Rule 12b-1 Supporting Statement

SUPPORTING STATEMENT
For the Paperwork Reduction Act Information Collection Submission for
Rule 12b-1
A. JUSTIFICATION
1. Necessity for the Collection of Information
Section 12(b) of the Investment Company Act of 1940 (the “Act”) 1 prohibits a
registered open-end investment company (“fund”), other than a fund complying with
Section 10(d) of the Act, 2 from acting as a distributor of securities that it has issued,
except through an underwriter, in contravention of Commission rules. 3 Rule 12b-1
under the Act permits a fund to bear expenses associated with the distribution of its
shares, provided that the fund complies with certain requirements. 4
Rule 12b-1 requires, among other things, that the fund adopt a written plan
describing all material aspects of the proposed financing of distribution (“rule 12b-1
plan”). 5 The rule 12b-1 plan must be in writing and approved by the fund’s board of
directors, and separately by the “independent” directors (as described in the rule). 6 If
the rule 12b-1 plan is being adopted after public offering of the fund’s voting
securities, it must also be approved initially by a vote of at least a majority of the
fund’s outstanding voting securities. 7 Similarly, any material amendments to the rule
12b-1 plan must be approved by the fund’s directors, including the independent
directors, and any material increase in the amount to be spent under the rule 12b-1
plan must be approved by the fund’s shareholders. 8 In considering the
implementation or continuance of a rule 12b-1 plan, the fund’s board must request
and evaluate information reasonably necessary to make an informed decision. 9 The
board also must conclude, in the exercise of reasonable business judgment and in

1

15 U.S.C. 80a-1 et seq.

2

15 U.S.C. 80a-10(d).

3

15 U.S.C. 80a-12(b).

4

17 CFR 270.12b-1.

5

17 CFR 270.12b-1(b).

6

17 CFR 270.12b-1(b)(2).

7

17 CFR 270.12b-1(b)(1).

8

17 CFR 270.12b-1(b)(4).

9

17 CFR 270.12b-1(d).

light of the directors’ fiduciary duties, that there is a reasonable likelihood that the
rule 12b-1 plan will benefit the fund and its shareholders. 10
The rule 12b-1 plan and, in certain instances, any related agreements must
incorporate certain specified provisions, including that: (i) the plan or agreement will
continue in effect for more than one year only if the board, including the
independent directors, approve the continuance at least annually; 11 (ii) the fund’s
board will review quarterly reports of the amounts spent under the plan; 12 and (iii)
the plan may be terminated at any time by a majority vote of the independent
directors or outstanding voting securities. 13 Rule 12b-1 also requires the fund to
preserve for six years copies of the rule 12b-1 plan and any related agreements and
reports, as well as minutes of board meetings that describe the factors considered and
the basis for implementing or continuing the rule 12b-1 plan. 14
Rule 12b-1 also prohibits funds from paying for distribution of fund shares with
brokerage commissions on their portfolio transactions. 15 The rule requires funds that
use broker-dealers that sell their shares to also execute their portfolio securities
transactions, to implement policies and procedures reasonably designed to prevent:
(i) the persons responsible for selecting broker-dealers to effect transactions in fund
portfolio securities from taking into account broker-dealers’ promotional or sales
efforts when making those decisions; and (ii) a fund, its adviser, or its principal
underwriter, from entering into any agreement under which the fund directs
brokerage transactions or revenue generated by those transactions to a broker-dealer
to pay for distribution of the fund’s (or any other fund’s) shares. 16
2. Purpose and Use of the Information Collection
Rule 12b-1 enables funds to use their own assets to pay for distribution of their
shares. The board and shareholder approval requirements of the rule are designed to
ensure that fund shareholders and directors receive adequate information to evaluate
and approve a rule 12b-1 plan and, thus, are necessary for investor protection. The
provisions that require the board to be provided with quarterly reports and
termination authority are designed to ensure that the rule 12b-1 plan continues to

