[Congressional Bills 108th Congress]
[From the U.S. Government Publishing Office]
[S. 1822 Introduced in Senate (IS)]
1st Session
S. 1822
To require disclosure of financial relationships between brokers and
mutual fund companies and of certain brokerage commissions paid by
mutual fund companies.
_______________________________________________________________________
IN THE SENATE OF THE UNITED STATES
November 5, 2003
Mr. Akaka (for himself, Mr. Fitzgerald, and Mr. Lieberman) introduced
the following bill; which was read twice and referred to the Committee
on Banking, Housing, and Urban Affairs
_______________________________________________________________________
A BILL
To require disclosure of financial relationships between brokers and
mutual fund companies and of certain brokerage commissions paid by
mutual fund companies.
Be it enacted by the Senate and House of Representatives of the
United States of America in Congress assembled,
SECTION 1. SHORT TITLE.
This Act may be cited as the ``Mutual Fund Transparency Act of
2003''.
SEC. 2. DISCLOSURE OF FINANCIAL RELATIONSHIPS BETWEEN BROKERS AND
MUTUAL FUND COMPANIES.
(a) In General.--Section 15(b) of the Securities Exchange Act of
1934 (15 U.S.C. 78o(b)) is amended by adding at the end the following:
``(11) Confirmation of transactions for mutual funds.--
``(A) In general.--Each broker shall disclose in
writing to customers that purchase the shares of an
open-end company registered under section 8 of the
Investment Company Act of 1940 (15 U.S.C. 80a-8)--
``(i) the amount of any compensation
received or to be received by the broker in
connection with such transaction from any
sources; and
``(ii) such other information as the
Commission determines appropriate.
``(B) Timing of disclosure.--The disclosure
required under subparagraph (A) shall be made to a
customer not later than as of the date of the
completion of the transaction.
``(C) Limitation.--The disclosures required under
subparagraph (A) may not be made exclusively in--
``(i) a registration statement or
prospectus of an open-end company; or
``(ii) any other filing of an open-end
company with the Commission.
``(D) Commission authority.--
``(i) In general.--The Commission shall
promulgate such rules as are necessary to carry
out this paragraph not later than 1 year after
the date of enactment of the Mutual Fund
Transparency Act of 2003.
``(ii) Form of disclosure.--Disclosures
under this paragraph shall be in such form as
the Commission, by rule, shall require.
``(E) Definition.--In this paragraph, the term
`open-end company' has the same meaning as in section 5
of the Investment Company Act of 1940 (15 U.S.C. 80a-
5).''.
(b) Disclosure of Brokerage Commissions.--Section 30 of the
Investment Company Act of 1940 (15 U.S.C. 80a-29) is amended by adding
at the end the following:
``(k) Disclosure of Brokerage Commissions.--The Commission, by
rule, shall require that brokerage commissions as an aggregate dollar
amount and percentage of assets paid by an open-end company be included
in any disclosure of the amount of fees and expenses that may be
payable by the holder of the securities of such company for purposes
of--
``(1) the registration statement of that open-end company;
and
``(2) any other filing of that open-end company with the
Commission, including the calculation of expense ratios.''.
SEC. 3. MUTUAL FUND GOVERNANCE.
(a) Independent Fund Boards.--Section 10(a) of the Investment
Company Act of 1940 (15 U.S.C. 80a-10(a)) is amended--
(1) by striking ``shall have'' and inserting the following:
``shall--
``(1) have'';
(2) by striking ``60 per centum'' and inserting ``25
percent'';
(3) by striking the period at the end and inserting a
semicolon; and
(4) by adding at the end the following:
``(2) have as chairman of its board of directors an
interested person of such registered company; or
``(3) have as a member of its board of directors any person
that is an interested person of such registered investment
company--
``(A) who has served without being approved or
elected by the shareholders of such registered
investment company at least once every 5 years; and
``(B) unless such director has been found, on an
annual basis, by a majority of the directors who are
not interested persons, after reasonable inquiry by
such directors, not to have any material business or
familial relationship with the registered investment
company, a significant service provider to the company,
or any entity controlling, controlled by, or under
common control with such service provider, that is
likely to impair the independence of the director.''.
(b) Action by Independent Directors.--Section 10 of the Investment
Company Act of 1940 (15 U.S.C. 80a-10) is amended by adding at the end
the following:
``(i) Action by Board of Directors.--No action taken by the board
of directors of a registered investment company may require the vote of
a director who is an interested person of such registered investment
company.
``(j) Independent Committee.--
``(1) In general.--The members of the board of directors of
a registered investment company who are not interested persons
of such registered investment company shall establish a
committee comprised solely of such members, which committee
shall be responsible for--
``(A) selecting persons to be nominated for
election to the board of directors; and
``(B) adopting qualification standards for the
nomination of directors.
``(2) Disclosure.--The standards developed under paragraph
(1)(B) shall be disclosed in the registration statement of the
registered investment company.''.
