Another fee charged by many money market funds advisors is the so-called 12b-1 fee named after an SEC rule that reimburses the fund’s sponsor for the advertising and marketing costs associated with distributing shares.  Other money market funds operating expenses cover the custody of securities and transactions and communications with shareholders.  In addition to operating expenses, money market funds pay various registration fees and taxes and incur other expenses resulting from government regulations and requirements, such as auditing expenses and directors’ fees.

12b-1 fees are named after the provision in the Investment Company Act of 1940 that authorizes these fees.  This category identifies these 12b-1 fees, which are fees paid by the fund out of fund assets to cover distribution expenses and certain shareholder service expenses. 

The rule permits a fund to pay distribution fees out of fund assets only if the fund has adopted a plan, 12b-1 plan), authorizing their payment.  Distribution fees include fees paid for marketing and selling fund shares, such as compensating brokers and others who sell fund shares, and paying for advertising, the printing and mailing of prospectuses to new investors, and the printing and mailing of sales literature.  The SEC does not limit the size of 12b-1 fees that funds may pay.  But under FINRA rules, 12b-1 fees that are used to pay marketing and distribution expenses, as opposed to shareholder service expenses cannot exceed 0.75 percent of a fund’s average net assets per year.

Some 12b-1 plans also authorize and include shareholder service fees, which are fees paid to persons to respond to investor inquiries and provide investors with information about their investments.  A fund may pay shareholder service fees without adopting a 12b-1 plan.  If shareholder service fees are part of a fund’s 12b-1 plan, these fees will be included in this category of the fee table.  If shareholder service fees are paid outside a 12b-1 plan, then they will be included in the other expenses category.  FINRA imposes an annual .25% cap on shareholder service fees, regardless of whether these fees are authorized as part of a 12b-1 plan.

12b-1 service fees/shareholder servicing fees are contractual fees which a fund may charge to cover the marketing expenses of the fund.  Non-12b-1 service fees are marketing/shareholder servicing fees which do not fall under SEC rule 12b-1.  While funds do not have to charge the full contractual 12b-1 fee, they often do.  When investing in a front-end load or no-load fund, the 12b-1 fees for the fund are usually .250%.  The 12b-1 fees for back-end and level-load share classes are usually between 50 and 75 basis points but may be as much as 100 basis points.  While funds are often marketed as “no-load” funds, this does not mean they do not charge a distribution expense through a different mechanism.  It is expected that a fund listed on an online brokerage site will be paying for the “shelf-space” in a different manner even if not directly through a 12b-1 fee.

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