compensation to the provider that may arise from
its relationship with the fund.”
Evaluating Potential Conflicts of Interest
The report makes a number of recommendations
regarding a board’s oversight of potential conflicts of
interest, including that:
• “the board should be alert for any
arrangements that could unfairly benefit the
adviser or others to the detriment of the
fund and its shareholders,”
•
“[d]irectors should be especially attuned
to the potential conflicts of interest that
may arise between the fund and a service
provider that is affiliated with the fund’s
adviser. . . . When an adviser receives a
material benefit as a result of an arrangement
with a fund’s service provider, boards should
include a review of the arrangement as part
of the fund’s annual advisory contract review,”
and
• boards should be mindful that conflicts of
interest may also arise with unaffiliated
service providers.
Although the report finds that the nature and
extent of board involvement in service provider
selection and oversight varies across the fund
industry according to funds’ different service
provider structures and needs, it stresses that,
“regardless of the extent of that involvement,
directors should be aware of the potential for
conflicts of interest that may arise under certain
circumstances and the protections in place to
address such conflicts” and “each investment
company board should seek the advice of
counsel for issues relating to its individual
circumstances.”
Investment Management Update
A service to our clients.
Investment Management and
financial MARKETS Group
Cameron S. Avery
312-807-4302
cavery@bellboyd.com
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312-807-4386
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312-807-4442
kbettsteller@bellboyd.com
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312-781-6027
ppike@bellboyd.com
Inside This Issue
Paul H. Dykstra
312-781-6029
pdykstra@bellboyd.com
Eric S. Purple
202-955-7081
epurple@bellboyd.com
Possible Changes In
Store for Rule 12b-1,
Soft Dollars - page 3
Jennifer C. Esquibel
312-807-4262
jesquibel@bellboyd.com
Bruce A. Rosenblum
202-955-7087
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312-807-4227
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gcooney@bellboyd.com
August 2007
Wells Fargo Excessive
Fee Case Settles page 4
Board Process
Important In Dismissal
of Ameriprise
Excessive Fee Case page 5
Morgan Stanley Settles
SEC Charges Relating
To Best Execution page 6
Supreme Court To
Examine State Taxation
of Municipal Bonds page 6
NYSE Proxy Voting
Proposal Revised To
Exclude Investment
Companies - page 6
IDC Releases Task
Force Report On Board
Oversight of Certain
Service Providers page 7
IN TOUCH. IN SYNC. INVOLVED.
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© 2007 Bell, Boyd & Lloyd LLP. All rights reserved.
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Investment Management Update is published by Bell, Boyd & Lloyd LLP for clients and friends of the firm and is for information only. It is not a substitute for legal advice or
individual analysis of a particular legal matter. Readers should not act without seeking professional legal counsel. Transmission and receipt of this publication does not create
an attorney-client relationship.
MFDF and ICI Weigh In On 12b-1 Reform
The Mutual Fund Directors Forum and the Investment Company Institute’s Working
Group on Rule 12b-1 recently published reports advocating reform of Rule 12b-1.
The MFDF report offers guidance to mutual fund directors regarding the requirements
of Rule 12b-1, while the ICI’s report focuses on current 12b-1 practices and
recommends potential changes to the rule.
MFDF Report
While indicating that “Rule 12b-1, as currently structured, simply does not reflect
the current marketplace,” the MFDF report nevertheless recognizes that directors
“must still abide by it.” The report seeks to offer “practical guidance” for directors and
acknowledges that “because every fund faces different circumstances, directors will
need to adapt and apply these guidelines sensitively and flexibly.” The MFDF advises
that:
• Fund directors have “a general familiarity with the ways in which any fund for
which they are responsible is distributed, irrespective of whether the distribution
arrangements include a 12b-1 plan,”
• Fund directors “understand how a fund’s 12b-1 plan fits into the fund’s overall
distribution plan” and that, “rather than considering the 12b-1 plan in isolation,
directors should first seek to understand the manner in which fund shares
are distributed, the economics of the distribution system, and the competitive
environment within which their funds operate,”
• Fund directors “request and obtain from management the materials and
information necessary to evaluate the fund’s 12b-1 plan, including a breakdown
of how 12b-1 fees are being used. . . . Developing an understanding of the
goals and underpinnings of a fund’s 12b‑1 plan is, by itself, not sufficient to an
existing 12b-1 plan; directors need to understand how the plan is, in fact, being
used,”
• Fund directors “judge whether continued distribution through the fund’s
existing intermediate channels is in the best interests of the fund’s
shareholders,”
• “The factors and considerations that fund directors use to analyze the value
and efficacy of the fund’s 12b-1 plan . . . be related to the purposes of the plan.
. . . [T]hrough careful analysis of the purposes of their fund’s 12b-1 plan and
of the expenditures it is actually making, directors should seek to identify
a set of factors (whether or not those factors were on the SEC’s original
list) that is relevant to the plan they are evaluating, and use those factors to
determine what action they should take with respect to the plan,”
• “As part of their review of the fund’s plan, fund directors . . . be aware of
the factors identified in the SEC’s initial adopting release for Rule 12b-1.
However, they need consider only those factors relevant to their fund’s
circumstances, and should assign those factors an appropriate weight as
Investment Management Update
part of their analysis of whether to continue,
alter or eliminate their fund’s 12b-1 plan,”
ICI Report
The ICI Working Group report was the culmination
of the Group’s evaluation of “current law, regulation,
and industry practices relating to . . . distribution
and . . . the need to revise Rule 12b‑1.” Although
the ICI report notes that “regulatory guidance
concerning the board’s responsibilities under
[the] Rule has long been outdated,” it advocates
strongly against any repeal of Rule 12b-1, stating
that “[r]epealing the authority provided under Rule
12b-1 for funds to pay distribution costs out of their
assets would change significantly the regulatory and
business landscape and jeopardize the existence of
current distribution systems and shareholder service
requirements.” Instead, the report recommends
changes to the current application of Rule 12b-1.
• Fund directors “consider the ways in which
continued distribution of fund shares,
and, in particular, the use of fund assets to
pay for distribution, will potentially benefit
fund shareholders,” including whether
continuance of a fund’s 12b-1 plan will:
 “minimize the disruption to portfolio
management,”
 “lead to a greater stability of (or a more
predictable change in) fund assets,” and
 “permit fund shareholders to obtain other
benefits from growth in assets (such
as increased investment by the adviser
in its compliance functions, its asset
management capabilities, including portfolio
management personnel, and back-office
functions),”
Fund Disclosures
The report recommends that: (1) 12b-1 fees “be
identified in a manner that describes their general
purpose and should be listed in the prospectus fee
table using tailored, straightforward, descriptive
terms to accurately describe the main purpose of a
fund’s 12b-1 fee”; (2) the SEC “allow funds to offer
their shares using a short-form disclosure document
that provides key information about a fund, including
the fund’s fee table”; and (3) “brokers [be required]
to provide investors with information about 12b-1
fees and other fund distribution costs at the point
of sale . . . so long as any point-of-sale disclosure
requirements do not operate to discourage brokers
from selling mutual funds.”
