Distribution Fee

Under FINRA rules limiting asset-based sales charges, a fund 12b-1 distribution fee and its separate shareholder service fee are capped, respectively, at annual rates of:

1. A.1.00% for distribution and 0.50% for shareholder service1.00% is the combined total, not the distribution cap alone, and the service cap is 0.25%.
2. B.0.25% for distribution and 0.75% for shareholder serviceThis reverses the caps - the distribution component carries the larger 0.75% limit.
3. C.0.75% for distribution and 0.25% for shareholder serviceCorrect - 0.75% distribution plus 0.25% service, totaling the familiar 1.00% level load.
4. D.8.5% combined8.5% is the maximum front-end sales charge under FINRA rules, an unrelated limit misapplied to annual asset-based fees.

Why: FINRA caps the asset-based distribution (12b-1) component at 0.75% of average net assets annually, with a separate 0.25% cap for shareholder service fees - a combined 1.00%. Review: 12b-1 and service fee limits.

Marchbank Securities offers the same fund in Class A, which its clearing arrangement pays the firm 0.25% annually to service, and an institutional class with no distribution fee that the firm may make available to any client who asks. A representative recommends Class A to Georgiana for a 400,000 dollar purchase without mentioning the institutional class, noting only that Class A is the firm's standard offering. Under Regulation Best Interest, what is the central failure?

1. A.A reasonably available and materially cheaper class of the identical fund was neither considered nor disclosed, and the class recommended pays the firm moreCorrect. The Care Obligation requires evaluating reasonably available alternatives, and the compensation difference is a conflict that must be addressed rather than ignored.
2. B.The representative failed to obtain Georgiana's written consent to the 0.25% servicing payment before placing the tradeReg BI does not operate through customer consent. It requires disclosure, care, conflict management and compliance policies.
3. C.Class A is never appropriate for a purchase of 400,000 dollars, so the recommendation was unsuitable on its faceClass A with breakpoints can be entirely appropriate at that size. The defect is the missing comparison and undisclosed conflict, not the class itself.
4. D.The firm was required to eliminate the 0.25% servicing payment entirely, because any differential compensation between share classes is prohibitedDifferential compensation is not banned outright; it must be identified and mitigated or disclosed. Only certain sales contests and quotas tied to specific securities must be eliminated.

Why: Reg BI's Care Obligation requires consideration of reasonably available alternatives, and the Conflict of Interest Obligation requires the firm to identify and at a minimum disclose, and in some cases mitigate, conflicts associated with recommendations. Here a materially cheaper class of the identical fund was reasonably available and was not considered or disclosed, and the firm earns more from the class recommended. Calling something the firm's standard offering is not an analysis. The clue is that the two classes are the same fund with different compensation to the firm. Review: Reg BI Care and Conflict of Interest Obligations. Trap: assuming that offering a permissible product satisfies the rule.