The Securities and Exchange Commission announced July 21, 2010, that its staff was proposing a new rule and rule amendments that would place limits on the cumulative sales charges investors pay and encourage competition by allowing funds to permit broker-dealers to establish their own sales charges. The proposal would also eliminate Rule 12b-1 and the requirement that a fund's board of directors explicitly approve and annually reapprove a fund's distribution arrangements.

"Marketing and Service Fees" and "Ongoing Sales Charges"

The proposal would rescind Rule 12b-1 in its entirety and instead permit funds to deduct "Asset-Based Distribution Fees" pursuant to new proposed Rule 12b-2 and pursuant to amendments to Rule 6c-10.

Under new proposed Rule 12b-2, funds would be permitted to use fund assets to pay up to 0.25 percent annually out of their assets for distribution as "marketing and service fees," for expenses such as advertising, sales compensation and services. The maximum amount of this fee would be tied to the service fee limit imposed by NASD Conduct Rule 2830 but, unlike the service fee, funds could use the marketing and service fees for any distribution related expenses.

In addition, funds also would be permitted pursuant to amendments to Rule 6c-10 to deduct additional Asset-Based Distribution Fees in excess of the amount permitted under Rule 12b-2 as an "ongoing sales charge." The cumulative maximum fee that any investor would pay over time through an ongoing sales charge would be limited to either (i) the maximum front-end sales charge that could be paid by an investor in the fund if another class of shares has a front-end sales charge, or (ii) the maximum sales charge permitted under NASD Conduct Rule 2830 (currently 6.25 percent) if no class of the fund has a front-end sales charge.

Permitting Broker-Dealers to Establish Their Own Sales Charges

Pursuant to proposed amendments to Rule 6c-10, funds would also be permitted to sell their shares through broker-dealers who determine their own sales compensation. To prevent an investor from being double charged, classes of shares sold in reliance on this exemption would not be subject to any other sales charges.

Revisions to Board Oversight Duties

The proposal would remove the requirement that fund directors explicitly approve and annually reapprove a fund's distribution arrangements. Directors would still have responsibility for overseeing ongoing sales charges, and marketing and service fees in accordance with their general fiduciary duties. The proposal would permit a fund, for a period up to five years after the compliance date of Rule 12b-2, to act as a distributor of securities sold prior to the compliance date of Rule 12b-2 pursuant to a previously approved 12b-1 plan. A fund's board would be permitted to vote to eliminate the provisions in the fund's 12b-1 plan requiring annual board approval.

The SEC's proposing release is available at: http://www.sec.gov/rules/proposed/2010/33-9128.pdf.

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