[Congressional Bills 108th Congress]
[From the U.S. Government Publishing Office]
[S. 1971 Introduced in Senate (IS)]
108th CONGRESS
1st Session
S. 1971
To improve transparency relating to the fees and costs that mutual fund
investors incur and to improve corporate governance of mutual funds.
_______________________________________________________________________
IN THE SENATE OF THE UNITED STATES
November 25, 2003
Mr. Corzine (for himself, Mr. Dodd, 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 improve transparency relating to the fees and costs that mutual fund
investors incur and to improve corporate governance of mutual funds.
Be it enacted by the Senate and House of Representatives of the
United States of America in Congress assembled,
SECTION 1. SHORT TITLE; TABLE OF CONTENTS.
(a) Short Title.--This Act may be cited as the ``Mutual Fund
Investor Confidence Restoration Act of 2003''.
(b) Table of Contents.--The table of contents for this Act is as
follows:
Sec. 1. Short title; table of contents.
TITLE I--ENHANCING COST, FEE, AND OTHER DISCLOSURES TO SHAREHOLDERS
Sec. 101. Improved transparency of mutual fund costs.
Sec. 102. Obligations regarding certain distribution and soft dollar
arrangements.
Sec. 103. Definition of no-load mutual fund.
Sec. 104. Disclosure of incentive compensation and mutual fund sales.
TITLE II--MUTUAL FUND GOVERNANCE
Sec. 201. Independent mutual fund boards.
Sec. 202. Audit committee requirements for investment companies.
Sec. 203. Informing directors of significant deficiencies.
Sec. 204. Certification by chairman and chief compliance officer.
TITLE III--PREVENTING ABUSIVE MUTUAL FUND PRACTICES
Sec. 301. Prevention of fraud; internal compliance and control
procedures.
Sec. 302. Ban on joint management of mutual funds and hedge funds.
Sec. 303. Restrictions on short term trading and mandatory redemption
fees.
Sec. 304. Elimination of stale prices.
Sec. 305. Formal policies and procedures related to market timing.
Sec. 306. Prevention of late trades.
Sec. 307. Disclosure of insider transactions.
TITLE IV--STRENGTHENING MUTUAL FUND INDUSTRY OVERSIGHT
Sec. 401. Study of Mutual Fund Oversight Board.
Sec. 402. Study of coordination of enforcement efforts.
Sec. 403. Review of Commission resources.
Sec. 404. Commission study and report regulating soft dollar
arrangements.
Sec. 405. Report on adequacy of regulatory response to late trading and
market timing.
Sec. 406. Study of arbitration claims.
TITLE V--PROMOTING SHAREHOLDER LITERACY
Sec. 501. Financial literacy among mutual fund investors study.
TITLE I--ENHANCING COST, FEE, AND OTHER DISCLOSURES TO SHAREHOLDERS
SEC. 101. IMPROVED TRANSPARENCY OF MUTUAL FUND COSTS.
(a) Regulation Revision Required.--
(1) In general.--Not later than 180 days after the date of
enactment of this Act, the Securities and Exchange Commission
shall revise regulations under the Securities Act of 1933, the
Securities Exchange Act of 1934, or the Investment Company Act
of 1940, or any combination thereof, to require, consistent
with the protection of investors and the public interest,
improved disclosure with respect to an open-end management
investment company, in the quarterly statement or other
periodic report to shareholders or other appropriate disclosure
document, of--
(A) the actual dollar amount, borne by each
shareholder, of the expenses of the company;
(B) the structure of, method used to determine, and
the total amount of the compensation of individuals
employed by the investment adviser of the company to
manage the portfolio of the company, and the ownership
interest of such individuals in the securities of the
company, including when such individuals have no
ownership interest in the company;
(C) whether the chairman of the board of directors
of the open-end management investment company or any
directors of the investment adviser of such company
employed to manage the portfolio of the company do not
own any securities of the company;
(D) the estimated total annual dollar amount of
fees, costs, expenses, taxes, and any other payments
made by the company for any purpose, excluding only pro
rata distributions to shareholders, and set forth in a
manner that facilitates comparison among different
companies;
(E) information concerning the company's policies
and practices with respect to the payment of
commissions for effecting securities transactions to a
member of an exchange, broker, or dealer who--
(i) furnishes advice, either directly or
through publications or writings, as to the
value of securities, the advisability of
investing in, purchasing, or selling
securities, and the availability of securities
or purchasers or sellers of securities;
(ii) furnishes analyses and reports
concerning issuers, industries, securities,
economic factors and trends, portfolio
strategy, and the performance of accounts; or
(iii) facilitates the sale and distribution
of the company's shares;
(F) information concerning payments by any person
other than the company that are intended to facilitate
the sale and distribution of the company's shares; and
(G) information concerning discounts on front-end
sales loads for which investors may be eligible,
including the minimum purchase amounts required for
such discounts.