• Fund directors “consider the need of the
fund to penetrate particular distribution
channels in the marketplace, as well as the
competitive conditions within those channels,
as part of their analysis of the fund’s 12b-1
plan,”
• “In appropriate circumstances, fund
directors may wish to consider whether
fund shareholders (or shareholders of a
particular class) have effectively agreed
to pay specific amounts to support
distribution of the fund to them. . . .
However, directors should be prepared to
address their fund’s share class structure
carefully if it becomes apparent that that
structure encourages unsuitable sales,”
Board Oversight
Noting that “[b]oard involvement in fund distribution
arrangements should stem from regulatory
responsibilities that are consistent with marketplace
realities,” the ICI report recommends that boards
fulfill their oversight role “by focusing on the full
range of activities financed under a fund’s 12b-1 plan
and the options and other benefits those activities
provide to the fund’s shareholders.” The report
recommends that the SEC no longer “specify the
factors that a board should consider in deciding
whether or not to approve or continue a 12b-1
plan. In fact, the SEC should eliminate the factors
that were listed in 1980. By identifying specific
factors, the SEC creates the risk that a board will
focus too much attention on enumerated factors, and
too little on other relevant, non-enumerated factors.”
• “Although fund directors should review
carefully the need for a 12b-1 plan when a
fund is closed to new investors, the need to
repay amounts already spent distributing
the fund can warrant continuance of the
plan,” and
• “With respect to each of the services being
funded through a 12b-1 plan, directors should
examine whether the cost of the service is
reasonable in light of the nature of the service
generally and the quality of the specific
service being obtained.”
2
• “the fees for the services are fair and
Prior to the NYSE’s decision, the ICI prepared a
report noting that:
reasonable in light of the usual and
customary charges made by others for
services of the same nature and quality.”
• “if discretionary broker voting is eliminated,
typical proxy costs are estimated to more
than double,”
The report further advises that “each service
provider agreement should clearly outline the
scope of the provider’s responsibilities.”
• “conservative analysis indicates that closed-
end fund expense ratios could rise by
approximately 1 to 2 basis points owing to
higher proxy costs” and “expense ratios could
increase by as much as 5 basis points,”
and
Evaluating Service Providers
With respect to the services rendered by the service
providers, the IDC report encourages a board to:
• “understand the division of responsibilities
• “eliminating discretionary broker voting will
among [service] providers,”
have a disproportionate impact on closedend funds as compared to operating
companies because funds have a higher
proportion of retail investors.”
• “consider how the service provider . . .
support[s] and interact[s] with the fund’s
Chief Compliance Officer,”
The NYSE proposal was discussed at the proxy
voting roundtables held by the SEC on May 24.
Both the NYSE and the ICI participated in the
broker proxy voting panel discussion.
• request that management “clearly describe
the compensation to be paid under the
proposed arrangement and whether it
expects to receive any ancillary benefits
from the selection of the proposed service
provider,”
IDC Releases Task Force Report On Board
Oversight of Certain Service Providers
• understand that while “the terms of the
contracts may vary greatly. . . . [w]hatever the
formal term of [a] contract, boards may seek
to determine that the frequency with which
they review the arrangement is sufficient
to detect and correct any problems in
a timely manner, and that the services
performed and the fees charged under the
contract continue to be reasonable in light of
the fund’s possibly changing needs,” and
The Independent Directors Council has released
a report that offers guidance regarding the
selection and review of certain fund service
providers such as the administrator, custodian,
accounting agent, transfer agent, and securities
lending agent. The report focuses on criteria that
directors may want to consider as part of their
oversight of those service providers.
Agreement With Affiliated Providers
• consider that “[t]here are practical difficulties
associated with making a change in
service providers. The conversion process
from one service provider to another may
be expensive and may be complicated by a
period of adjustment, technical difficulties, or
even a temporary lapse in service. If a fund
undertakes a change in service providers,
directors may wish to inquire whether fund
management has carefully planned the
transition to ensure it operates smoothly.”
The report notes that, in evaluating the agreement
with an affiliated service provider, a board may
consider whether:
• “the agreement is in the best interest of the
fund and its shareholders,
• “the services to be performed under the
agreement are required for the operation of
the fund,
• “the services provided are of a nature and
Evaluating Fees
quality at least equal to the same or similar
services provided by independent third
parties, and
The report notes that “[i]n assessing the level of
[a] fee, boards should be aware of the nature
and extent of the services that will be provided in
return for the fee, including any indirect benefit or
7
Investment Management Update
• retain an independent distribution
Morgan Stanley Settles SEC Charges
Relating To Best Execution
consultant to “develop a [d]istribution
[p]lan for the distribution of disgorgement
[penalties] . . . and any interest thereon,”
The SEC has settled an enforcement action
against Morgan Stanley, which the SEC alleges
failed to provide best execution on over 1.2
million trades and thereby recognized excessive
revenue of about $6 million. The SEC states that
Morgan Stanley violated Section 15(c)(1)(A) of the
Securities Exchange Act of 1934, which prohibits
broker-dealers from using “manipulative, deceptive,
or fraudulent devices or contrivances” to effect
securities transactions.
• pay “disgorgement . . . plus prejudgment
interest . . . of $6,457,200 to the Securities
and Exchange Commission” and “a civil
money penalty in the amount of $1.5 million to
the United States Treasury.”
Supreme Court To Examine State Taxation
of Municipal Bonds
According to the settlement, in 2001, Morgan
Stanley developed a trading platform that
automated the execution of certain orders, which
under the previous trading platform, would have
been executed manually by traders. Specifically,
the settlement alleges that, from October 2001
through December 2004, Morgan Stanley
breached its duty of best execution by:
Either scenario could be detrimental to statespecific municipal bond funds, placing them on a
level playing field from a tax perspective with more
diversified multi-state municipal bond funds. It is
expected that the case will be argued and decided
before the end of the Supreme Court’s session that
ends June 30, 2008.
