Mutual Fund Distribution: SEC Proposes a New Regulatory Framework for Mutual Fund Distribution Fees, Including the Repeal of Rule 12b-1 and the Adoption of New Rules Limiting Ongoing Fund Sales Charges, Improving Disclosure and Encouraging Retail Price Competition

Sullivan & Cromwell LLP - August 13, 2010

The Securities and Exchange Commission has proposed a new rule and rule amendments that would replace Rule 12b-1 under the Investment Company Act, which has permitted registered mutual funds to use fund assets to pay for the cost of promoting sales of fund shares.  If adopted, the new rule and amendments would:

  • continue to allow funds to bear promotional costs within certain limits, and to provide investors with alternatives for paying sales charges (e.g., at the time of purchase, at the time of redemption, or through a continuing fee charged to fund assets), but would limit the cumulative sales charges that a fund investor pays, no matter how they are imposed;
  • give funds the ability to offer shares that could be sold through broker-dealers who would determine their own sales charges, set at competitively established rates;
  • require additional disclosure about all sales charges in fund prospectuses, annual and semi-annual reports to shareholders, and in investor confirmation statements; and
  • revise the role of fund directors in overseeing fund distribution expenses, including by eliminating the need for fund directors to expressly approve and re-approve fund distribution plans and to make special findings.

Comments on the proposals are due on November 5, 2010.  In addition to a general request for comments, the SEC’s release on these proposals includes numerous requests for comments on specific matters.