(2) Rules and regulations.--
(A) Other management and service-related cost.--Not
later than 180 days after the date of enactment of this
Act, the Securities and Exchange Commission shall issue
rules or regulations defining ``fees, costs, expenses,
taxes, and any other payments made by the company'' for
purposes of paragraph (1)(D). Such definition shall
include any management fees, transfer agency expenses,
custodial fees, shareholder servicing fees, portfolio
transaction costs (including commissions, market
impact, spread, and opportunity costs, fees charged
under a plan adopted pursuant to rule 12b-1 of the
rules of the Securities and Exchange Commission (17
C.F.R. 270.12b-1), and other distribution expenses,
directors' fees, and registration fees.
(B) Manner that facilitates comparison among
investment companies.--
(i) In general.--Not later than 180 days
after the date of enactment of this Act, the
Securities and Exchange Commission shall issue
rules or regulations defining ``manner that
facilitates comparison amount investment
companies'' for purposes of paragraph (1)(D).
Such definition shall include definitions of
functional categories of fees, costs, expenses,
taxes, and other payments disclosed under
paragraph (1)(D) that shall not be based on the
contract under which or with whom the services
are provided, and shall instead be based on the
nature of the services provided.
(ii) Display.--Each category of costs under
clause (i) shall be presented in a graphical
display (such as a bar or pie chart) that shows
each category as a percentage of the total
dollar amount under paragraph (1)(D).
(C) Certification.--Not later than 90 days after
the date of enactment of this Act, the Securities and
Exchange Commission shall issue rules or regulations
requiring the independent audit of the estimate
required under paragraph (1)(D) and certification by
the investment adviser and the chairman of the board of
directors of the open-end investment company.
(b) Appropriate Disclosure Document.--
(1) In general.--For purposes of subsection (a)(1), a
disclosure shall not be considered to be made in an appropriate
disclosure document if the disclosure is made exclusively in a
prospectus or statement of additional information, or both such
documents.
(2) Exceptions.--Notwithstanding paragraph (1), the
disclosures required by paragraph (1)(B), (C), and (E) of
subsection (a) may be considered to be made in an appropriate
disclosure document if the disclosure is made exclusively in a
prospectus or statement of additional information, or both such
documents.
SEC. 102. OBLIGATIONS REGARDING CERTAIN DISTRIBUTION AND SOFT DOLLAR
ARRANGEMENTS.
Section 15 of the Investment Company Act of 1940 (15 U.S.C. 80a-15)
is amended by adding at the end the following:
``(g) Obligations Regarding Certain Distribution and Soft Dollar
Arrangements.--
``(1) Reporting requirements.--Each investment adviser to a
registered investment company shall, not less frequently than
annually, submit to the board of directors of the company a
report on--
``(A) payments during the reporting period by the
adviser (or an affiliated person of the adviser) that
were directly or indirectly made for the purpose of
promoting the sale of shares of the investment company
(referred to in paragraph (2) as a `revenue sharing
arrangement');
``(B) services to the company provided or paid for
by a broker or dealer or an affiliated person of the
broker or dealer (other than brokerage and research
services) in exchange for the direction of brokerage to
the broker or dealer (referred to in paragraph (2) as a
`directed brokerage arrangement'); and
``(C) research services obtained by the adviser (or
an affiliated person of the adviser) during the
reporting period from a broker or dealer, the receipt
of which may reasonably be attributed to securities
transactions effected on behalf of the company or any
other company that is a member of the same group of
investment companies (referred to in paragraph (2) as a
`soft dollar arrangement').
