12b-1 fees are distribution and/or service fees that are considered an
annual marketing expense of a
mutual fund. The fees, normally 0.25-1% of a fund's net assets, are named after
the 1980 SEC rule that authorized them. Typically, the fee is used to
compensate brokers and others who sell fund shares, along with paying
for marketing and advertising expenses.
This compensation can take place even in funds that market themselves
as no-load or no-commission funds, because the 12b-1 fees are considered
operating expenses rather than transaction fees. Recently, the SEC has
voiced concern that investors may not understand or even be aware of the
fees and their potential effect on investor returns.
Investors benefit by paying the charges in bulk, proponents of the fees
say, because the fees can reduce investors' taxable incomes, according
to a July 6 WSJ article by Karen Damato. The real reason, however, may
have more to do with charging investors for broker commissions in a way
unlikely to produce scrutiny or concern.
SEC Chairman Mary Schapiro was quoted in the WSJ article as saying, "We
need to critically rethink how 12b-1 fees are used and whether they remain
According to Damato, the SEC has a long history of concern about 12b-1
fees, yet never seems to make any progress toward overhauling the rule
or ensuring better disclosures.
Current proposals by the SEC include adjusting the 12b-1 rule by treating
any 12b-1 fees over 0.25% as assets that must be paid over time and requiring
clearer disclosures of how the fees are charged. At this point, repealing
the 12b-1 fees altogether seems unlikely.