Financial Industry Regulatory Authority (FINRA) Practice Exam

In the context of mutual funds, what is a 12b-1 fee?

1. A front-end sales charge

2. An annual fee to cover marketing and distribution expenses

3. A fee charged for fund management services

4. A fee applied to redeem shares of the fund

The correct answer is: An annual fee to cover marketing and distribution expenses

A 12b-1 fee is an annual fee that mutual funds charge to cover marketing and distribution expenses. This fee is included as part of the fund’s operating expenses and is deducted directly from the fund's assets. It allows mutual funds to promote their products, compensate brokers, and provide ongoing services to shareholders. Investors should be aware of the 12b-1 fee, as it can affect the overall return on their investment. While it can help mutual funds attract more investment through marketing efforts, it also adds to the cost of investing in the fund. Understanding this fee is important for investors when evaluating the total expenses associated with a mutual fund investment, as many funds may have different levels of 12b-1 fees that can influence their net performance. The other options mention charges that relate to different aspects of mutual fund operations, such as sales loads paid when purchasing shares, management fees for investment decisions, and redemption fees charged when investors sell their shares, but the 12b-1 fee specifically pertains to the fund's marketing and distribution expenses.