Category: Compliance, Financial Intermediary Administration, Transfer Agency

SEC Guidance on Distribution Fees: A Closer Look


In March 2015, our post on intermediary fees included three suggested actions for fund companies to take to avoid potential enforcement actions. They were:

  1. The board first needs to set policies, consistent with the funds’ 12b-1 plan, about what the funds will pay for intermediary based shareholder services.
  2. Funds should be as specific as possible in their agreements about the services that the intermediary firm will perform specific to sub-TA, servicing and retirement fees.
  3. Funds then need to establish a repeatable process to allocate funding of intermediary fees to the funds, up to the levels agreed by the board, and then allocate the remainder to another corporate entity.


While the recent SEC guidance on distribution fees does not invalidate these recommendations, it does provide insights into the regulator’s position on the issue. There are two underlying thoughts that seem to provide the basis for the Commission’s view, one which is very clear; the other a little less so.

First, everyone understands that Rule 12b-1 prohibits funds from paying, either directly or indirectly, for distribution related activities except pursuant to a board approved 12b-1 plan. However, the Commission also believes that an intermediary firm receiving sub-TA fees to cover servicing expenses is also performing distribution related activities.

The view that some portion of the sub-TA fees is for distribution is not new. In the 1998 Supermarket Letter, the Commission expressed the same view: “When a fund participates in a fund supermarket primarily to sell its shares to investors, at least a portion of the fees must be considered to be compensation paid to the sponsor for providing distribution services.

In Distribution Fee Guidance, the SEC makes the fund board responsible for determining what portion of the sub-TA fees directly or indirectly pay for distribution activities. They further require the advisor and other parties (fund transfer agent, distributor, and fund administrator) provide the board with sufficient information to support its analysis. This information includes:

  • The specific services provided under the sub-TA agreements
  • Fees paid
  • Any changes to either the fee structures or the services provided
  • Information about the process used to determine if the fees are reasonable
  • How the board can evaluate the quality of these services
  • A view about whether any of the services provide either direct or indirect distribution benefits

As we discussed in our post last year, one way that fund boards can address this issue is by establishing caps on the amounts of sub-TA fees that can be paid from fund assets. Any fees paid in excess of this cap must be paid under the fund 12b-1 plan or by the advisor or another source (i.e., distributor).

While the SEC did not prescribe the process that the fund board should use in making its determination, they did identify scenarios that would be warning flags and may require deeper analysis and discussion.

  • Certain distribution related activities (i.e., preferred lists, access) are conditioned on the payment of sub-TA fees
  • Payment of sub-TA fees where the fund does not have a 12b-1 plan
  • Tiered payments involving a combination of fund paid 12b-1 fees and fees paid by the advisor or other affiliate
  • Sub-TA agreements that do not define the services provided or where the sub-TA fee and distribution fees are bundled
  • Large disparities in the fees paid to firms for the same services
  • Payments for sales data

At Boston Financial, we are uniquely positioned to help our clients incorporate this guidance into their oversight programs. We provide a systematic process using the best available data to validate intermediary fee invoices. With access to both the invoiced fees and the fees paid directly from our TA system, we can supply information about all intermediary fees.

Once the board has analyzed the sub-TA fees and determined what portions of the invoice are to be paid from fund assets, we can provide reporting that allocates the fees between different sources (fund CUSIP, fund 12b-1 plan, advisor, or distributor) according to the business rules provided by your board. Additionally, the systematic payments from the TA system can be established in a similar manner with clearly defined rates and funding rules for each fee type.



Ken Larsen

Ken Larsen

Ken is a Vice President at Boston Financial with responsibility for the strategy of the Financial Intermediary Administration (FIA) products and services. These offerings include a suite of tools designed to assist broker-dealer distributed fund companies in the oversight and servicing of their third-party relationships. The FIA team provides fund companies with innovative solutions and support to their financial intermediary, trust, and retirement business relationships. Ken's career in the transfer agent business spans the U.S., U.K., and European marketplaces. He began his career at Fidelity Investments in Boston. For the last 24 years, he has worked for several third-party transfer agents including Boston Financial, IFDS (UK), and State Street Bank Luxembourg in operational, management, relationship and product development roles. Ken received his Bachelor of Science degree from Providence College.


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