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October 01, 2010 at 08:00 PM
On July 21, 2010, the SEC voted to rescind Rule 12b-1 in its entirety and replace it with a new rule, Rule 12b-2.
What does this mean to you, your clients, and your trail commissions? FSI helpfully explains.
Under the current Rule 12b-1, mutual funds can charge a 12b-1 fee of up to 1.00% annually. 12b-1 fees are composed of two parts–a 0.25% service fee (which is the main source of Class A and B-share trail commissions), and a 0.75% distribution fee (aka “asset-based sales charge”). These two parts combined provide funding for 1.00% annual C-share trail commissions.
Effect on Class A and B Shares
Under proposed Rule 12b-2, the 0.25% service fee portion of 12b-1 would essentially be renamed a “marketing and service fee,” but would be otherwise unchanged. Thus, your 0.25% Class A and B-share trail commissions are unaffected and will continue as usual. We worked diligently over the past three years to influence the SEC to retain these trail commissions.
Effect on Class C Shares
However, the proposed Rule would affect Class C shares. The 0.75% distribution fee portion of 12b-1 would essentially be renamed an “ongoing sales charge,” and would also be subjected to certain limitations. Specifically, an investor would not be allowed to pay more “ongoing sales charges” in a C-share than they would have paid upfront had they chosen that same fund’s Class A share (at maximum load). After the break-even time period is reached, the C-share must convert to Class A.
For example, if a certain fund’s maximum Class A load is 5.75%, then its Class C shares must convert to Class A no later than end of the investment’s 92nd month (7 years, 8 months). To do the math to arrive at the conversion month in this example, simply divide 5.75 (A-share load) by 0.75 (ongoing sales charge in C-shares), and multiply by 12.
