SEC Proposes a Complete Overhaul of Fund Distribution Fees

The SEC has issued a proposal to eliminate Rule 12b-1 fees and replace them with a 25 basis point marketing and service fee and a limited “ongoing sales charge.” In place of Rule 12b-1, the SEC has proposed a new Rule 12b-2 that would allow a 25 basis point marketing and service fee that could be used for a wide range of purposes including the payment of supermarket fees. To charge an asset based fee in excess of 25 basis points, a fund would have to implement an “ongoing sales charge” which could be no greater than the highest front-end load on another class of shares within the same family. If no such other class exists, the ongoing sales charge would be capped at 6.25%. Funds would have to track each shareholder investment and, upon reaching the maximum charge, either convert to a different class or cease charging the fee. The ongoing sales charge would be treated as a load and would not require Board approval. However, an existing class could not implement an ongoing sales charge under any circumstances. The Rule proposal also allows for intermediary-based load variation and enhanced confirmation requirements.