Business Glossary

mutual fund that assesses shareholders for some of its promotion expenses. Adopted by the Securities and Exchange Commission in 1980, Rule 12b-1 provides mutual funds and their shareholders with an asset-based alternative method of covering sales and marketing expenses. At least half of the more than 10,000 mutual funds in existence today have a 12b-1 fee typically ranging from .25%, in the case of "no-load" funds that use it to cover advertising and marketing costs, to as high as 8.5%, the maximum "front-end load" allowed under National Association of Securities Dealers (NASD) rules, in cases where annual 12b-1 "spread loads" replaced traditional front-end loads. The predominant use of 12b-1 fees is in funds sold through brokers, insurance agents, and financial planners.

Changes to 12b-1 that became effective July 7, 1993, aim to limit fees paid by most fund investors to the 8.5% limit on front-end loads. This is achieved by an annual limit and by a rolling cap placed on new sales. The annual limit is .85% of assets, with an additional .25% permitted as a service fee. The rolling cap on the total of all sales charges is 6.25% of new sales, plus interest, for funds that charge the service fee, and 7.25%, plus interest, for funds that do not. The new regulation also prohibits funds with front-end, deferred, and/or 12b-1 fees in excess of .25% from being called "no-load."

mutual fund that uses part of its assets to cover sales and marketing expenses, named after the 1980 Securities And Exchange Commission ruling allowing the practice. Instead of charging the customer an up-front commission, or a sales load as high as 81/2%, the mutual fund manager assesses an annual charge, usually less than 1% of a mutual fund's net asset value. Originally, fund managers thought they could reduce average expenses by using fund assets to cover management fees and other expenses, thereby lowering costs paid by shareholders as a fund grew in size. The SEC requires disclosure of 12b-1 fees in a mutual fund prospectus, a requirement that caused some fund sponsors to switch from 12b-1 fees to back-end load funds with redemption charges when fund shares are sold by an investor. So-called 12b-1 funds have been popular with banks because some mutual fund sponsors have been willing to share these sales fees to help offset a bank's marketing costs.