: This is the percentage of investor assets taken to support 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
. 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
A Re-examination of the Effect of 12b-1 Plans
on Mutual Fund Expense Ratios.
* 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" 0.25% to, in some cases, more than 1% annually.
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.
The tendency of fund boards routinely to renew 12b-1 plans
without proof the plans actually confer a net financial benefit on the fund and its shareholders may be understood, though not excused, by two realities.
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.