A broker asked the Advisory Board to consider whether the restriction on the payment of sales commissions noted in Prohibited Transaction Exemption 77-3 applies to the payment of distribution-related expenses, or 12b-1 fees, by a mutual fund to a broker unaffiliated with the plan. T he broker in question wanted to know whether the mutual fund distributor would get to keep some of the fees, or whether the broker would get all of the fees. PTE 77-3 permits the purchase and sale of open-end mutual fund shares by a plan which only covers employees of a mutual fund, its investment adviser or principal underwriter, or an affiliate.
The question at hand was whether the payment of 12b-1 fees to this unrelated broker of funds to a 401(k) plan with a feature that allows employees to direct the investment of their accounts among funds – via a self-directed brokerage account – meets the exemption requirements under PTE 77-3.
In its opinion, the DOL acknowledged concerns previously expressed regarding 12b-1 payments in Employee Retirement Income Security Act Advisory Opinion 93-12A in the context of a transaction otherwise covered by PTE 77-4 (this exemption permits the purchase or sale by a plan of shares of a registered open-end investment company where an investment adviser to the mutual fund is also fiduciary with respect to the plan). In that previous opinion, the DOL addressed the question of a firm who served as investment manager or trustee to employee benefit plans invested plan assets in affiliated mutual funds. The company credited the plan for investment advisory fees the company received from the mutual fund, but did not credit the plan for fees it received for administrative services it provided. In that case, the DOL said a prohibited transaction exemption would be available if those administrative (secondary) services were not investment advisory services and the conditions of this class exemption were otherwise met.
In the case at hand, t he DOL advisory opinon noted that the broker claimed it held no fiduciary responsibilities regarding the plan, no conflict-of-interest in regard to the funds that the plan invests in, and assured the DOL that no fiduciary or fiduciary-affiliate will benefit from the 12b-1 fees. Furthermore, the mutual fund distributor would have paid the unrelated broker from the mutual fund assets received by the distributor under a Rule 12b-1 plan of distribution. “Accordingly,” the opinion noted, “it is the Department’s view that the term “sales commission,” as used in section (c) of PTE 77-3, would not include 12b-1 Fees that are paid to Company H, by Company B, from Mutual Fund assets, where Company H is an unrelated party and Company B keeps no part of the 12b-1 Fees.”