WASHINGTON (CN) – Mutual funds will be limited to charging clients less than .25 percent per year of the value of their funds for sales and marketing expenses, under proposed Securities and Exchange Commission rules.
The funds would be allowed to charge a higher fee for other expenses called “ongoing sales charges,” according to the planned changes of Rule 12b-1 under the Investment Company Act.
Sales and marketing fees would be paid to broker-dealers who sell a fund’s shares, which is a way of having the fund pay for its own sales costs without cutting into the overhead of the fund managers.
This change would limit the shareholder’s contribution to the marketing costs to sell a fund. To cover other costs associated with fund operations, ongoing sales charges would be assessed at the time of the purchase of fund shares, and different classes of shares, with different sales charges, would be offered with varying levels of services available to the shareholder.
The proposed rule would allow broker-dealers of fund shares to include their own sales charge onto that levied by the fund to maintain their compensation at current levels. However, they would have to compete with other broker-dealers who might charge less or nothing for their services.
The SEC believes that this rule would allow shareholders to pay only for the level of service they want from a fund, and that it would require fund operators to limit their costs so they do not exceed the funds that may be raised by the sales charges, a threshold after which the fund operators own profits would be used to cover operating costs.
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