them. The Institute also notes that other well-regarded researchers have recognized for some time that 12b-1 fees serve primarily as an alternative to front-end loads and that this use of the fees can provide additional choices and benefits to fund shareholders. In addition, the SEC and its staff have acknowledged the current uses of 12b-1 fees on many occasions and, through several regulatory actions, the SEC helped build the infrastructure to support their use in these ways. Contrary to the implications of the article, experience demonstrates that the current uses of 12b-1 fees benefit investors in several ways, including: allowing investors the option of paying distribution costs over time; giving those who choose to own funds through a particular distribution channel access to funds that otherwise might not be available to them; and, where used to pay for ongoing services to shareholders, acting as an incentive for financial professionals to continue to provide such services.

The Institute also reiterated its recommendation that any reevaluation of Rule 12b-1 should take into account the benefits of the current uses of 12b-1 fees.

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