NYSE Proxy Voting Proposal Revised To
Exclude Investment Companies
Possible Changes In Store for Rule 12b-1,
Soft Dollars
On May 23, the NYSE revised its proposal
to eliminate discretionary broker voting in
uncontested elections of directors so that the
proposed revision “is not applicable to companies
registered under the Investment Company Act of
1940.” The proposal continues to be applicable to
operating companies.
Chairman Cox on Rule 12b-1
• income earned on municipal bonds issued in
any state will be exempt from taxation by the
taxpayer’s state of residence, or
(2) “improperly delay[ing]” the execution of
. . . orders for which [it] had an obligation to
execute without hesitation,” and
• income earned on municipal bonds issued
in the taxpayer’s state of residence will be
subject to the same state-level tax that is
currently imposed on income earned on outof-state municipal bonds.
(3) imbedding “undisclosed mark-ups and markdowns on certain retail orders for [over the
counter] stocks in which it made a market
but filled with executions from other market
centers.”
The settlement also asserts that Morgan Stanley
“had no procedure requiring Compliance’s approval
of changes to the [trading] system by Information
Technology personnel. As a result, Compliance’s
knowledge and understanding of specific
programming changes and their intended and
actual effects, was either incomplete or nonexistent.”
Under the settlement, Morgan Stanley must:
• retain an independent compliance
consultant “to conduct a comprehensive
review of [its] automated retail order handling
practices to ensure that [Morgan Stanley] is
complying with its duty of best execution
to its retail customers’ orders,”
6
of independent directors, whose responsibilities
and sensitivities to the fund’s investors are
thought to be particularly acute, uppermost in
our minds.” Chairman Cox outlined his concerns
with Rule 12b-1, noting that “today’s uses of 12b‑1
fees” are “barely recognizable in the light of the
rule’s original purpose,” which, he noted was to
“solve specific distribution problems, as they arose.”
He also addressed the role of independent directors
in reviewing Rule 12b-1 plans, stating that “both [the
SEC] and [independent directors] together have
to tackle head-on the problem of brokers’ sales
commissions masquerading as fund marketing
costs” and that it was time for “independent
directors to take a fresh look at the way this use
of investors’ funds has evolved.”
Rejection of Proposed Repeal or Operational
Changes to Rule 12-1
The report also counters proposals made by various
commentators to eliminate or modify Rule 12b-1.
In discussing proposals to eliminate Rule 12b‑1,
the report advocates that “repeal of the rule
would not benefit shareholders.” The report
argues that eliminating 12b-1 fees for mutual funds
closed to new investors “seems inconsistent with
current uses of 12b-1 fees. . . . [which] include
providing ongoing advice and shareholder servicing
to existing shareholders, irrespective of whether
they are shareholders in open or closed funds,
and allowing the fund’s underwriter to recoup
advanced sales commissions.” With respect to
proposals to “deduct distribution-related costs
directly from shareholder accounts rather
than from fund assets,” the report advocates
that such a change “has significant tax and
operational disadvantages that other disclosure
modifications designed to enhance investors’
understanding of fees associated with a fund
purchase do not.” The report notes that proposals
to bar 12b-1 payments for “administrative (as
opposed to distribution) purposes” would be difficult
because “there is no single industry convention (nor
any explicit regulatory standard) about how funds
classify or label their services, nor is there a bright
line that differentiates various kinds of services
under 12b-1 plans.” Finally, the report contends that
concerns regarding Class B shares “relate to the
suitability of Class B shares for certain investors,
rather than the inherent nature of Class B shares
themselves.”
The U.S. Supreme Court recently agreed to review
a ruling by the Kentucky Court of Appeals that it is
unconstitutional for Kentucky to tax income earned
by Kentucky residents on municipal bonds issued
in other states while exempting from state taxation
income earned on municipal bonds of in-state
issuers. If the Supreme Court upholds the ruling,
states likely will no longer be permitted to tax income
from out-of-state bonds differently than income from
in-state bonds, leading to two possible scenarios:
(1) imbedding “undisclosed mark-ups and
mark-downs . . . without retail customers’
prior consent to do so,”
Finally, the report notes that “[q]uarterly board
consideration does not provide any meaningful
additional protection to investors and should
be eliminated. . . . [I]t would be a more productive
use of their time, if, similar to their consideration of
advisory agreements, fund directors reviewed and
considered this type of information as part of the
annual renewal process.”
Rule 12b-1 Roundtable
Continuing the theme that Rule 12b-1 is a top
priority, the SEC recently held a public roundtable
to discuss the Rule, inviting representatives from
across the financial services industry. The all-day
roundtable was divided into four panels, which
addressed:
• historical perspectives on the Rule,
• the role of 12b-1 plans in current fund
distribution practices,
• the costs and benefits of 12b-1 plans, and
• options for reforming the Rule.
The panelists were generally in agreement that
Rule 12b-1 needs to be reformed, but there was a
great deal of debate as to the extent and nature of
any such reform, with some suggesting only minor
tweaks and others proposing wholesale changes.
There did seem to be a consensus among the
panelists that more effective shareholder disclosure
regarding 12b-1 fees, including the use of a more
descriptive term than “12b-1 fees,” should be
developed.
As to the role of directors, most panelists agreed
that, at the very least, the factors for a board
to consider in determining whether to approve
a 12b-1 plan should be updated and clarified.
Andrew “Buddy” Donohue, Director of the SEC’s
Division of Investment Management, moderating
the fourth panel, acknowledged that he had heard
concerns from directors that it was difficult to
carry out their duty with respect to Rule 12b-1.
Representatives of the SEC, including Chairman
In a speech at the Mutual Fund Directors Forum’s
Seventh Annual Policy Conference, SEC Chairman
Christopher Cox confirmed that “Rule 12b-1 is an
issue the Commission will address this year”
and promised to “have the interests and concerns
3
Investment Management Update
recommendation, lawmakers from both parties
“have long been concerned about the conflicts
of interest” inherent in soft dollar arrangements.
Cox, who was present at the discussion for most of
the day, were careful not to give any indication of
potential changes to the Rule, although Chairman
Cox indicated that those changes would come “later
this year.”
Wells Fargo Excessive Fee Case Settles
IDC and ICI Comment on Rule 12b-1 Reform
In November 2005, a class action lawsuit was filed
in federal court against Wells Fargo Funds Trust
and certain affiliated Wells Fargo entities alleging
that the funds’ investment adviser engaged in
a revenue sharing “scheme.” Specifically, the
plaintiffs alleged that the investment adviser
paid financial intermediaries with monies derived
from fund fees and without proper disclosure to
fund shareholders to induce the intermediaries’
clients to purchase Wells Fargo funds. The
lawsuit, which survived several motions to dismiss,
recently settled for $1,150,000 and an agreement
by the defendants to amend registration statement
disclosure regarding revenue sharing arrangements.
