Brokerage firms and brokers are paid for the sale of mutual fund shares in several ways. Not all such payments are disclosed to the investors. In the past, investors were usually not aware when the investment advisor for a mutual fund was paying the brokerage firm undisclosed cash compensation such as payments for “shelf space” and marketing support. Payments for “shelf space” are those cash payments made to the brokerage firm so that it will more prominently feature the mutual fund or fund family in its sales literature and website.

Related to revenue sharing is the practice of paying differential cash compensation. That occurs when a brokerage firm provides higher payouts or other subsidies to its brokers for the sale of certain mutual funds, such as the firm’s own proprietary funds.

Undisclosed revenue sharing and enhanced commission payouts can create incentives for brokers to favor some funds over others. They may base their recommendations to investor to buy certain fund to maximize their own compensation rather than to best meet their customers’ investment needs.

Disclosure of revenue sharing differential cash compensation arrangements enables the would-be investor to ask informed questions and evaluate whether the recommendation was influenced by the increased compensation paid to the firm and the broker.