``(2) Fiduciary duty of board of directors.--The board of
directors of a registered investment company shall have a
fiduciary duty--
``(A) to review the investment adviser's direction
of the company's brokerage transactions, including
directed brokerage arrangements and soft dollar
arrangements, and that the direction of such brokerage
adheres to the Fund's stated policies and is in the
best interests of the shareholders of the company; and
``(B) to review any revenue sharing arrangements to
ensure compliance with this Act and the rules adopted
thereunder, and that such revenue sharing arrangements
adheres to the Fund's stated policies and are in the
best interests of the shareholders of the company.
``(3) Summaries of reports in annual reports to
shareholders.--In accordance with regulations prescribed by the
Commission under paragraph (4), annual reports to shareholders
of a registered investment company shall include a summary of
the most recent report submitted to the board of directors
under paragraph (1).
``(4) Regulations.--The Commission shall adopt rules and
regulations implementing this section, which rules and
regulations shall, among other things, prescribe the content of
the required reports.
``(5) Definition.--For purposes of this subsection--
``(A) the term `brokerage and research services'
has the same meaning as in section 28(e)(3) of the
Securities Exchange Act of 1934; and
``(B) the term `research services' means the
services described in subparagraphs (A) and (B) of such
section.''.
SEC. 103. DEFINITION OF NO-LOAD MUTUAL FUND.
Not later than 180 days after the date of enactment of this Act,
the Securities and Exchange Commission shall, by rule adopted by the
Commission or a self-regulatory organization (or both)--
(1) clarify the definition of ``no-load'' as such term is
used by investment companies that impose any fee under a plan
adopted pursuant to rule 12b-1 of the rules of the Securities and
Exchange Commission (17 C.F.R. 270.12b-1); and
(2) require disclosure to prevent investors from being
misled by the use of such terminology by the company or its
adviser or principal underwriter.
SEC. 104. DISCLOSURE OF INCENTIVE COMPENSATION AND MUTUAL FUND SALES.
(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, including--
``(I) the amount and source of
sales fees, payments by persons other
than the investment company that are
intended to facilitate the sale and
distribution of the securities, and
commissions for effecting portfolio
securities transactions, or other
payments, paid to such broker or
dealer, or municipal securities broker
or dealer, or associated person thereof
in connection with such sale;
``(II) any commission or other fees
or charges the investor has paid or
will or might be subject to, including
as a result of purchases or
redemptions;
``(III) any conflicts of interest
that any associated person of the
broker, dealer, or municipal securities
broker or dealer of the investor may
face due to the receipt of differential
compensation in connection with such
sale; and
``(IV) information about the
estimated amount of any asset-based
distribution expenses incurred, or to
be incurred, by the investment company
in connection with the purchase of
securities by the investor; 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.--Not later than 1 year
after the date of enactment of the Mutual Fund Investor
Confidence Restoration Act of 2003, the Commission
shall, by rule, establish, to the extent practicable,
standards for the disclosures required under
subparagraph (A).
``(E) Definition of open-end company.--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).
``(F) Definitions of differential compensation and
municipal fund security.--
``(i) Differential compensation.--In this
paragraph, an associated person of a broker or
dealer shall be considered to receive
differential compensation if such person
receives any increased or additional
remuneration, in whatever form--
``(I) for sales of the securities
of an investment company or municipal
fund security that is affiliated with,
or otherwise specifically designated
by, such broker or dealer or municipal
securities broker or dealer, as
compared with the remuneration for
sales of securities of an investment
company or municipal fund security
offered by such broker or dealer or
municipal securities broker or dealer
that are not so affiliated or
designated; or
``(II) for the sale of any class of
securities of an investment company or
municipal fund security as compared
with the remuneration for the sale of a
class of securities of such investment
company or municipal fund security
(offered by such broker or dealer or
municipal securities broker or dealer)
that charges a sales load (as defined
in section 2(a)(35) of the Investment
Company Act of 1940 (15 U.S.C. 80a-
2(a)(35)) only at the time of such a
sale.