The SEC has invited comments regarding
Rule 12b‑1 reform, and several industry groups,
including the Independent Directors Council and
the Investment Company Institute, recently have
submitted their comments. Generally, the IDC
recommended that the SEC:
• modify the role of directors in overseeing
12b‑1 plans by scaling back board oversight
of 12b-1 fees used for advice and shareholder
servicing while effectively retaining the
current level of board oversight with respect
to 12b-1 fees used for distribution-related
expenses, including advertising, marketing
and promotion,
Allegations
• clarify the standard for board approval of
The plaintiffs’ complaint alleged that the purported
undisclosed scheme lasted for about five years and
that:
12b‑1 plans, and
• enhance shareholder disclosure regarding
• the revenue-sharing arrangements provided
12b-1 fees.
no benefit to the Wells Fargo funds or
shareholders because the adviser increased
fees to recoup costs of payments to brokers,
The ICI echoed the changes proposed by the IDC
and urged the SEC to “refrain from making
changes that would fundamentally alter the
way Rule 12b-1 operates or that would fully or
partially rescind the rule.”
• the expense ratios of the funds were higher
than those of similar funds,
• as the funds’ assets grew, benefits were not
Chairman Cox Seeks Soft Dollar Reform
shared with shareholders,
Chairman Cox recently has sent a letter to Senate
Banking Committee Chairman Christopher
Dodd and House Financial Services Committee
Chairman Barney Frank asking that Congress
take action to remove the legal protection for
soft dollar arrangements. In a speech before the
National Italian-American Foundation, Chairman
Cox explained his position, stating that “the market
considerations that gave rise to so-called ‘soft
dollars’ are as out of date as the Betamax, leisure
suits, and ‘Welcome Back Kotter’” and that today
soft dollar arrangements involve a “witch’s
brew of hidden fees, conflicts of interest, and
complexity in application [that] is at odds with
investors’ best interests.” He also noted in an
interview with the Wall Street Journal that, while
he cannot predict whether Congress will follow his
• the funds’ poor performance did not justify the
fees charged, and
• the funds’ board of directors “recklessly
disregarded the revenue-sharing scheme,
. . . disregarded the fact that the funds had
an excessively high fee structure . . . . [and]
deliberately ignored [the adviser’s use of fund
fees,] neglecting the board’s duty to oversee
the funds and the adviser.”
Jury Trial Implications
The lawsuit was based not only on alleged violations
of the Investment Company Act of 1940, but also on
alleged violations of the antifraud provisions of the
4
Securities Act of 1933 and the Securities Exchange
Act of 1934. This is significant because fraud
claims, like those asserted in this case, may be tried
before a jury if they are not otherwise dismissed or
settled. Given that Wells Fargo did not succeed
in its efforts to have the case dismissed, if the
case had not been settled it would have been
tried in front of a jury – a first for a mutual fund
excessive fee case.
excessive fee case. The Court’s dismissal of the
claim was based, in part, on the process followed
by the Ameriprise Funds’ board when considering
renewal of the investment advisory and distribution
agreements. The Court pointed with approval to key
elements of the Board’s deliberations.
• “Board and Defendants meet several times
during the annual process of negotiating
and approving Defendants’ fees,” and the
Board maintains a contracts committee
that “reviews current contracts and makes
recommendations to the entire Board,”
Role of the Board
While none of the funds’ directors were named as
defendants, the complaint did, as noted above, levy
certain accusations against the board of directors. It
is noteworthy that, in ruling on one of the defendant’s
motions to dismiss, the judge commented:
• “the Board sought the advice of independent
counsel during the fee-negotiation process . .
. . [and] also retained independent third-party
consultants . . . to assist them,”
It is true, perhaps, that the board approved
all fees. But there was only one board for
approximately 100 Wells Fargo Funds. It would
have been hard for a single board to supervise
and monitor 100 different fee structures and
to keep the fiduciary from overreaching. This
weakness in the oversight of the sponsors
left the investors’ money at greater risk. In
this connection, instead of setting realistic
breakpoints to give the investors the benefit of
the expanded investor base and the economies
of scale, the board simply rubber-stamped a
schedule of breakpoints that were illusory as
rarely or never attainable. The result was that
the sponsors raked in ever larger fees without
having to do any significant extra work. All of
the economies of scale were appropriated to the
sponsors rather than the investors.
• “the Board . . . commissioned . . . Lipper,
Inc. . . .to provide . . . written materials on
the comparison of the Funds’ fees to those
of a pool of the Funds’ competitors . . . . [and
the] Board was involved in the process by
which Lipper selected the pool of Funds’
competitors,”
• “the Board adopted a ‘pricing philosophy’ for
setting the Funds’ fees that focused on the
Funds’ performance and pricing structure on
a comparative basis to the Funds’ relevant
competitors. Specifically, the Board aspired to
negotiate fess for the Funds that were at the
median level of fees charged to comparable
funds in the industry. The Board was willing to
pay fees above the median when the Funds’
performance was good, but sought to pay
fees below the median when performance
was poor,” and
The plaintiffs’ third amended complaint referred to
Morningstar’s 2004 “Stewardship Grades” of the
Wells Fargo board, which noted that overseeing
100 funds “could make it more difficult for the board
to focus on what is happening to each fund.” We
note that Morningstar announced on June 19, 2007
that it would be revising the methodology of its
Stewardship Grades so that they no longer focus on
“the board members’ workloads.”
• the Board “requested that Defendants create
a report that describes the similarities and
differences between the fees charged and
services provided to Defendants’ non-mutual
fund clients, including accounts of institutional
investors . . . . The report describes those
additional services that Defendants provide to
the Funds that Defendants do not provide to
Defendants’ institutional accounts.”
Board Process Important In Dismissal of
Ameriprise Excessive Fee Case
The Court held that, “[w]hile the evidence . . . may
show that the Board could have negotiated lower
fees, whether the fees could have been lower is not
the question the Court is required to address.”
A federal district court recently granted summary
judgment to the investment adviser and distributor
of several Ameriprise mutual funds involved in an
5
Investment Management Update
recommendation, lawmakers from both parties
“have long been concerned about the conflicts
of interest” inherent in soft dollar arrangements.
Cox, who was present at the discussion for most of
the day, were careful not to give any indication of
potential changes to the Rule, although Chairman
Cox indicated that those changes would come “later
this year.”
