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The combined use of 12b-1 fees with CDSCs allowed load funds marketers to pay large front-end commissions without appearing to do so.
One fund that pioneered the use of spread loads financed by 12b-1 charges and CDSCs experienced asset growth from $109,000 to nearly $4 billion in a single year.
There is nothing "contingent" about the SC part of CDSCs. The load is not contingent any more than death and taxes are.
(243) Investors are apt to stumble into CDSC purchases by assuming that they are in essence getting a form of no-load fund since the sales charge is hidden from view.
In 1998, the SEC proposed a rule aimed at creating detailed prospectus disclosure requirements for multiple class funds in order to help mutual fund investors understand the options presented by multi-class fund share offerings, particularly as to 12b-1 fees and CDSCs. (320) The notice sought public comment as to whether prospectus disclosure alone would be an effective way to ensure that fund investors would understand their investment options and whether the Commission should work with NASD to set standards for basic information that representatives must communicate with their customers, either orally or in writing.
The world of 12b-1 and CDSCs is never simple, however.
On the other hand, for funds and fund classes where 12b-1 money is being used not to finance CDSCs, but supposedly to generate benefits for the fund and its shareholders, it is time for the SEC to face up to the absence of any proof over 27 years that rule 12b-1 payments yield financial benefits for fund shareholders.
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