SEC Proposes Reform of Mutual Fund Distribution Framework
By The Investment Management Practice
On July 21, 2010, after a multi-year review, the Securities and Exchange Commission (SEC) proposed significant changes to the current mutual fund distribution framework, including the proposed rescission of Rule 12b-1 under the Investment Company Act of 1940, as amended (the 1940 Act). In its place, the SEC proposed a new rule, Rule 12b-2 (Rule 12b-2), and amendments to other rules which would allow registered open-end investment companies (funds) to charge a limited marketing and service fee (currently up to .25% of the funds net assets) to finance the marketing and distribution of fund shares. In a significant departure from the structure of current Rule 12b-1, under proposed Rule 12b-2 fund directors would not be required to adopt or annually approve any distribution plan nor would they be required to make any special findings in order for a fund to pay the proposed marketing and service fee. Under the proposals, any distribution related fee in excess of the marketing and service fee would be considered an asset-based sales charge and would be limited so that, over time, an investor would pay no more in asset-based sales charges than he/she would have paid if he/she had purchased a class of shares with a front-end sales load.