[15882]
April 9, 2003
TO: SALES FORCE MARKETING COMMITTEE No. 4-03
RE: SEC STAFF ISSUES NO-ACTION LETTER ON 12b-1 FEE REBATES
The Division of Market Regulation of the Securities and Exchange Commission recently
issued a no-action letter relating to the ability of a registered broker-dealer to provide mutual
fund investors with a refund of a portion of the Rule 12b-1 fees paid by mutual funds to broker-
dealers.* In particular, the broker-dealer sought assurances that paying rebates of 12b-1 fees to
mutual fund investors would not violate Section 15(a) of the Securities Exchange Act of 1934,
which prohibits a broker or dealer from effecting securities transactions without being
registered under the Act.
According to the request for no-action relief, a registered representative of the broker-
dealer proposed to solicit mutual fund investors by offering to provide them with a refund of a
portion of the Rule 12b-1 fees paid to broker-dealers that are attributable to their investment in
mutual funds. To take advantage of the program, investors would be required either to re-
register their mutual fund shares in street name or name the broker-dealer as the broker of
record for the shares. No investor would be obligated to purchase or sell shares through the
broker-dealer. Each customer participating in the program would be screened to confirm that
neither the customer nor an associated person of the customer is engaged in broker-dealer
activities. Any advertising or other communications with the public relating to the program
would be subject to the NASD’s advertising rules.
Based upon the facts presented, the staff of the Division of Market Regulation stated that
it would not recommend enforcement action under Section 15(a) of the Exchange Act against
any customer of the broker-dealer who, though not registered as a broker-dealer, receives a
partial refund from the broker-dealer of Rule 12b-1 fees attributable to mutual fund shares
owned by that customer.
The letter notes that the request for no-action relief did not ask for any guidance
regarding whether the proposal implicates the Investment Company Act. Notwithstanding
this, the staff of the Division of Investment Management “questions whether direct or indirect
rebates of 12b-1 fees by a fund are consistent with the policies and provisions of the 1940 Act.”
The staff reiterates the views expressed in the Southeastern Growth Fund no-action letter (Pub.
* See Edward Mahaffy (Pub. Avail. Mar. 6, 2003), which is available through the SEC’s website at
http://www.sec.gov/divisions/marketreg/mr-noaction/mahaffy030603.htm.
2
Avail. May 22, 1986) that “any waiver or rebate of an investor’s pro rata portion of the expenses
incurred under a 12b-1 plan would raise serious concerns under both section 36 of the [1940]
Act and general fiduciary principles.” It notes that Rule 12b-1(e) requires a fund’s board of
directors to conclude that there is a reasonable likelihood that a 12b-1 plan will benefit the fund
and its shareholders before a fund may implement or continue the plan. As such, the staff
believes that providing rebates of all or a portion of 12b-1 fees “would be a pertinent factor
requiring a board of directors’ full consideration in reaching its conclusion with respect to a
fund’s 12b-1 plan, and the staff . . . questions whether a 12b-1 plan under which broker-dealers
rebate 12b-1 fees to their customers would benefit the fund and its shareholders.”
Tamara K. Salmon
Senior Associate Counsel