``(ii) Municipal fund security.--In this
paragraph, a municipal fund security is any
municipal security issued by an issuer that,
but for the application of section 2(b) of the
Investment Company Act of 1940 (15 U.S.C. 80a-
2(b)), would constitute an investment company
within the meaning of section 3 of the
Investment Company Act of 1940 (15 U.S.C. 80a-
3).''.
TITLE II--MUTUAL FUND GOVERNANCE
SEC. 201. INDEPENDENT MUTUAL FUND BOARDS.
(a) Director Independence.--
(1) In general.--Section 10(a) of the Investment Company
Act of 1940 (15 U.S.C. 80a-10(a)) is amended--
(A) by striking ``more than 60 per centum'' and
inserting ``more than 25 percent''; and
(B) by striking the period at the end and inserting
``, and such company shall not have as a member of its
board of directors any person--
``(1) who has served without being approved or elected by
the shareholders of such registered investment company at least
once every 5 years; and
``(2) unless such director is an interested person or 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.''.
(2) Chairman; financial expert; independent committee.--
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) Chairman.--No registered investment company shall have as
chairman of its board of directors an interested person of such
registered 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.
``(k) Financial Expert.--
``(1) In general.--Each registered investment company shall
have as a member of its board of directors not less than 1
member who is a financial expert, as such term is defined by
the Commission.
``(2) Rules defining financial expert.--In defining the
term `financial expert' for purposes of paragraph (1), the
Commission shall consider whether a person has, through
education and experience as a public accountant or auditor or
principal financial officer, comptroller, or principal
accounting officer of a registered investment company, or from
a position involving the performance of similar functions--
``(A) an understanding of generally accepted
accounting principles and financial statements; and
``(B) experience in the preparation or auditing of
financial statements of general comparable registered
investment companies.
``(3) Deadline for rulemaking.--Not later than 180 days
after the date of enactment of the Mutual Fund Investor
Confidence Restoration Act of 2003, the Commission shall issue
rules under paragraph (2).''.
(c) Definition of Interested Person.--Section 2(a)(19) of the
Investment Company Act of 1940 (15 U.S.C. 80a-2(a)(19)) 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;
or
``(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.''; and
(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 (15 U.S.C. 80a-2(a)) is amended by
adding at the end the following:
``(53) Significant service provider.--
``(A) In general.--Not later than 180 days after
the date of enactment of the Mutual Fund Investor
Confidence Restoration 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).''.
SEC. 202. AUDIT COMMITTEE REQUIREMENTS FOR INVESTMENT COMPANIES.
(a) Amendments.--Section 32 of the Investment Company Act of 1940
(15 U.S.C. 80a-31) is amended--
(1) in subsection (a)--
(A) by striking paragraphs (1) and (2) and
inserting the following:
``(1) such accountant shall have been selected at a meeting
held within 30 days before or after the beginning of the fiscal
year or before the annual meeting of stockholders in that year
by the vote, cast in person, of a majority of the members of
the audit committee of such registered company;
``(2) such selection shall have been submitted for
ratification or rejection at the next succeeding annual meeting
of stockholders if such meeting be held, except that any
vacancy occurring between annual meetings, due to the death or
resignation of the accountant, may be filled by the vote of a
majority of the members of the audit committee of such
registered company, cast in person at a meeting called for the
purpose of voting on such action;''; and
(B) by adding at the end the following new
sentence: ``The Commission, by rule, regulation, or
order, may exempt a registered management company or
registered face-amount certificate company subject to
this subsection from the requirement in paragraph (1)
that the votes by the members of the audit committee be
cast at a meeting in person when such a requirement is
impracticable, subject to such conditions as the
Commission may require.''; and
(2) by adding at the end the following:
``(d) Audit Committee Requirements.--
``(1) Requirements as prerequisite to filing financial
statements.--Any registered management company or registered
face-amount certificate company that files with the Commission
any financial statement signed or certified by an independent
public accountant shall comply with the requirements of
paragraphs (2) through (6) of this subsection and any rule or
regulation of the Commission issued thereunder.
