The effects of the SEC’s proposal to eliminate Rule 12b-1 may have far-reaching and multi-level implications, according to Diana McCarthy, partner at Drinker Biddle. As reported in Fund Directions, McCarthy said that fund directors may have to take into account “the implications of other forms of compensation paid to broker-dealers and the effect on the 15(c) process.”
McCarthy, in a Sept. 8 webinar on the topic, said in the report, "If a fund is going to cap distribution fees and sales charges there will probably be some pressure on revenue sharing, soft dollars and portfolio brokerage even though we have a rule now that prohibits taking that into account in the selling of fund shares." She pointed out in an interview that this is one concern not addressed by the SEC—revenue sharing.
“Unless something is done,” she said, “there will probably be some increased pressure on boards to consider revenue sharing. If you take away or cap the distribution fees that broker-dealers can receive,” she added, “they’re going to be looking for other avenues of compensation, and the SEC has said in a release that they don’t want to deal with revenue sharing right now, deferring it to another day. So if the SEC does not do anything or provide guidance, boards will have to be especially alert to any conflicts of interest and increases in revenue-sharing payments that might indicate the fund is indirectly paying for distribution.”
She warned that boards will need to consider the issue because of the annual 15(c) contract renewal process. Among other factors, she said they should focus on how the issue will affect service levels to shareholders; any potential conflicts resulting from mixed payments; and who will pay for the conversion, new classes, and registration changes.
Also, she mentioned, the board would have limited duties in the determination of whether to approve a share class to be sold pursuant to broker pricing.
Their fiduciary duty would have to be maintained with regard to oversight of the fees for marketing and any ongoing sales charges, as well as fiduciary of care and fiduciary of loyalty.
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