A provision that allows a mutual fund to collect a small fee from investors. This fee is designated for promotions, sales, or any other activity connected with the distribution of the fund's shares. The fee must be reasonable: 0.5% to 1% of the fund's net assets, and up to a maximum of 8.5% of the offering price per share.
Originally the 12b-1 fee was thought to help investors. It was believed that by marketing a mutual fund its assets would increase. This would ultimately lower management expenses because the cost would be spread out among more investors. However, like the Loch Ness monster, this has yet to be proven. Most of the time the 12B-1 is just a way for fund companies to impose hidden costs on investors.Most mutual funds with 12B-1 fees in excess of 0.25% are classified as a load fund
A no-load mutual fund that is allowed to use fund assets to pay for distribution costs rather than charging a 12b-1 fee. The 12b-1 fee is an annual percentage charge based on the current value of the investment.
The Government typically restrict this to 1%.
A portion of the Investment Company Act of 1940 that permits the exclusion of investment companies from standard registration requirements with the Securities and Exchange Commission (SEC) if all U.S. investors are considered to be "qualified purchasers" or "accredited investors."
This particular section is one of the policies used frequently by hedge fund companies to avoid certain SEC requirements.
Portions of this page are © 2006 Investopedia Inc.
