12b-1 fees in mutual funds, are known as “asset-based distribution charges,” and sometimes called “Class C” shares. These are fees that are taken from all investor assets on a quarterly basis. Which of the following must approve these fees initially?
I. A majority of the non-affiliated board members
II. A majority of the outstanding shareholders
III. A majority of the fund’s board of directors
IV. A majority of the fund’s board of directors, including a majority of the non-affiliated board members
a) I, III, IV
b) II, III
c) I, II, IV
d) II, IV

The correct answer is b.
To initiate 12b-1 fee charges in a mutual fund, there must be a majority vote by the full board of directors and a majority vote of the outstanding shares (shareholders cast the votes--the shares vote). It is not necessary to have a majority of the non-affiliated board members approve the initiation of these fees. Side note: to continue 12b-1 fees, the charter of the fund may stipulate that either a majority vote of the board or the shareholders is all that is required.


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