The Securities and Exchange Commission (SEC) has made a point in cracking down on 12(b)-1 fees in mutual funds and exchange traded funds (ETFs), but the fight against the fees has been dealt a major setback.
The U.S. District Court for the Northern District of California has ruled to dismiss claims made against Franklin Templeton, writes Beagan Wilcox Volz for Ignites. Eaton Vance and Oppenheimer, both with similar cases, are in earlier stages of litigation.
The plaintiffs claim the fund firms’ affiliated distributors are making improper 12(b)-1 payments to broker-dealers, arguing that this violates federal securities law and a 2007 D.C. circuit ruling in Financial Planning Association vs. SEC – the ruling states that asset-based compensation cannot be received by brokers from mutual fund shares placed in non-advisory accounts. [What Are 12(b)-1 Fees?]
Additionally, plaintiffs are trying to convince the courts that the 12(b)-1 payments are in violation of SEC compliance rules. [The SEC Takes Aim at 12(b)-1 Fees in ETFs.]
Judge Phyllis Hamilton ruled that the section of the Investment Company Act of 1940 provides a “remedy for a violation of ‘any provision of [the ICA], or of any rule, regulation, or order thereunder,’ rather than a distinct cause of action or basis for liability.” He also disagrees with the plaintiff’s interpretation of the Financial Planning casing, arguing that it is “irrelevant” to 12(b)-1 fees.
Other firms that may be affected by the Franklin decision on what law firm Milberg calls “excessive and unlawful” fees include: BlackRock, PIMCO, The Hartford, Ivy, MFS, First Eagle, Davis, Evergreen, Calamos, Van Kampen, Columbia, Lord Abbett, Loomis Sayles, Legg Mason, AllianceBerStein, Thornburg, Transamerica, Putnam, Russell, Allianz and Invesco.
For more information on ETFs and taxes, visit our taxes category.
Max Chen contributed to this article.