10

17 CFR 270.12b-1(e).

11

17 CFR 270.12b-1(b)(3)(i).

12

17 CFR 270.12b-1(b)(3)(ii).

13

17 CFR 270.12b-1(b)(3)(iii).

14

17 CFR 270.12b-1(f).

15

17 CFR 270.12b-1(h)(1).

16

17 CFR 270.12b-1(h)(2)(ii).

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benefit the fund and its shareholders. The recordkeeping requirements of the rule are
necessary to enable Commission staff to oversee compliance with the rule. The
requirement that funds or their advisers implement, and fund boards approve,
policies and procedures in order to prevent persons charged with allocating fund
brokerage from taking distribution efforts into account is designed to ensure that
funds’ selection of brokers to effect portfolio securities transactions is not influenced
by considerations about the sale of fund shares.
3. Consideration Given to Information Technology
The Commission’s Electronic Data Gathering, Analysis, and Retrieval
(“EDGAR”) system provides for the automated filing, processing, and dissemination
of full disclosure filings. This automation has increased the speed, accuracy, and
availability of information, generating benefits to investors and financial markets.
Although rule 12b-1 does not require the filing of any documents with the
Commission, the Commission may use its EDGAR facility in the future to improve
the examination of records funds must keep under the rule. The Electronic
Signatures in Global and National Commerce Act and the conforming amendments
to rules under the Act permit funds to preserve records electronically. 17
4. Efforts to Identify Duplication
The Commission periodically evaluates rule-based reporting and recordkeeping
requirements for duplication and reevaluates them whenever it proposes a rule or a
change in a rule. Rule 12b-1 does not require duplicative reporting or recordkeeping.
Although rules 31a-1 and 31a-2 under the Act generally require the maintenance and
preservation of records, including board minutes, 18 rule 12b-1 specifies documents to
be retained under rule 12b-1 and substantive issues to be addressed in the board
minutes. Although rule 38a-1 under the Act requires funds to adopt and implement
compliance policies and procedures, 19 the requirement in rule 12b-1 to adopt
procedures is intended to ensure the active monitoring of brokerage allocation
decisions when executing brokers also distribute a fund’s shares.
5. Effect on Small Entities
The Commission reviews all rules periodically, as required by the Regulatory
Flexibility Act, 20 to identify methods to minimize recordkeeping or reporting
requirements affecting small businesses. The recordkeeping requirements of rule

17

See 17 CFR 270.31a-2(f).

18

17 CFR 270.31a-1; 17 CFR 270.31a-2.

19

17 CFR 270.38a-1.

20

5 U.S.C. 601 et seq.

3

12b-1 are the same for all funds that choose to rely on the rule, including small
entities. The burden on smaller funds, however, to prepare a 12b-1 plan and to
comply with the other conditions of the rule, may be proportionally greater than for
larger funds. The Commission believes, however, that imposing different conditions
on smaller funds would not be consistent with investor protection and the purposes
of the rule’s conditions. Rule 12b-1 is not mandatory, and funds may choose other
distribution arrangements. All funds that use their selling brokers to execute fund
portfolio securities transactions, however, are required to adopt policies and
procedures under rule 12b-1(h).
6. Consequences of Not Conducting Collection
Pursuant to rule 12b-1, fund directors receive information regarding a rule 12b-1
plan and any related agreements (i) when the plan or any related agreements are
implemented or when a material amendment is made to the plan; (ii) quarterly in
connection with reports concerning amounts spent under the plan; and (iii) annually
when the board decides whether to continue the plan and any related agreements.
The fund also must provide information to fund shareholders when their vote is
required to implement the plan and if any material increases in amounts spent under
the plan are proposed. These requirements are necessary to ensure proper approval
by fund boards and shareholders in connection with the adoption, continuance, or
amendment of a rule 12b-1 plan, and to ensure that fund boards can monitor
payments made under a rule 12b-1 plan. These requirements also are necessary for
Commission staff to monitor the duties and responsibilities of fund boards and to
determine fund compliance with the requirements of the rule. Rule 12b-1 also
requires that, before a fund uses a broker-dealer that sells fund shares to also execute
portfolio transactions, the fund implement (and its board approve) policies and
procedures to prevent distribution efforts from being a factor in the selection of
executing broker-dealers. This requirement is necessary to ensure the active
monitoring of brokerage allocation decisions when executing brokers also distribute the
fund’s shares.
7. Inconsistencies with Guidelines in 5 CFR 1320.5(d)(2)
Rule 12b-1 requires funds to retain certain written records for more than three
years. Funds relying on rule 12b-1 must preserve copies of the rule 12b-1 plan,
related agreements and reports, and board minutes related to the rule for at least six
years and maintain such records in an easily accessible place for the first two years.
The long-term retention of these records is necessary for the Commission’s staff to
determine compliance with rule 12b-1.
8. Consultation Outside the Agency
The Commission and the staff of the Division of Investment Management
participate in an ongoing dialogue with representatives of the fund industry through
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public conferences, meetings, and informal exchanges. These various forums provide
the Commission and staff with a means of ascertaining and acting upon paperwork
burdens confronting the industry. The Commission requested public comment on the
collection of information requirements in rule 12b-1 before it submitted this request
for extension and approval to the Office of Management and Budget. The
Commission received no comments in response to its request.
9. Payment or Gift
No payment or gift to respondents was provided.
10. Assurance of Confidentiality
No assurance of confidentiality was provided.
11. Sensitive Questions
No information of a sensitive nature, including social security numbers, will be
required under this collection of information. The collection of information does not
collect personally identifiable information. The agency has determined that a system
of records notice and privacy impact assessment are not required in connection with
the collection of information.
12. Burden of Information Collection
The following estimates of average burden hours and costs are made solely for
purposes of the Paperwork Reduction Act of 1995 21 and are not derived from a
comprehensive or even representative survey or study of the cost of Commission
rules and forms. Reliance on rule 12b-1 is generally voluntary, but compliance with
its conditions for funds that do rely on it is mandatory.
Rule 12b-1 requires the board of each fund with a rule 12b-1 plan to (i) initially
approve the plan and thereafter consider the plan’s continuation on an annual basis
and to approve any material amendments to the plan; (ii) review quarterly reports of
amounts spent under the plan; and (iii) approve policies and procedures to enable the
fund to effect portfolio securities transactions through an executing broker-dealer that
also distributes the fund’s shares. The number of hours required to comply with rule
12b-1 will vary considerably depending on several factors, including the complexity
of the rule 12b-1 plan and the number of classes of fund shares covered by the plan.
Based on information filed with the Commission by funds, Commission staff
estimates that there are approximately 7,858 fund portfolios that have at least one
share class subject to a rule 12b-1 plan. 22 However, many of these portfolios are part