``(2) Responsibility relating to independent public
accountants.--The audit committee of the registered company, in
its capacity as a committee of the board of directors, shall be
directly responsible for the appointment, compensation, and
oversight of the work of any independent public accountant
employed by such registered company (including resolution of
disagreements between management and the auditor regarding
financial reporting) for the purpose of preparing or issuing
the audit report or related work, and each such independent
public accountant shall report directly to the audit committee.
``(3) Independence.--
``(A) In general.--Each member of the audit
committee of the registered company shall be a member
of the board of directors of the company, and shall
otherwise be independent.
``(B) Criteria.--In order to be considered to be
independent for purposes of this paragraph, a member of
an audit committee of a registered company may not,
other than in his or her capacity as a member of the
audit committee, the board of directors, or any other
board committee--
``(i) accept any consulting, advisory, or
other compensatory fee from the registered
company or the investment adviser or principal
underwriter of the registered company; or
``(ii) be an `interested person' of the
registered company, as such term is defined in
section 2(a)(19).
``(4) Complaints.--The audit committee of the registered
company shall establish procedures for--
``(A) the receipt, retention, and treatment of
complaints received by the registered company regarding
accounting, internal accounting controls, or auditing
matters; and
``(B) the confidential, anonymous submission by
employees of the registered company and its investment
adviser or principal underwriter of concerns regarding
questionable accounting or auditing matters.
``(5) Authority to engage advisers.--The audit committee of
the registered company shall have the authority to engage
independent counsel and other advisers, as it determines
necessary to carry out its duties.
``(6) Funding.--The registered company shall provide
appropriate funding, as determined by the audit committee, in
its capacity as a committee of the board of directors, for
payment of compensation--
``(A) to the independent public accountant employed
by the registered company for the purpose of rendering
or issuing the audit report; and
``(B) to any advisers employed by the audit
committee under paragraph (5).
``(7) Audit committee.--For purposes of this subsection,
the term `audit committee' means--
``(A) a committee (or equivalent body) established
by and among the board of directors of a registered
investment company for the purpose of overseeing the
accounting and financial reporting processes of the
company and audits of the financial statements of the
company; and
``(B) if no such committee exists with respect to a
registered investment company, the entire board of
directors of the company.''.
(b) Conforming Amendment.--Section 10A(m) (15 U.S.C. 78j-1(m)) of
the Securities Exchange Act of 1934 is amended by adding at the end the
following:
``(7) Exemption for investment companies.--Effective 1 year
after the date of enactment of the Mutual Fund Investor
Confidence Restoration Act of 2003, for purposes of this
subsection, the term `issuer' shall not include any investment company
that is registered under section 8 of the Investment Company Act of
1940.''.
(c) Implementation.--
(1) In general.--Not later than 180 days after the date of
enactment of this Act, the Securities and Exchange Commission
shall issue final regulations to carry out section 32(d) of the
Investment Company Act of 1940, as added by subsection (a) of
this section.
(2) Incentives.--Not later than 180 days after the date of
enactment of this Act, the Securities and Exchange Commission
shall, by rule, establish--
(A) a program of incentives to encourage the filing
of meritorious complaints under section 32(d)(4)(A) of
the Investment Company Act of 1940; and
(B) appropriate penalties for the willful filing of
materially false complaints under such section.
SEC. 203. INFORMING DIRECTORS OF SIGNIFICANT DEFICIENCIES.
Section 42 of the Investment Company Act of 1940 (15 U.S.C. 80a-41)
is amended by adding at the end the following:
``(f) Informing Directors of Significant Deficiencies.--
``(1) In general.--If the report of an inspection by the
Commission of a registered investment company identifies
significant deficiencies in the operations of such company, or
of its investment adviser or principal underwriter, the company
shall provide such report to the directors of such company.
