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12b-1 Fees Resource Center

Issues Around 12b-1 and Intermediary Payments Through the Years

Issues Around 12b-1 and Intermediary Payments Through the Years

ICI No-Action Letter (1998) (the “Supermarket Letter”)

The SEC’s 1998 no-action letter on mutual fund supermarket fees outlined several factors that a fund board may review in determining whether intermediary payments are for distribution or nondistribution services. A fund that pays intermediaries for shareholder servicing in a manner consistent with the Supermarket Letter has assurance that these payments may be made outside of a 12b-1 plan and that the Division of Investment Management staff will not recommend enforcement action for violation of Rule 12b-1.

SEC Roundtable on Rule 12b-1 (2007)

The SEC hosted a roundtable discussion on June 19, 2007, on issues surrounding Rule 12b-1. The roundtable consisted of panels addressing the historical circumstances that led to the promulgation of Rule 12b-1, and the original intended purpose of the rule; the evolution of the uses of the rule and its current role in fund distribution practices; the costs and benefits of the current use of the rule; and the options for its reform or rescission.

SEC Proposed Revisions to Rule 12b-1 (2010)

The SEC proposed a new rule, Rule 12b-2, and a number of amendments to various rules and disclosure forms that would create a new framework, replacing Rule 12b-1. There were four basic elements to the proposed framework: i) a new “marketing and service fee” under new Rule 12b-2; ii) the treatment of “ongoing sales charges” under Rule 6c-10; iii) new disclosure requirements related to marketing and service fees and ongoing sales charges; and iv) a new option for “account level sales charges,” where funds would issue shares at net asset value to dealers, who would set and collect their own commissions and sales charges on those shares. The SEC’s proposal was never adopted.

SEC OCIE “Distribution-In-Guise” Sweep Examination (2013-2016)

The SEC’s Office of Compliance Inspections and Examinations (OCIE) conducted a sweep examination beginning in 2013 that examined whether funds were using payments for subaccounting services effectively to pay for distribution outside of a 12b-1 plan (i.e., “distribution-in-guise”).

SEC Settles First Eagle Enforcement Action (2015)

The SEC has brought only one case to date under its Distribution-in-Guise Initiative, against a fund adviser and distributor for causing the funds to pay for distribution-related services outside of a 12b-1 plan.

Guidance from SEC Division of Investment Management (2016)

In January 2016, the SEC staff of the Division of Investment Management issued its first written guidance since the 1998 Supermarket Letter on fund payments to financial intermediaries for distribution and subaccounting services. The guidance reiterated the deference given to the fund board’s business judgment, while making several recommendations on the process and substance of fund board evaluation and oversight of these payments. Notably, the guidance adds that funds must have explicit policies and procedures as part of their Rule 38a-1 compliance programs designed to prevent violation of Section 12(b) and Rule 12b-1. This requirement explicitly includes funds without a 12b-1 plan.