Wells Fargo Excessive Fee Case Settles
IDC and ICI Comment on Rule 12b-1 Reform
In November 2005, a class action lawsuit was filed
in federal court against Wells Fargo Funds Trust
and certain affiliated Wells Fargo entities alleging
that the funds’ investment adviser engaged in
a revenue sharing “scheme.” Specifically, the
plaintiffs alleged that the investment adviser
paid financial intermediaries with monies derived
from fund fees and without proper disclosure to
fund shareholders to induce the intermediaries’
clients to purchase Wells Fargo funds. The
lawsuit, which survived several motions to dismiss,
recently settled for $1,150,000 and an agreement
by the defendants to amend registration statement
disclosure regarding revenue sharing arrangements.
The SEC has invited comments regarding
Rule 12b‑1 reform, and several industry groups,
including the Independent Directors Council and
the Investment Company Institute, recently have
submitted their comments. Generally, the IDC
recommended that the SEC:
• modify the role of directors in overseeing
12b‑1 plans by scaling back board oversight
of 12b-1 fees used for advice and shareholder
servicing while effectively retaining the
current level of board oversight with respect
to 12b-1 fees used for distribution-related
expenses, including advertising, marketing
and promotion,
Allegations
• clarify the standard for board approval of
The plaintiffs’ complaint alleged that the purported
undisclosed scheme lasted for about five years and
that:
12b‑1 plans, and
• enhance shareholder disclosure regarding
• the revenue-sharing arrangements provided
12b-1 fees.
no benefit to the Wells Fargo funds or
shareholders because the adviser increased
fees to recoup costs of payments to brokers,
The ICI echoed the changes proposed by the IDC
and urged the SEC to “refrain from making
changes that would fundamentally alter the
way Rule 12b-1 operates or that would fully or
partially rescind the rule.”
• the expense ratios of the funds were higher
than those of similar funds,
• as the funds’ assets grew, benefits were not
Chairman Cox Seeks Soft Dollar Reform
shared with shareholders,
Chairman Cox recently has sent a letter to Senate
Banking Committee Chairman Christopher
Dodd and House Financial Services Committee
Chairman Barney Frank asking that Congress
take action to remove the legal protection for
soft dollar arrangements. In a speech before the
National Italian-American Foundation, Chairman
Cox explained his position, stating that “the market
considerations that gave rise to so-called ‘soft
dollars’ are as out of date as the Betamax, leisure
suits, and ‘Welcome Back Kotter’” and that today
soft dollar arrangements involve a “witch’s
brew of hidden fees, conflicts of interest, and
complexity in application [that] is at odds with
investors’ best interests.” He also noted in an
interview with the Wall Street Journal that, while
he cannot predict whether Congress will follow his
• the funds’ poor performance did not justify the
fees charged, and
• the funds’ board of directors “recklessly
disregarded the revenue-sharing scheme,
. . . disregarded the fact that the funds had
an excessively high fee structure . . . . [and]
deliberately ignored [the adviser’s use of fund
fees,] neglecting the board’s duty to oversee
the funds and the adviser.”
Jury Trial Implications
The lawsuit was based not only on alleged violations
of the Investment Company Act of 1940, but also on
alleged violations of the antifraud provisions of the
4
Securities Act of 1933 and the Securities Exchange
Act of 1934. This is significant because fraud
claims, like those asserted in this case, may be tried
before a jury if they are not otherwise dismissed or
settled. Given that Wells Fargo did not succeed
in its efforts to have the case dismissed, if the
case had not been settled it would have been
tried in front of a jury – a first for a mutual fund
excessive fee case.
excessive fee case. The Court’s dismissal of the
claim was based, in part, on the process followed
by the Ameriprise Funds’ board when considering
renewal of the investment advisory and distribution
agreements. The Court pointed with approval to key
elements of the Board’s deliberations.
• “Board and Defendants meet several times
during the annual process of negotiating
and approving Defendants’ fees,” and the
Board maintains a contracts committee
that “reviews current contracts and makes
recommendations to the entire Board,”
Role of the Board
While none of the funds’ directors were named as
defendants, the complaint did, as noted above, levy
certain accusations against the board of directors. It
is noteworthy that, in ruling on one of the defendant’s
motions to dismiss, the judge commented:
• “the Board sought the advice of independent
counsel during the fee-negotiation process . .
. . [and] also retained independent third-party
consultants . . . to assist them,”
It is true, perhaps, that the board approved
all fees. But there was only one board for
approximately 100 Wells Fargo Funds. It would
have been hard for a single board to supervise
and monitor 100 different fee structures and
to keep the fiduciary from overreaching. This
weakness in the oversight of the sponsors
left the investors’ money at greater risk. In
this connection, instead of setting realistic
breakpoints to give the investors the benefit of
the expanded investor base and the economies
of scale, the board simply rubber-stamped a
schedule of breakpoints that were illusory as
rarely or never attainable. The result was that
the sponsors raked in ever larger fees without
having to do any significant extra work. All of
the economies of scale were appropriated to the
sponsors rather than the investors.
• “the Board . . . commissioned . . . Lipper,
Inc. . . .to provide . . . written materials on
the comparison of the Funds’ fees to those
of a pool of the Funds’ competitors . . . . [and
the] Board was involved in the process by
which Lipper selected the pool of Funds’
competitors,”
• “the Board adopted a ‘pricing philosophy’ for
setting the Funds’ fees that focused on the
Funds’ performance and pricing structure on
a comparative basis to the Funds’ relevant
competitors. Specifically, the Board aspired to
negotiate fess for the Funds that were at the
median level of fees charged to comparable
funds in the industry. The Board was willing to
pay fees above the median when the Funds’
performance was good, but sought to pay
fees below the median when performance
was poor,” and
The plaintiffs’ third amended complaint referred to
Morningstar’s 2004 “Stewardship Grades” of the
Wells Fargo board, which noted that overseeing
100 funds “could make it more difficult for the board
to focus on what is happening to each fund.” We
note that Morningstar announced on June 19, 2007
that it would be revising the methodology of its
Stewardship Grades so that they no longer focus on
“the board members’ workloads.”
• the Board “requested that Defendants create
a report that describes the similarities and
differences between the fees charged and
services provided to Defendants’ non-mutual
fund clients, including accounts of institutional
investors . . . . The report describes those
additional services that Defendants provide to
the Funds that Defendants do not provide to
Defendants’ institutional accounts.”
Board Process Important In Dismissal of
Ameriprise Excessive Fee Case
The Court held that, “[w]hile the evidence . . . may
show that the Board could have negotiated lower
fees, whether the fees could have been lower is not
the question the Court is required to address.”
