12B-1 plan is a plan structured by mutual fund companies for distributing funds through intermediaries. Plans 12B-1 provide an overview of the partnerships between distributors and intermediaries that help secure the sale of a fund. Sales commission plans and 12B-1 sales costs are the main components of a 12B-1 plan.
Realizing the 12B-1 Plan
12B-1 plans facilitate partnerships between distributors and intermediaries who offer parts of mutual funds. The 12B-1 plans primarily focus on mutual funds that have multiple category structures for sales charges and distribution costs. Mutual fund companies in two types of 12B-1 charge their 12B-1 plans, sales commissions and 12B-1 expenses.
The sales commission plans are structured to compensate intermediaries for transactions with mutual funds. These partnerships can help increase demand for funds by having them marketed through a full-service brokerage that allows the transaction for a sales fee. These
fees are paid to the broker and are not linked to the annual operating costs of the fund.
The sales bonuses are structured such that they vary depending on the share class. The share classes may include entry, exit and level charge sales charges. These sales charges are associated with the retail investor share classes, which generally include A, B and C shares.
The 12B-1 expenses paid by the mutual fund to distributors and intermediaries are also an important part of a 12B-1 plan. To market and sell mutual fund stocks, mutual fund companies work with distributors to list their funds with discount brokers and financial advisory platforms. Distributors help finance companies work with full-service brokers who will liquidate their funds according to the agreed-upon sales load schedule.
Mutual fund companies pay a 12B-1 fee to a mutual fund to compensate distributors. In some cases, the Funds may also be structured with a small commission which is paid annually to financial advisers during an investor’s holding period.
Financial industry law typically limits the 12B-1 fee to 1% of the current value of the investment on an annual basis, but the fee is typically between 0.25% and 1%. In most cases, fund companies have higher 12B-1 charges for share classes that pay lower initial charges and lower 12B-1 charges for share classes with higher initial sales charges. This makes it possible to compensate the remuneration paid to the agents while ensuring the payment to the distributors.
Investment fund companies must provide full details of their subscription plans and annual fund costs 12B-1 in the fund prospectus. The prospectus is one aspect of the documentation required to register the mutual fund and is also the primary offering document that provides information about the fund to investors. The 12B-1 plans and any changes to their spending structure must be approved by the Fund’s Board of Directors and amended in its prospectus filed with the Securities and Exchange Commission.