(c) Definition of Interested Person.--Section 2(a)(19) of the
Investment Company Act of 1940 (15 U.S.C. 80a-2) is amended--
(1) in subparagraph (A)--
(A) in clause (iv), by striking ``two'' and
inserting ``5''; and
(B) by striking clause (vii) and inserting the
following:
``(vii) any natural person who has served
as an officer or director, or as an employee
within the preceding 10 fiscal years, of an
investment adviser or principal underwriter to
such registered investment company, or of any
entity controlling, controlled by, or under
common control with such investment adviser or
principal underwriter;
``(viii) any natural person who has served
as an officer or director, or as an employee
within the preceding 10 fiscal years, of any
entity that has within the preceding 5 fiscal
years acted as a significant service provider
to such registered investment company, or of
any entity controlling, controlled by, or under
the common control with such service provider;
``(ix) any natural person who is a member
of a class of persons that the Commission, by
rule or regulation, determines is unlikely to
exercise an appropriate degree of independence
as a result of--
``(I) a material business
relationship with the investment
company or an affiliated person of such
investment company;
``(II) a close familial
relationship with any natural person
who is an affiliated person of such
investment company; or
``(III) any other reason determined
by the Commission.'';
(2) in subparagraph (B)--
(A) in clause (iv), by striking ``two'' and
inserting ``5''; and
(B) by striking clause (vii) and inserting the
following:
``(vii) any natural person who is a member
of a class of persons that the Commission, by
rule or regulation, determines is unlikely to
exercise an appropriate degree of independence
as a result of--
``(I) a material business
relationship with such investment
adviser or principal underwriter or
affiliated person of such investment
adviser or principal underwriter;
``(II) a close familial
relationship with any natural person
who is an affiliated person of such
investment adviser or principal
underwriter; or
``(III) any other reason as
determined by the Commission.''.
(d) Definition of Significant Service Provider.--Section 2(a) of
the Investment Company Act of 1940 is amended by adding at the end the
following:
``(53) Significant service provider.--
``(A) In general.--Not later than 270 days after
the date of enactment of the Mutual Fund Transparency
Act of 2003, the Securities and Exchange Commission
shall issue final rules defining the term `significant
service provider'.
``(B) Requirements.--The definition developed under
paragraph (1) shall include, at a minimum, the
investment adviser and principal underwriter of a
registered investment company for purposes of paragraph
(19).''.
(e) Study.--
(1) In general.--The Securities and Exchange Commission
shall conduct a study to determine whether the best interests
of investors in mutual funds would be served by the creation of
a Mutual Fund Oversight Board that--
(A) has inspection, examination, and enforcement
authority over mutual fund boards of directors;
(B) is funded by assessments against mutual fund
assets;
(C) the members of which are selected by the
Securities and Exchange Commission; and
(D) has rulemaking authority.
(2) Report.--Not later than 1 year after the date of
enactment of this Act, the Securities and Exchange Commission
shall submit a report on the study required under paragraph (1)
to--
(A) the Committee on Banking, Housing, and Urban
Affairs of the Senate; and
(B) the Committee on Financial Services of the
House of Representatives.
SEC. 4. PORTFOLIO MANAGER COMPENSATION.
Not later than 270 days after the date of enactment of this Act,
the Securities and Exchange Commission shall prescribe rules under the
Investment Company Act of 1940, requiring that a registered investment
company disclose the structure of, or method used to determine, the
compensation of--
(1) individuals employed by the investment adviser of the
company to manage the portfolio of the company; and
(2) the ownership interest of such individuals in the
securities of the registered investment company.
SEC. 5. FINANCIAL LITERACY AMONG MUTUAL FUND INVESTORS STUDY.
(a) In General.--The Securities and Exchange Commission shall
conduct a study to identify--
(1) the existing level of financial literacy among
investors that purchase shares of open-end companies, as such
term is defined under section 5 of the Investment Company Act
of 1940, that are registered under section 8 of such Act;
(2) the most useful and understandable relevant information
that investors need to make sound financial decisions prior to
purchasing such shares;
(3) methods to increase the transparency of expenses and
potential conflicts of interest in transactions involving the
shares of open-end companies;
(4) the existing private and public efforts to educate
investors; and
(5) a strategy to increase the financial literacy of
investors that results in a positive change in investor
behavior.
(b) Report.--Not later than 1 year after the date of enactment of
this Act, the Securities and Exchange Commission shall submit a report
on the study required under subsection (a) to--
(1) the Committee on Banking, Housing, and Urban Affairs of
the Senate; and
(2) the Committee on Financial Services of the House of
Representatives.
SEC. 6. STUDY REGARDING MUTUAL FUND ADVERTISING.
(a) In General.--The Comptroller General of the United States shall
conduct a study on mutual fund advertising to identify--
(1) existing and proposed regulatory requirements for open-
end investment company advertisements;
(2) current marketing practices for the sale of open-end
investment company shares, including the use of unsustainable
past performance data, funds that have merged, and incubator
funds;
(3) the impact of such advertising on consumers;
(4) recommendations to improve investor protections in
mutual fund advertising and additional information necessary to
ensure that investors can make informed financial decisions
when purchasing shares.
(b) Report.--Not later than 1 year after the date of enactment of
this Act, the Comptroller General of the United States shall submit a
report on the results of the study conducted under subsection (a) to--
(1) the Committee on Banking, Housing, and Urban Affairs of
the United States Senate; and
(2) the Committee on Financial Services of the House of
Representatives.
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