A federal district court recently granted summary
judgment to the investment adviser and distributor
of several Ameriprise mutual funds involved in an
5
Investment Management Update
• retain an independent distribution
Morgan Stanley Settles SEC Charges
Relating To Best Execution
consultant to “develop a [d]istribution
[p]lan for the distribution of disgorgement
[penalties] . . . and any interest thereon,”
The SEC has settled an enforcement action
against Morgan Stanley, which the SEC alleges
failed to provide best execution on over 1.2
million trades and thereby recognized excessive
revenue of about $6 million. The SEC states that
Morgan Stanley violated Section 15(c)(1)(A) of the
Securities Exchange Act of 1934, which prohibits
broker-dealers from using “manipulative, deceptive,
or fraudulent devices or contrivances” to effect
securities transactions.
• pay “disgorgement . . . plus prejudgment
interest . . . of $6,457,200 to the Securities
and Exchange Commission” and “a civil
money penalty in the amount of $1.5 million to
the United States Treasury.”
Supreme Court To Examine State Taxation
of Municipal Bonds
According to the settlement, in 2001, Morgan
Stanley developed a trading platform that
automated the execution of certain orders, which
under the previous trading platform, would have
been executed manually by traders. Specifically,
the settlement alleges that, from October 2001
through December 2004, Morgan Stanley
breached its duty of best execution by:
Either scenario could be detrimental to statespecific municipal bond funds, placing them on a
level playing field from a tax perspective with more
diversified multi-state municipal bond funds. It is
expected that the case will be argued and decided
before the end of the Supreme Court’s session that
ends June 30, 2008.
NYSE Proxy Voting Proposal Revised To
Exclude Investment Companies
Possible Changes In Store for Rule 12b-1,
Soft Dollars
On May 23, the NYSE revised its proposal
to eliminate discretionary broker voting in
uncontested elections of directors so that the
proposed revision “is not applicable to companies
registered under the Investment Company Act of
1940.” The proposal continues to be applicable to
operating companies.
Chairman Cox on Rule 12b-1
• income earned on municipal bonds issued in
any state will be exempt from taxation by the
taxpayer’s state of residence, or
(2) “improperly delay[ing]” the execution of
. . . orders for which [it] had an obligation to
execute without hesitation,” and
• income earned on municipal bonds issued
in the taxpayer’s state of residence will be
subject to the same state-level tax that is
currently imposed on income earned on outof-state municipal bonds.
(3) imbedding “undisclosed mark-ups and markdowns on certain retail orders for [over the
counter] stocks in which it made a market
but filled with executions from other market
centers.”
The settlement also asserts that Morgan Stanley
“had no procedure requiring Compliance’s approval
of changes to the [trading] system by Information
Technology personnel. As a result, Compliance’s
knowledge and understanding of specific
programming changes and their intended and
actual effects, was either incomplete or nonexistent.”
Under the settlement, Morgan Stanley must:
• retain an independent compliance
consultant “to conduct a comprehensive
review of [its] automated retail order handling
practices to ensure that [Morgan Stanley] is
complying with its duty of best execution
to its retail customers’ orders,”
6
of independent directors, whose responsibilities
and sensitivities to the fund’s investors are
thought to be particularly acute, uppermost in
our minds.” Chairman Cox outlined his concerns
with Rule 12b-1, noting that “today’s uses of 12b‑1
fees” are “barely recognizable in the light of the
rule’s original purpose,” which, he noted was to
“solve specific distribution problems, as they arose.”
He also addressed the role of independent directors
in reviewing Rule 12b-1 plans, stating that “both [the
SEC] and [independent directors] together have
to tackle head-on the problem of brokers’ sales
commissions masquerading as fund marketing
costs” and that it was time for “independent
directors to take a fresh look at the way this use
of investors’ funds has evolved.”
Rejection of Proposed Repeal or Operational
Changes to Rule 12-1
The report also counters proposals made by various
commentators to eliminate or modify Rule 12b-1.
In discussing proposals to eliminate Rule 12b‑1,
the report advocates that “repeal of the rule
would not benefit shareholders.” The report
argues that eliminating 12b-1 fees for mutual funds
closed to new investors “seems inconsistent with
current uses of 12b-1 fees. . . . [which] include
providing ongoing advice and shareholder servicing
to existing shareholders, irrespective of whether
they are shareholders in open or closed funds,
and allowing the fund’s underwriter to recoup
advanced sales commissions.” With respect to
proposals to “deduct distribution-related costs
directly from shareholder accounts rather
than from fund assets,” the report advocates
that such a change “has significant tax and
operational disadvantages that other disclosure
modifications designed to enhance investors’
understanding of fees associated with a fund
purchase do not.” The report notes that proposals
to bar 12b-1 payments for “administrative (as
opposed to distribution) purposes” would be difficult
because “there is no single industry convention (nor
any explicit regulatory standard) about how funds
classify or label their services, nor is there a bright
line that differentiates various kinds of services
under 12b-1 plans.” Finally, the report contends that
concerns regarding Class B shares “relate to the
suitability of Class B shares for certain investors,
rather than the inherent nature of Class B shares
themselves.”
The U.S. Supreme Court recently agreed to review
a ruling by the Kentucky Court of Appeals that it is
unconstitutional for Kentucky to tax income earned
by Kentucky residents on municipal bonds issued
in other states while exempting from state taxation
income earned on municipal bonds of in-state
issuers. If the Supreme Court upholds the ruling,
states likely will no longer be permitted to tax income
from out-of-state bonds differently than income from
in-state bonds, leading to two possible scenarios:
(1) imbedding “undisclosed mark-ups and
mark-downs . . . without retail customers’
prior consent to do so,”
Finally, the report notes that “[q]uarterly board
consideration does not provide any meaningful
additional protection to investors and should
be eliminated. . . . [I]t would be a more productive
use of their time, if, similar to their consideration of
advisory agreements, fund directors reviewed and
considered this type of information as part of the
annual renewal process.”
Rule 12b-1 Roundtable
Continuing the theme that Rule 12b-1 is a top
priority, the SEC recently held a public roundtable
to discuss the Rule, inviting representatives from
across the financial services industry. The all-day
roundtable was divided into four panels, which
addressed:
• historical perspectives on the Rule,
• the role of 12b-1 plans in current fund
distribution practices,
• the costs and benefits of 12b-1 plans, and
• options for reforming the Rule.
