Mutual Fund Distribution and Shareholder Servicing Practices
SIFMA provided this white paper on the history and purpose of Rule 12b-1 and other revenue streams as background material for a June 19, 2007 SEC Roundtable discussion.
Excerpt
Introduction
Compensation arrangements between fund complexes and broker-dealers support a wide range of services that benefit fund investors and facilitate the enormous diversity in fund products.
Funds, and the broker-dealers that sell them, offer investors an unprecedented range of investment choices. In the 1960s, investors had a relatively small number of funds from which to choose and (with the limited exception of no-load funds) could buy them only by paying an up-front load of approximately 8%. Today, investors may pick from literally thousands of funds and may pay for those investments in a variety of ways.
The Securities and Exchange Commission’s (the “SEC” or the “Commission”) adoption of Rule 12b-1 under the Investment Company Act of 1940 (the “1940 Act”) has been one of the critical events in facilitating diversity in fund products, although that action has both fostered, and been accompanied by, other innovations in fee arrangements. As the number and types of funds, the number of channels through which funds may be purchased, and the demands of clients for more sophisticated advice have increased, broker dealers, third party retirement plan administrators and fund complexes have developed additional fee arrangements to support those broad investment choices, and the distribution, servicing and administrative costs they entail. The developments of these fee arrangements, and the services that they support, have given investors many more choices. Unfortunately, as those fee arrangements have become more diverse, it may have become more difficult for investors to keep track of how these relationships work. This WHITE PAPER seeks to explain those relationships in simple terms. It addresses not only Rule 12b-1 fees but also discusses other aspects of the relationships between fund complexes and broker-dealers. SIFMA hopes that this WHITE PAPER will give policy makers a clearer picture from which to make decisions.
SIFMA notes that the developments in the relationships between funds and broker-dealers have outpaced the development of disclosure regulations regarding these relationships. Investors need more information about these marketing and servicing arrangements. Investors should have a good understanding of the fees that they are paying in connection with their investment in mutual funds. At the same time, it is not helpful to bury investors in minutiae about the relationships between funds and broker-dealers.