We include this because Philpot (1994) reports that funds with 12b-1 plans
have lower returns compared to funds that do not have 12b-1 plans
This review will likely be important to the variable annuities industry, he said, as "a number of funds underlying variable insurance products" have adopted 12b-1 plans
in connection with distributing fund shares through variable contract sales.
The rule sets forth a number of requirements relating to the adoption and renewal of 12b-1 plans
Investment companies with enhanced 12b-1 plans
to recognize a liability, with a corresponding charge to expenses, for excess costs.
Mutual funds can charge shareholders to pay for distribution and marketing under 12b-1 plans
, as Ceresney noted, but FEF was already making payments to two intermediaries for distribution and marketing as part of its 12b-1 plan
, according to the SEC.
By 1986, the number of funds featuring 12b-1 plans
had ballooned to nearly 600, and average fees had risen from "a token" 0.
While funds with 12b-1 plans
do, in fact, grow faster than funds without them, shareholders are not obtaining benefits in the form of lower average expenses or lower flow volatility.
Over the years, the SEC turned a blind eye to various means used by the fund industry to evade the 12b-1 principle requirement: fund assets may be used to pay for distribution only if embodied in 12b-1 plans
approved by fund board after a finding of likely benefit to the fund and its shareholders.
A fundamental factor to be considered in connection with all Rule 12b-1 plans
is whether the distribution method under consideration provides for a reasonable financing alternative under the facts and circumstances of the particular fund and the type of investor to which the plan is directed.
No lawsuit attacking 12b-1 plans
has succeeded, and, as discussed above, suits contesting Class B share sales (funded with 12b-1 fees) on fraud or suitability grounds have not met much success.
The rule has given us a fund marketplace where we find deceptive selling of Class B shares, deceptive competition with the no-loads, fund brokerage fees fattened to provide soft-dollar and shelf space payoffs, advisory fees fattened to provide revenue-sharing sales push for selling brokers, and adoption of 12b-1 plans
in the face of precious little evidence that fund shareholders, on balance, benefit from the pay-outs.
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.