21

44 U.S.C. 3501 et seq.

22

This estimate is based on information from the Commission’s Form N-SAR database.

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of an affiliated group of funds, or fund family, that is overseen by a common board
of directors. Although the board must review and approve the rule 12b-1 plan for
each fund separately, we have allocated the costs and hourly burden related to rule
12b-1 based on the number of fund families that have at least one fund that charges
rule 12b-1 fees, rather than on the total number of fund portfolios that individually
have a rule 12b-1 plan. 23 Based on information filed with the Commission, the staff
estimates that there are approximately 323 fund families with common boards of
directors that have at least one fund with a rule 12b-1 plan.
Based on previous conversations with fund representatives, Commission staff
estimates that for each of the 323 fund families with a portfolio that has a rule 12b-1
plan, the average annual burden of complying with the rule is 425 hours. This
estimate takes into account the time needed to prepare quarterly reports to the board
of directors, the board’s consideration of those reports, and the board’s initial or
annual consideration of whether to continue the plan. 24 We therefore estimate that
the total hourly burden per year for all funds to comply with current information
collection requirements under rule 12b-1, is 137,275 hours. 25

23

This allocation is based on previous conversations with fund representatives on how
fund boards comply with the requirements of rule 12b-1. Despite this allocation of hourly
burdens and costs, the number of annual responses each year will continue to depend on
the number of fund portfolios with rule 12b-1 plans rather than the number of fund
families with rule 12b-1 plans. The staff estimates that the number of annual responses
per fund portfolio will be four per year (quarterly, with the annual reviews taking place at
one of the quarterly intervals). Thus, we estimate that funds will make 31,432 responses
each year. 7,858 fund portfolios × 4 responses per year per fund portfolio = 31,432
responses per year.

24

We do not estimate any costs or time burden related to the recordkeeping requirements
in rule 12b-1, as funds are either required to maintain these records pursuant to other
rules or would keep these records in any case as a matter of business practice.

25

323 fund families × 425 hours per fund family per year = 137,275 hours per year.

