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AIM Closes Fund and Reduces 12b-1 Fee


On November 4, not only did AIM Management of Houston, Texas officially close its doors to new investors of the nearly $500 million AIM Small-Cap Opportunities Fund, but it also threw a sale for existing shareholders. As a direct result of the fund's closing, AIM cut the fund's 12b-1 distribution fee to 0.25 percent from 0.35 percent on its A class of shares. AIM appears to be among the few, if not the sole, fund group to cut its 12b-1 fee upon closing.

Closing a fund, especially a small-cap fund, is not unusual in itself. Often small- cap managers find themselves with excess cash to invest and a dearth of choices within the small company universe. Many choose to limit new investments by closing the doors, at least temporarily. But AIM, with a total of $120 billion under management, went one step further by trimming the distribution fee which funds generally use to pay for advertising, marketing or to compensate the financial intermediaries who sell and service new and existing accounts.

Bob Plaze, associate director of the SEC's division of investment management, said he had never before seen a fund take such a step.

"Since the fund is not going to be actively sold to new investors, we are not going to have the expense of (lots of) marketing materials," said Ivy MacLemore, a spokesperson for AIM. Although MacLemore expects there will be some sales materials still made available, the anticipated decrease in marketing expenses related to attracting new investors means the fund can decrease the 12b-1 expense it charges shareholders.

The decision to decrease the 12b-1 fee was discussed by the fund group's board of directors, said Carl Frischling, partner at Kramer, Levin, Naftalis & Frankel in New York and an attorney for the fund's trustees.

"Determining how much (of the 12b-1) is paid for retaining accounts and how much is used to attract new assets is an important consideration for the board," said Frischling. The law requires the independent trustees who sit on fund boards to, at least annually, review a fund's 12b-1 plan and decide if the plan should be continued or altered.

For years, the industry has debated whether funds that close to new investors should continue to charge 12b-1 fees.

"The big question has been, if the purpose of a 12b-1 fee is to sell more shares, if you close the fund, how can you sell new shares and justify the fee?" said David Sturms, partner with Vedder Price, Kaufman & Kammholz in Chicago.

While the section of law that originally created 12b-1 fees in 1980 was intended to help fund advisers offset the cost of attracting new investors and assets, over the years the use of the 12b-1 fee has broadened. A fund's 12b-1 fee may be used to pay the current expenditures related to the marketing of the fund, or for ongoing compensation to brokers who have sold the fund in the past and still service those investors, said Plaze of the SEC.

While securities law does not directly prohibit funds that are closed to new investors from assessing a 12b-1 fee, one would assume that those costs related to the current marketing of the fund would decrease, said Plaze. It is consequently up to the fund's board to determine why it is in the best interest of investors to continue the plan or if the fee should be reduced, he said.

Despite the fact that shareholders of the Oppenheimer Enterprise A share class have seen their fund close, reopen, then close again this past July, the fund has never discounted its 0.25 percent 12b-1 fee, said Greg Stitt, spokesperson for OppenheimerFunds in New York. The fund's prospectus clearly states that the 12b-1 charge is an ongoing "service fee" used to pay the broker/dealers who shepherd investors into the fund, said Stitt.

AIM learned a lesson on the use of 12b-1 fees the hard way. In the fall of 1996, a shareholder of a different AIM fund, the AIM Aggressive Growth Fund, filed a lawsuit in U.S. District Court for the Southern District of Texas in Houston. Named as defendants in the suit were the company, AIM Distributors, the fund's distribution unit, and the fund itself. The lawsuit charged that a fund that was closed to new investors should not be allowed to charge a 12b-1 fee since no new investors were being solicited to invest in the fund.

The suit, which sought to recover damages allegedly suffered by fund shareholders in connection with the 0.25 percent 12b-1 fee paid for marketing and shareholder services, was dismissed by the District Court judge on summary judgement, before the suit went to trial.

Even though the case was dismissed, the board felt it had to consider reducing its 12b-1 fees in future fund closings, said Frischling, the fund trustees' attorney.