12B-1 Fund

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12B-1 Fund

A mutual fund that charges shareholders a small percentage of the fund's market value, instead of a load (or sales fee). That is, a 12B-1 Plan does not require shareholders to pay a fee when buying or selling shares; rather, they simply deduct what is owed to the shareholder once per year. Usually a 12B-1 plan charges less than 1%.
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The guidance, Fleming notes, addresses the possibility of "potential mischaracterization" of 12b-1 and other fund fees, as well as the potential for the inappropriate use of fund assets to pay for distribution-related activities outside of a 12b-1 plan.
The SEC enforcement director, Andrew Ceresney, said when the First Eagle action was taken that "First Eagle and FEF [Distributors] inappropriately used money belonging to the shareholders of the funds to pay for services clearly intended to market and distribute the shares." Unless part of a 12b-1 plan, he said, "the firm should bear those costs, not the shareholders." FEF is an affiliated distributor of First Eagle funds.
(1a) TOTAL RETURN =a + [b.sub.1]BOARD QUALITY) + [b.sub.2](CORPORATE CULTURE) + [b.sub.3](MANAGERIAL INCENTIVES) + [b.sub.4](REGULATORY ISSUES) + [b.sub.5](ASSETS) + [b.sub.6](AGE) + [b.sub.7](BETA) + [b.sub.8](CASH FLOWS) + [b.sub.9](DEFERRED LOAD) + [b.sub.10](EXPENSE RATIO)+ [b.sub.11](FRONT END LOAD) + [b.sub.12](FUND FAMILY) + [b.sub.13](FUND FOCUS) + [b.sub.14](EARNINGS GROWTH) + [b.sub.15](INSTITUTIONAL) + [b.sub.16](STOCK) + [b.sub.17](STD DEV) + [b.sub.18](TURNOVER RATIO) + [b.sub.19](12B-1 PLAN) + e
The rule sets forth a number of requirements relating to the adoption and renewal of 12b-1 plans. In general, funds are barred from paying for distribution unless all fund distribution expenses are made pursuant to a written plan adopted in accordance with the rule (a "12b-1 plan").
* Investment companies with board-contingent plans to recognize a liability for excess costs, computed in the same way as for an enhanced 12b-1 plan, when the company's board commits to pay such costs.
White also reminded mutual fund boards and directors of their obligations to ensure that fund payments to financial intermediaries that are being used to finance distributions are paid pursuant to a rule 12b-1 plan, pointing to recent SEC staff guidance on funds boards' obligations.
SEC enforcement director Andrew Ceresney said when the First Eagle action was taken that "First Eagle and FEF [Distributors] inappropriately used money belonging to the shareholders of the funds to pay for services clearly intended to market and distribute the shares." Unless part of a 12b-1 plan, he said, "the firm should bear those costs, not the shareholders." FEF is an affiliated distributor of First Eagle funds.
Prior to adopting or renewing a fund's 12b-1 plan, fund directors are required to consider "whether the plan has in fact produced the anticipated benefits for the company and its shareholders." (154) After all, it would be a breach of fiduciary duty for directors to take and spend shareholder money with no honest, reasonable expectation that spending the money would leave shareholders better off.
Here's where the crux of the distribution-in-guise initiative begins to unfold: depending on what services the intermediary performs in exchange for these fees, the fund may need to pay at least some of these fees pursuant to a 12b-1 plan.
"Unless part of a 12b-1 plan, the firm should bear those costs, not the shareholders." FEF is an affiliated distributor of First Eagle funds.
After 27 years of 12b-1 plan adoptions and renewals, no proof of 12b-1 fees' cost-effectiveness has surfaced.
* Distribution in Guise: Developed by AMU in collaboration with exam staff and Division of Investment Management is a risk-analytic initiative that identifies advisors that might be causing funds to violate Rule 12b-1 by using fund assets to make distribution payments to intermediaries outside of the funds' Rule 12b-1 plan, whether funds' boards are aware of such payments, and how such payments are disclosed to shareholders.