``(2) Disclosure of deficiencies.--The Commission shall, on
an annual basis, review all inspection reports of registered
investment companies and publicly disclose the 10 most common
deficiencies cited in those reports.''.
SEC. 204. CERTIFICATION BY CHAIRMAN AND CHIEF COMPLIANCE OFFICER.
(a) In General.--Subsection (j) of section 17 of the Investment
Company Act of 1940 (15 U.S.C. 80a-17(j)), as amended by section 301 of
this Act, is amended by adding at the end the following:
``(4) Certification by chairman.--The rules and regulations
established under paragraph (1) shall require the chairman of
the board of directors of each registered open-end investment
company to certify, in the periodic report to shareholders, or
other appropriate disclosure document, that--
``(A) procedures are in place for verifying that
the determination of current net asset value of any
redeemable security issued by the company used in
computing periodically the current price for the
purpose of purchase, redemption, and sale complies with
the requirements of the Investment Company Act of 1940
and the rules and regulations thereunder, and the
company is in compliance with such procedures;
``(B) procedures are in place for the oversight of
the flow of funds into and out of the securities of the
company, and the company is in compliance with such
procedures;
``(C) procedures are in place to ensure that
investors are receiving any applicable discounts on
front-end sales loads that are disclosed in the
company's prospectus;
``(D) procedures are in place to ensure that, if
the company's shares are offered as different classes
of shares, such classes are designed in the interests
of investors, and could reasonably be an appropriate
investment option for an investor;
``(E) procedures are in place to ensure that
information about the company's portfolio securities is
not disclosed in violation of the securities laws or
the company's code of ethics;
``(F) the members of the board of directors who are
not interested persons of the company have reviewed and
approved the compensation of the company's portfolio
manager in connection with their consideration of the
investment advisory contract under section 15(c);
``(G) the company has established and enforces a
code of ethics as required by paragraph (2) of this
subsection;
``(H) the company is in compliance with the
additional requirements of paragraph (3) of this
subsection;
``(I) the report submitted to the board of
directors under section 15(g)(1) is complete and
accurate; and
``(J) the board of directors has fulfilled its
obligations under section 15(g)(2).''
``(5) Certification by chief compliance officer.--The rules
and regulations established under paragraph (1) shall require
the chief compliance officer of each registered open-end
investment company to certify, on an annual basis, that--
``(A) appropriate internal controls are in place
for the review required under subparagraphs (A) through
(H) of paragraph (4); and
``(B) such internal controls have been reviewed,
and determined to reasonably achieve their stated
purpose, by the chief compliance officer.
``(6) Review of advisory contracts.--The rules and
regulations established under paragraph (1) shall require that
the chairman of the board of directors and the chief compliance
officer of a registered open-end investment company certify, on
an annual basis, that any advisory contract entered into by the
company and associated management fees have been negotiated and
are in the best interests of the company.''.
(b) Deadline for Rules.--Not later than 90 days after the date of
enactment of this Act, the Securities and Exchange Commission shall
prescribe--
(1) rules to implement subsection (a); and
(2) minimum standards for compliance with the certification
requirements of paragraphs (4) and (5) of section 17(j) of the
Investment Company Act of 1940 (15 U.S.C. 80a-17(j)).
TITLE III--PREVENTING ABUSIVE MUTUAL FUND PRACTICES
SEC. 301. PREVENTION OF FRAUD; INTERNAL COMPLIANCE AND CONTROL
PROCEDURES.
