A 12b-1 fee refers to a type of fee that mutual funds charge to cover marketing and distribution expenses. The name “12b-1” comes from the Securities and Exchange Commission (SEC) rule that authorizes these fees.

Here’s a breakdown of the 12b-1 fee and its purpose:

1. **Definition:** The 12b-1 fee is an annual fee that mutual funds charge to cover the costs associated with marketing, distribution, and sometimes shareholder services.

2. **SEC Rule:** The term “12b-1” comes from SEC Rule 12b-1 under the Investment Company Act of 1940. This rule allows mutual funds to charge these fees within certain limits.

3. **Purpose:** The primary purpose of the 12b-1 fee is to help mutual funds cover the costs associated with promoting and selling their shares. These costs may include advertising, distribution of marketing materials, and payments to intermediaries such as financial advisors.

4. **Components:** The 12b-1 fee can have different components. Some funds use it solely for marketing and distribution, while others may allocate a portion of the fee to cover shareholder services, such as maintaining customer service lines or providing educational materials.

5. **Limits:** The SEC imposes limits on the 12b-1 fees that mutual funds can charge. These limits are meant to ensure that investors are not subjected to excessive fees. The total of all fees and expenses charged to investors, including the 12b-1 fees, is disclosed in the fund’s prospectus.

It’s important for investors to be aware of the 12b-1 fees associated with a mutual fund, as these fees can impact the overall cost of owning the fund. When considering mutual funds, investors should carefully review the fund’s prospectus to understand the fees and expenses involved, including any 12b-1 fees.

It’s worth noting that there has been ongoing discussion and debate about the transparency and appropriateness of 12b-1 fees, and regulatory changes may impact how these fees are assessed in the future.