6

We estimate the annual cost of the hourly burden per fund family under the rule
to be $119,720. This figure reflects an estimate that each fund family with a rule
12b-1 plan would spend the following hours each year complying with rule 12b-1:

ESTIMATED HOURLY BURDEN

ESTIMATED
APPLICABLE
WAGE RATE 26

ESTIMATED COST
OF HOURLY
BURDEN

380 hours per year
by intermediate accountants
for preparing quarterly reports

×

$165

$62,700

10 hours per year
by paralegals for assisting with quarterly
reports and initial or annual approval materials

×

$210

$2,100

20 hours per year
by compliance attorneys for reviewing quarterly reports
and preparing initial or annual approval materials

×

$352

$7,040

5 hours per year
by deputy general counsel for reviewing quarterly reports
and initial or annual approval materials

×

$576

$2,880

10 hours per year
by board of directors reviewing quarterly reports and the
initial or annual approval materials and making the
necessary findings

×

$4,500

+ $45,000

TOTAL

$119,720

Thus, we estimate that the total annual cost to all funds of the rule 12b-1 hour burden
is approximately $39 million. 27
As a result, we estimate that there will be an industry total of 137,275 burden hours
per year at a cost of $39 million per year over the three year period for which we are
requesting approval of the information collection burden.
13. Cost to Respondents
If a currently operating fund seeks to (i) adopt a new rule 12b-1 plan or
(ii) materially increase the amount it spends for distribution under its rule 12b-1 plan,
rule 12b-1 requires that the fund obtain shareholder approval. As a consequence, the
26

The Commission’s estimate concerning the wage rate is based on salary information for
the securities industry compiled by the Securities Industry and Financial Markets
Association. The estimated wage figure is based on published rates for intermediate
accountants, paralegals, compliance attorneys, and deputy general counsels, modified to
account for an 1,800-hour work year; multiplied by 5.35 to account for bonuses, firm
size, employee benefits, and overhead; and adjusted to account for the effects of
inflation, yielding effective hourly rates of $165, $210, $352, and $576, respectively. See
Securities Industry and Financial Markets Association, Report on Management &
Professional Earnings in the Securities Industry 2013.

27

323 fund families with rule 12b-1 plans × $119,720 per year = $38,669,560.

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fund will incur the cost of a proxy. 28 Based on previous conversations with fund
representatives, Commission staff estimates that approximately three funds per year
prepare a proxy in connection with the adoption or material amendment of a rule
12b-1 plan. Funds typically hire outside legal counsel and proxy solicitation firms to
prepare, print, and mail such proxies. The staff further estimates that the cost of each
fund’s proxy is $34,849. 29 Thus, the total annual cost burden of rule 12b-1 to the fund
industry is $104,547. 30
14. Cost to the Federal Government
Rule 12b-1 does not currently impose any costs on the federal government. The
rule does not require funds to file any documents with the Commission. Commission
staff may review records produced pursuant to the rule in order to assist the
Commission in carrying out its examination and oversight program.
15. Changes in Burden
The estimated annual burden hours for funds with rule 12b-1 plans has decreased
from 140,250 to 137,275 hours (a decrease of 2,975 hours). This is due to a decrease
in the number of fund families that have at least one fund that has a rule 12b-1 plan.
The estimated annual cost burden associated with rule 12b-1 has increased from
$103,116 to $104,547 (an increase of $1,431). The increase in cost is due to the effects
of inflation.
16. Information Collection Planned for Statistical Purposes
The results of any information collection will not be published.
17. Approval to Omit OMB Expiration Date
The Commission is not seeking approval to not display the expiration date for
OMB approval.

28

In general, a fund adopts a rule 12b-1 plan before it begins operations. Therefore, the
fund is not required to obtain the approval of its public shareholders because the fund’s
shares have not yet been offered to the public.

29

This estimate is based on staff’s 2012 estimate of costs for each fund’s proxy ($32,174),
adjusted for inflation to January 2018 values using the Personal Consumption
Expenditures Chain-Type Price Index (“PCE Index”). See Personal Consumption
Expenditures, Chain-type Price Index, available at http://fred.stlouisfed.org/
series/PCEPI.

30

3 funds requiring a proxy per year × $34,849 per proxy = $104,547 per year.

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18. Exceptions to Certification Statement for Paperwork Reduction Act
Submission
The Commission is not seeking an exception to the certification statement.
B. COLLECTIONS OF INFORMATION EMPLOYING STATISTICAL
METHODS
The collection of information will not employ statistical methods.

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