(a) Amendment.--Subsection (j) of section 17 of the Investment
Company Act of 1940 (15 U.S.C. 80a-17(j)) is amended to read as
follows:
``(j) Detection and Prevention of Fraud.--
``(1) Commission rules to prohibit fraud, deception, and
manipulation.--It shall be unlawful for any affiliated person
of or principal underwriter for a registered investment company
or any affiliated person of an investment adviser of or
principal underwriter for a registered investment company, to
engage in any act, practice, or course of business in
connection with the purchase or sale, directly or indirectly,
by such person of any security held or to be acquired by such
registered investment company, or any security issued by such
registered investment company or by an affiliated registered
investment company, in contravention of such rules and
regulations as the Commission may adopt to define, and
prescribe means reasonably necessary to prevent, such acts,
practices, or courses of business as are fraudulent, deceptive,
or manipulative.
``(2) Codes of ethics.--The rules and regulations
established under paragraph (1) shall include requirements for
the adoption of codes of ethics by registered investment
companies and investment advisers of, and principal
underwriters for, such investment companies establishing such
standards as are reasonably necessary to prevent such acts,
practices, or courses of business. Such rules and regulations
shall require each such registered investment company to
disclose such codes of ethics (and any changes therein) in the
periodic report to shareholders of such company, and to
disclose such code of ethics and any waivers and material
violations thereof on a readily accessible electronic public
information facility of such company and in such additional
form and manner as the Commission shall require by rule or
regulation.
``(3) Additional compliance procedures.--The rules and
regulations established under paragraph (1) shall--
``(A) require each investment company and
investment adviser registered with the Commission to
adopt and implement policies and procedures reasonably
designed to prevent violation of the Securities Act of
1933 (15 U.S.C. 78a et seq.), the Securities Exchange
Act of 1934 (15 U.S.C. 78a et seq.), the Sarbanes-Oxley
Act of 2002 (15 U.S.C. 7201 et seq.), the Trust
Indenture Act of 1939 (15 U.S.C. 77aaa et seq.), the
Investment Company Act of 1940 (15 U.S.C. 80a-1 et
seq.), the Investment Advisers Act of 1940 (15 U.S.C.
80b et seq.), the Securities Investor Protection Act of
1970 (15 U.S.C. 78aaa et seq.), subchapter II of
chapter 53 of title 31, United States Code, chapter 2
of title I of Public Law 91-508 (12 U.S.C. 1951 et
seq.), or section 21 of the Federal Deposit Insurance
Act (12 U.S.C. 1829b);
``(B) require each such company and adviser to
review such policies and procedures annually for their
adequacy and the effectiveness of their implementation;
``(C) require each such company to appoint a chief
compliance officer to be responsible for overseeing
such policies and procedures, ensuring that the
practices of the company adhere to those policies and
procedures, and promote the interest of shareholders--
``(i) whose compensation shall be approved
by the members of the board of directors of the
company who are not interested persons of such
company;
``(ii) who shall report directly to the
members of the board of directors of the
company who are not interested persons of such
company, privately as such members request, but
no less frequently than annually; and
``(iii) whose report to such members shall
include any violations or waivers of, and any
other significant issues arising under, such
policies and procedures; and
``(D) require each such company to establish
policies and procedures reasonably designed to protect
any officer, director, employee, contractor,
subcontractor, or agent of such company from
retaliation, including discharge, demotion, suspension,
harassment, or any other manner of discrimination in
the terms and conditions of employment, because of any
lawful act done by such officer, director, employee,
contractor, subcontractor, or agent to provide
information, cause information to be provided, or
otherwise assist in an investigation that relates to
any conduct which such officer, director, employee,
contractor, subcontractor, or agent reasonably believes
constitutes a violation of the securities laws or the
code of ethics of such investment company.''.
(b) Deadline for Rules.--Not later than 90 days after the date of
enactment of this Act, the Securities and Exchange Commission shall
prescribe rules to implement subsection (a).
SEC. 302. BAN ON JOINT MANAGEMENT OF MUTUAL FUNDS AND HEDGE FUNDS.
(a) Amendment.--Section 15 of the Investment Company Act of 1940
(15 U.S.C. 80a-15) is further amended by adding at the end the
following:
``(h) Ban on Joint Management of Mutual Funds and Hedge Funds.--
``(1) Prohibition of joint management.--It shall be
unlawful for any individual to serve or act as the portfolio
manager or investment adviser of a registered open-end
investment company if such individual also serves or acts as
the portfolio manager or investment adviser of an investment
company that is not registered, or of such other categories of
companies as the Commission shall prescribe by rule in order to
prohibit conflicts of interest, such as conflicts in the
selection of the portfolio securities.
