12B-1 Fees

12B-1 Fees refer to fees that mutual funds are permitted to collect in order to promote, sell, or perform other activitieis related to the distribution of their shares.  The law requires that such fees must be reasonable (a maximum of 1% of a fund’s average net assets per year).

Reference Desk

U.S. Securities & Exchange Commission: 

12B-1 Fees are paid by the mutual fund out of fund assets to cover distribution expenses and sometimes shareholder service expenses.“12b-1 fees” get their name from the SEC rule that authorizes a fund to pay them. The rule permits a fund to pay distribution fees out of fund assets only if the fund has adopted a plan (12b-1 plan) authorizing their payment. “Distribution fees” include fees paid for marketing and selling fund shares, such as compensating brokers and others who sell fund shares, and paying for advertising, the printing and mailing of prospectuses to new investors, and the printing and mailing of sales literature.The SEC does not limit the size of 12b-1 fees that funds may pay. But under FINRA rules, 12b-1 fees that are used to pay marketing and distribution expenses (as opposed to shareholder service expenses) cannot exceed 0.75 percent of a fund’s average net assets per year.

Some 12b-1 plans also authorize and include “shareholder service fees,” which are fees paid to persons to respond to investor inquiries and provide investors with information about their investments. A fund may pay shareholder service fees without adopting a 12b-1 plan. If shareholder service fees are part of a fund’s 12b-1 plan, these fees will be included in this category of the fee table. If shareholder service fees are paid outside a 12b-1 plan, then they will be included in the “Other expenses” category, discussed below. FINRA imposes an annual .25% cap on shareholder service fees (regardless of whether these fees are authorized as part of a 12b-1 plan).

Pfeiffer v. Bjurman, Barry & Associates, Case No. 03 Civ. 9741 (S.D.N.Y. 2004):

Rule 12b-1 permits a mutual fund that meets certain conditions to use a percentage of its assets to reimburse “underwriters, dealers and sales personnel” in connection with the distribution and marketing of its shares. 17 C.F.R. § 270.12b-1. Rule 12b-1 also permits a mutual fund to use a portion of its assets to compensate broker-dealers for providing shareholder services such as maintaining shareholder accounts. Id.; see also NASD Rule 2830(b)(8) (the service fee is used to compensate broker-dealers for “personal service and/or maintenance of shareholder accounts”). A fund with a Rule 12b-1 fee thus permits shareholders to pay for sales-related and other expenses over time, rather than immediately on purchase.

In order to comply with Rule 12b-1, a mutual fund must issue a written distribution plan detailing “all material aspects of the proposed financing and distribution” of its shares. Id. at § 270.12b-1(b). Such plan must be approved by a majority of the fund’s board of directors, including a majority of the disinterested directors. Id. at § 270.12b-1(b), (c). The plan must also be approved by a majority of the fund’s outstanding voting shares. Id. The plan may be implemented or continued “only if the directors who vote to approve such implementation or continuation conclude, in the exercise of reasonable business judgment and in light of their fiduciary duties under state law and under sections 36(a) and (b)(15 U.S.C. 80a-35 (a) and (b)) of the Act, that there is a reasonable likelihood that the plan will benefit the company and its shareholders.” Id. at § 270.12b-1(e).

Although Rule 12b-1 does not impose limits on the amount a fund may charge its shareholders pursuant to its distribution plan, the SEC has specified such caps in approving amendments to the NASD’s Conduct Rules. See 15 U.S.C.§ 80a-22(b)(1) (authorizing NASD, subject to SEC approval, to impose limits on mutual fund sales charges). Pursuant to NASD Rule 2830, Rule 12b-1 fees are limited to a maximum of 1% of a fund’s average net assets per year, which may include a service fee of up to 0.25%. See NASD Rule 2830(b)(8). The NASD not only imposes annual limits but also cumulative limits on the level of “asset-based sales charges” that a mutual fund may charge its shareholders. The aggregate sales charges of a mutual fund such as the Fund, which has both an asset-based sales charge and a service fee, is 6.25% of the offering price of each share. See NASD Rule 2830(d)(2)(A).