The panelists were generally in agreement that
Rule 12b-1 needs to be reformed, but there was a
great deal of debate as to the extent and nature of
any such reform, with some suggesting only minor
tweaks and others proposing wholesale changes.
There did seem to be a consensus among the
panelists that more effective shareholder disclosure
regarding 12b-1 fees, including the use of a more
descriptive term than “12b-1 fees,” should be
developed.
As to the role of directors, most panelists agreed
that, at the very least, the factors for a board
to consider in determining whether to approve
a 12b-1 plan should be updated and clarified.
Andrew “Buddy” Donohue, Director of the SEC’s
Division of Investment Management, moderating
the fourth panel, acknowledged that he had heard
concerns from directors that it was difficult to
carry out their duty with respect to Rule 12b-1.
Representatives of the SEC, including Chairman
In a speech at the Mutual Fund Directors Forum’s
Seventh Annual Policy Conference, SEC Chairman
Christopher Cox confirmed that “Rule 12b-1 is an
issue the Commission will address this year”
and promised to “have the interests and concerns
3
Investment Management Update
part of their analysis of whether to continue,
alter or eliminate their fund’s 12b-1 plan,”
ICI Report
The ICI Working Group report was the culmination
of the Group’s evaluation of “current law, regulation,
and industry practices relating to . . . distribution
and . . . the need to revise Rule 12b‑1.” Although
the ICI report notes that “regulatory guidance
concerning the board’s responsibilities under
[the] Rule has long been outdated,” it advocates
strongly against any repeal of Rule 12b-1, stating
that “[r]epealing the authority provided under Rule
12b-1 for funds to pay distribution costs out of their
assets would change significantly the regulatory and
business landscape and jeopardize the existence of
current distribution systems and shareholder service
requirements.” Instead, the report recommends
changes to the current application of Rule 12b-1.
• Fund directors “consider the ways in which
continued distribution of fund shares,
and, in particular, the use of fund assets to
pay for distribution, will potentially benefit
fund shareholders,” including whether
continuance of a fund’s 12b-1 plan will:
 “minimize the disruption to portfolio
management,”
 “lead to a greater stability of (or a more
predictable change in) fund assets,” and
 “permit fund shareholders to obtain other
benefits from growth in assets (such
as increased investment by the adviser
in its compliance functions, its asset
management capabilities, including portfolio
management personnel, and back-office
functions),”
Fund Disclosures
The report recommends that: (1) 12b-1 fees “be
identified in a manner that describes their general
purpose and should be listed in the prospectus fee
table using tailored, straightforward, descriptive
terms to accurately describe the main purpose of a
fund’s 12b-1 fee”; (2) the SEC “allow funds to offer
their shares using a short-form disclosure document
that provides key information about a fund, including
the fund’s fee table”; and (3) “brokers [be required]
to provide investors with information about 12b-1
fees and other fund distribution costs at the point
of sale . . . so long as any point-of-sale disclosure
requirements do not operate to discourage brokers
from selling mutual funds.”
• Fund directors “consider the need of the
fund to penetrate particular distribution
channels in the marketplace, as well as the
competitive conditions within those channels,
as part of their analysis of the fund’s 12b-1
plan,”
• “In appropriate circumstances, fund
directors may wish to consider whether
fund shareholders (or shareholders of a
particular class) have effectively agreed
to pay specific amounts to support
distribution of the fund to them. . . .
However, directors should be prepared to
address their fund’s share class structure
carefully if it becomes apparent that that
structure encourages unsuitable sales,”
Board Oversight
Noting that “[b]oard involvement in fund distribution
arrangements should stem from regulatory
responsibilities that are consistent with marketplace
realities,” the ICI report recommends that boards
fulfill their oversight role “by focusing on the full
range of activities financed under a fund’s 12b-1 plan
and the options and other benefits those activities
provide to the fund’s shareholders.” The report
recommends that the SEC no longer “specify the
factors that a board should consider in deciding
whether or not to approve or continue a 12b-1
plan. In fact, the SEC should eliminate the factors
that were listed in 1980. By identifying specific
factors, the SEC creates the risk that a board will
focus too much attention on enumerated factors, and
too little on other relevant, non-enumerated factors.”
• “Although fund directors should review
carefully the need for a 12b-1 plan when a
fund is closed to new investors, the need to
repay amounts already spent distributing
the fund can warrant continuance of the
plan,” and
• “With respect to each of the services being
funded through a 12b-1 plan, directors should
examine whether the cost of the service is
reasonable in light of the nature of the service
generally and the quality of the specific
service being obtained.”
2
• “the fees for the services are fair and
Prior to the NYSE’s decision, the ICI prepared a
report noting that:
reasonable in light of the usual and
customary charges made by others for
services of the same nature and quality.”
• “if discretionary broker voting is eliminated,
typical proxy costs are estimated to more
than double,”
The report further advises that “each service
provider agreement should clearly outline the
scope of the provider’s responsibilities.”
• “conservative analysis indicates that closed-
end fund expense ratios could rise by
approximately 1 to 2 basis points owing to
higher proxy costs” and “expense ratios could
increase by as much as 5 basis points,”
and
Evaluating Service Providers
With respect to the services rendered by the service
providers, the IDC report encourages a board to:
• “understand the division of responsibilities
• “eliminating discretionary broker voting will
among [service] providers,”
have a disproportionate impact on closedend funds as compared to operating
companies because funds have a higher
proportion of retail investors.”
• “consider how the service provider . . .
support[s] and interact[s] with the fund’s
Chief Compliance Officer,”
The NYSE proposal was discussed at the proxy
voting roundtables held by the SEC on May 24.
Both the NYSE and the ICI participated in the
broker proxy voting panel discussion.
• request that management “clearly describe
the compensation to be paid under the
proposed arrangement and whether it
expects to receive any ancillary benefits
from the selection of the proposed service
provider,”
IDC Releases Task Force Report On Board
Oversight of Certain Service Providers
• understand that while “the terms of the
contracts may vary greatly. . . . [w]hatever the
formal term of [a] contract, boards may seek
to determine that the frequency with which
they review the arrangement is sufficient
to detect and correct any problems in
a timely manner, and that the services
performed and the fees charged under the
contract continue to be reasonable in light of
the fund’s possibly changing needs,” and
The Independent Directors Council has released
a report that offers guidance regarding the
selection and review of certain fund service
providers such as the administrator, custodian,
accounting agent, transfer agent, and securities
lending agent. The report focuses on criteria that
directors may want to consider as part of their
oversight of those service providers.
