When I first heard about 12b-1 fees, I knew they were a type of ongoing charge inside mutual funds—basically a cut that went toward marketing and distribution. But what I didn’t realize was how closely those fees are regulated behind the scenes. One of the key regulatory checks on these fees is something called 15(c) reporting. It’s not something most investors talk about, but it plays a big role in how mutual fund fees—including 12b-1 fees—are reviewed and justified.
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What Is a 12b-1 Fee, Again?
Just a quick recap—12b-1 fees are named after Rule 12b-1 under the Investment Company Act of 1940. This rule allows mutual funds to charge ongoing fees (typically up to 1% of assets annually) to cover marketing, sales, and shareholder servicing expenses.
The fee is usually part of the fund’s expense ratio, and it doesn’t show up as a line item in your account. Instead, it quietly reduces the fund’s returns over time. For example:
If I invest $100,000 in a fund with a 1% 12b-1 fee, that’s:
100000 \times 0.01 = 1000 taken out of my investment each year.
Over 10 years, even without compounding, that’s $10,000—and usually much more when you factor in lost growth.
What Is Section 15(c) of the Investment Company Act?
Section 15(c) is all about fund governance. It requires the board of directors or trustees of a mutual fund—most of whom must be independent—to review and approve the fund’s investment advisory agreement annually.
This includes a thorough review of:
- The investment adviser’s compensation
- The fund’s expense ratios, including 12b-1 fees
- Fund performance compared to benchmarks
- Economies of scale and how much of those are passed on to shareholders
- Any conflicts of interest
This process is sometimes called the “15(c) process”, and it results in what I think of as the 15(c) report—a written document outlining the board’s findings and justification for continuing the fund’s management and fee structure.
How 12b-1 Fees Are Reviewed Under 15(c)
Here’s where it connects: If a mutual fund charges 12b-1 fees, the board must assess:
- How the fees are being used
- Whether the fees benefit shareholders
- Whether the level of fees is reasonable and justified
- How the fund’s performance compares to similar funds with lower fees
This isn’t just a formality. The board has a fiduciary duty to act in the best interests of shareholders—like me and you. If the fund is underperforming and still charging high fees, including a fat 12b-1, the board can push to lower the fees or change managers.
Here’s a basic table that shows the kind of comparisons boards often make during 15(c) reviews:
| Aspect Reviewed | Fund A (charges 12b-1) | Peer Fund B (no 12b-1) |
|---|---|---|
| Expense Ratio | 1.50% | 0.30% |
| 12b-1 Fee | 1.00% | 0.00% |
| 5-Year Return | 6.2% | 7.8% |
| Assets Under Management | $1.2B | $1.0B |
| Net Flow | -$200M | +$100M |
If a fund charges more and delivers less, boards are expected to question it. But in practice, not all boards push back hard enough.
Why This Matters to Me as an Investor
I don’t get to vote directly on fees like 12b-1s. But through the 15(c) process, the independent directors are supposed to speak on my behalf.
Here’s what I now look for:
- In the prospectus or annual shareholder report, I check the section where the board explains why they approved the advisory contract. They’re required to summarize their 15(c) review and say whether the fees were found to be reasonable.
- If the explanation seems generic or boilerplate, I get suspicious.
- If the board is full of insiders or has a long history of approving high fees without question, I steer clear.
SEC Scrutiny on 12b-1 and 15(c)
The SEC has raised concerns in recent years about how effectively boards review 12b-1 fees. Some critics argue that the 15(c) process is often too cozy and rubber-stamped. That’s why the SEC has periodically suggested reforms, including more transparent disclosures about:
- Actual benefits to shareholders from 12b-1 expenditures
- Fee breakpoints passed on due to asset growth
- Competitive analysis of peer funds’ fees and performance
What I Do Differently Now
Once I understood how 12b-1 fees fit into the larger picture of fund governance and 15(c) reporting, I started:
- Favoring no-load mutual funds with 0% 12b-1 fees
- Reading fund reports, not just performance charts
- Checking the board composition—looking for independence and turnover
- Using low-cost providers like Vanguard and Fidelity, where the incentive structure aligns more with investors
Final Thoughts
I don’t think most investors realize that 12b-1 fees are still being reviewed and justified every single year by a board of directors through the 15(c) process. It’s not something flashy or widely advertised, but it’s the mechanism that gives us some form of protection from excessive or unjustified fees.
If I’m paying for marketing through a 12b-1 fee, I want to know who approved it and why—and that’s where 15(c) reporting comes in. It doesn’t mean fees will go away, but it gives me the tools to make smarter choices and invest in funds that put me first—not their distribution partners.
