SEC Proposes New Rule and Related Amendments to Replace Rule 12b-1


On July 21, 2010, the Securities and Exchange Commission (the “SEC”) voted unanimously to propose a new rule and 13 related rule and form amendments intended to modernize the regulation of how the assets of open-end investment companies (mutual funds) may be used in the promotion and sale of fund shares. Proposed after many years of debate regarding whether Rule 12b-1 under the Investment Company Act of 1940 (the “1940 Act”) reflects current economic realities and serves the best interests of fund investors, the SEC’s proposed rule and related amendments, which would replace Rule 12b-1 in its entirety, represent a significant rethinking of the regulation of asset-based distribution fees.

The proposed rule and related amendments would allow funds to continue to bear promotional costs, within certain limits, and would preserve the ability of funds to provide investors with alternatives for paying sales charges (e.g., at the time of purchase, at the time of redemption or through a continuing fee charged to fund assets). However, the new rule and related amendments would limit the cumulative sales charges each investor pays, regardless of the manner in which they are imposed. The SEC’s proposing release (the “Proposing Release”) states that the new rule and related amendments are designed to protect individual investors from paying disproportionate amounts of sales charges in certain share classes, promote investor understanding of fees, eliminate outdated requirements, provide a more appropriate oversight role for fund directors and allow greater competition among funds and intermediaries in setting sales loads and distribution fees. The SEC has requested comments regarding the proposals by November 5, 2010.

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