Agreement With Affiliated Providers
• consider that “[t]here are practical difficulties
associated with making a change in
service providers. The conversion process
from one service provider to another may
be expensive and may be complicated by a
period of adjustment, technical difficulties, or
even a temporary lapse in service. If a fund
undertakes a change in service providers,
directors may wish to inquire whether fund
management has carefully planned the
transition to ensure it operates smoothly.”
The report notes that, in evaluating the agreement
with an affiliated service provider, a board may
consider whether:
• “the agreement is in the best interest of the
fund and its shareholders,
• “the services to be performed under the
agreement are required for the operation of
the fund,
• “the services provided are of a nature and
Evaluating Fees
quality at least equal to the same or similar
services provided by independent third
parties, and
The report notes that “[i]n assessing the level of
[a] fee, boards should be aware of the nature
and extent of the services that will be provided in
return for the fee, including any indirect benefit or
7
compensation to the provider that may arise from
its relationship with the fund.”
Evaluating Potential Conflicts of Interest
The report makes a number of recommendations
regarding a board’s oversight of potential conflicts of
interest, including that:
• “the board should be alert for any
arrangements that could unfairly benefit the
adviser or others to the detriment of the
fund and its shareholders,”
•
“[d]irectors should be especially attuned
to the potential conflicts of interest that
may arise between the fund and a service
provider that is affiliated with the fund’s
adviser. . . . When an adviser receives a
material benefit as a result of an arrangement
with a fund’s service provider, boards should
include a review of the arrangement as part
of the fund’s annual advisory contract review,”
and
• boards should be mindful that conflicts of
interest may also arise with unaffiliated
service providers.
Although the report finds that the nature and
extent of board involvement in service provider
selection and oversight varies across the fund
industry according to funds’ different service
provider structures and needs, it stresses that,
“regardless of the extent of that involvement,
directors should be aware of the potential for
conflicts of interest that may arise under certain
circumstances and the protections in place to
address such conflicts” and “each investment
company board should seek the advice of
counsel for issues relating to its individual
circumstances.”
Investment Management Update
A service to our clients.
Investment Management and
financial MARKETS Group
Cameron S. Avery
312-807-4302
cavery@bellboyd.com
Andrew T. Pfau
312-807-4386
apfau@bellboyd.com
Kevin R. Bettsteller
312-807-4442
kbettsteller@bellboyd.com
Paulita A. Pike
312-781-6027
ppike@bellboyd.com
Inside This Issue
Paul H. Dykstra
312-781-6029
pdykstra@bellboyd.com
Eric S. Purple
202-955-7081
epurple@bellboyd.com
Possible Changes In
Store for Rule 12b-1,
Soft Dollars - page 3
Jennifer C. Esquibel
312-807-4262
jesquibel@bellboyd.com
Bruce A. Rosenblum
202-955-7087
brosenblum@bellboyd.com
Alan Goldberg
312-807-4227
agoldberg@bellboyd.com
Donald S. Weiss
312-807-4303
dweiss@bellboyd.com
Anna Paglia
312-781-7163
apaglia@bellboyd.com
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202-955-7040
swinick@bellboyd.com
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312-807-4318
aperla@bellboyd.com
Deborah M. Connor • Group Coordinator • 312-578-6034
dconnor@bellboyd.com
Gwen C. Cooney • Paralegal • 312-558-7826
gcooney@bellboyd.com
August 2007
Wells Fargo Excessive
Fee Case Settles page 4
Board Process
Important In Dismissal
of Ameriprise
Excessive Fee Case page 5
Morgan Stanley Settles
SEC Charges Relating
To Best Execution page 6
Supreme Court To
Examine State Taxation
of Municipal Bonds page 6
NYSE Proxy Voting
Proposal Revised To
Exclude Investment
Companies - page 6
IDC Releases Task
Force Report On Board
Oversight of Certain
Service Providers page 7
IN TOUCH. IN SYNC. INVOLVED.
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© 2007 Bell, Boyd & Lloyd LLP. All rights reserved.
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Investment Management Update is published by Bell, Boyd & Lloyd LLP for clients and friends of the firm and is for information only. It is not a substitute for legal advice or
individual analysis of a particular legal matter. Readers should not act without seeking professional legal counsel. Transmission and receipt of this publication does not create
an attorney-client relationship.
MFDF and ICI Weigh In On 12b-1 Reform
The Mutual Fund Directors Forum and the Investment Company Institute’s Working
Group on Rule 12b-1 recently published reports advocating reform of Rule 12b-1.
The MFDF report offers guidance to mutual fund directors regarding the requirements
of Rule 12b-1, while the ICI’s report focuses on current 12b-1 practices and
recommends potential changes to the rule.
MFDF Report
While indicating that “Rule 12b-1, as currently structured, simply does not reflect
the current marketplace,” the MFDF report nevertheless recognizes that directors
“must still abide by it.” The report seeks to offer “practical guidance” for directors and
acknowledges that “because every fund faces different circumstances, directors will
need to adapt and apply these guidelines sensitively and flexibly.” The MFDF advises
that:
• Fund directors have “a general familiarity with the ways in which any fund for
which they are responsible is distributed, irrespective of whether the distribution
arrangements include a 12b-1 plan,”
• Fund directors “understand how a fund’s 12b-1 plan fits into the fund’s overall
distribution plan” and that, “rather than considering the 12b-1 plan in isolation,
directors should first seek to understand the manner in which fund shares
are distributed, the economics of the distribution system, and the competitive
environment within which their funds operate,”
• Fund directors “request and obtain from management the materials and
information necessary to evaluate the fund’s 12b-1 plan, including a breakdown
of how 12b-1 fees are being used. . . . Developing an understanding of the
goals and underpinnings of a fund’s 12b‑1 plan is, by itself, not sufficient to an
existing 12b-1 plan; directors need to understand how the plan is, in fact, being
used,”
• Fund directors “judge whether continued distribution through the fund’s
existing intermediate channels is in the best interests of the fund’s
shareholders,”
• “The factors and considerations that fund directors use to analyze the value
and efficacy of the fund’s 12b-1 plan . . . be related to the purposes of the plan.
. . . [T]hrough careful analysis of the purposes of their fund’s 12b-1 plan and
of the expenditures it is actually making, directors should seek to identify
a set of factors (whether or not those factors were on the SEC’s original
list) that is relevant to the plan they are evaluating, and use those factors to
determine what action they should take with respect to the plan,”
• “As part of their review of the fund’s plan, fund directors . . . be aware of
the factors identified in the SEC’s initial adopting release for Rule 12b-1.
However, they need consider only those factors relevant to their fund’s
circumstances, and should assign those factors an appropriate weight as