The Mutual Fund Directors Forum released the Best Practices and Practical Guidance for Directors under Rule 12b-1. The Mutual Fund Directors Forum is an independent nonprofit organization that serves the independent directors of U.S. mutual funds.

The report states that 12b-1 fees today are used primarily for two purposes:

  • To offer purchasers of fund shares the alternative of paying for the services of a broker or other intermediary through a continuing 12b-1 fee rather than through the traditional front-end load, and 
  • to compensate brokers and sellers of fund shares for shareholder accounting and other services provided to fund shareholders.

The Forum noted that Rule 12b-1 has departed from its original contemplated purpose, which was to allow the use of mutual fund assets for fund distribution for limited periods of time. The report urges thorough regulatory reform. Until that happens, it provides "best practices" guidance for fund directors to oversee Rule 12b-1 plans in the current regulatory environment.

The report states that, in appropriate circumstances, fund directors may wish to consider whether fund shareholders have effectively agreed to pay specific amounts to support distribution of the fund to them. The report further states that fund management companies face a conflict in administering 12b-1 funds, because they have an incentive to use fund assets to promote distribution of fund shares in order to increase the rate of growth in fund assets and thereby increase their own profitability. Also, 12b-1 fees paid to fund affiliates may deserve additional scrutiny, particularly if made under circumstances where competitive factors do not operate.

Please click to access the report.