``(2) Exceptions.--Notwithstanding paragraph (1), the
Commission may, by rule, regulation, or order, permit joint
management by a portfolio manager in exceptional circumstances
when necessary to protect the interest of investors, provided
that such rule, regulation, or order requires--
``(A) enhanced disclosure by the registered open-
end investment company to investors of any conflicts of
interest raised by such joint management; and
``(B) fair and equitable policies and procedures
for the allocation of securities to the portfolios of
the jointly managed companies, and certification by the
members of the board of directors who are not
interested persons of such registered open-end
investment company, in the periodic report to
shareholders, or other appropriate disclosure document,
that such policies and procedures of such company are
fair and equitable.
``(3) Definition.--For purposes of this subsection, the
term `portfolio manager' means the individual or individuals
who are designated as responsible for decision-making in
connection with the securities purchased and sold on behalf of
a registered open-end investment company, but shall not include
individuals who participate only in making research
recommendations or executing transactions on behalf of such
company.''.
(b) Deadline for Rules.--The Securities and Exchange Commission
shall prescribe rules to implement the amendment made by subsection (a)
of this section within 90 days after the date of enactment of this Act.
SEC. 303. RESTRICTIONS ON SHORT TERM TRADING AND MANDATORY REDEMPTION
FEES.
(a) Short Term Trading Prohibited.--Section 17 of the Investment
Company Act of 1940 (15 U.S.C. 80a-17) is amended by adding at the end
the following:
``(k) Short Term Trading Prohibited.--It shall be unlawful for any
officer, director, partner, or employee of a registered investment
company, any affiliated person, investment adviser, or principal
underwriter of such company, or any officer, director, partner, or
employee of such an affiliated person, investment adviser, or principal
underwriter, to engage in short-term transactions, as such term is
defined by the Commission by rule, in any securities of which such
company, or any affiliate of such company, is the issuer, except that
this subsection shall not prohibit transactions in money market funds,
other funds the investment policy of which expressly permits short-term
transactions, or such other categories of registered investment
companies as the Commission shall specify by rule.''.
(b) Mandatory Redemption Fees.--Not later than 180 days after the
date of enactment of this Act, the Securities and Exchange Commission
shall, by rule, require that any investment company that does not allow
for market timing practices to charge a redemption fee upon the short-
term redemption of any securities of such company.
(c) Deadline for Rules.--Not later than 180 days after the date of
enactment of this Act, the Securities and Exchange Commission shall
prescribe rules to implement the amendment made by subsection (a) of
this section.
SEC. 304. ELIMINATION OF STALE PRICES.
(a) In General.--Not later than 180 days after the date of
enactment of this Act, the Securities and Exchange Commission shall
prescribe, by rule or regulation, standards concerning the obligation
of registered open-end investment companies under the Investment
Company Act of 1940 to apply and use fair value methods of
determination of net asset value when market quotations are unavailable
or do not accurately reflect the fair market value of the companies'
portfolio securities, in order to prevent dilution of the interests of
long-term investors or as necessary in the other interests of
investors. Such rule or regulation shall identify, in addition to
significant events, the conditions or circumstances from which such
obligation will arise, such as the need to value securities traded on
foreign exchanges, and the methods by which fair value methods shall be
applied in such events, conditions, and circumstances.
(b) Formal Policies and Procedures.--
(1) In general.--Not later than 180 days after the date of
enactment of this Act, the Securities and Exchange Commission
shall, by rule or regulation--
(A) require that each registered open-end
investment company and registered investment advisor
establish formal policies with respect to compliance
with the regulations established under subsection (a);
(B) require such policies to be publicly disclosed
to shareholders;
(C) require the adoption of internal procedures to
ensure compliance with such policies;
(D) require that such policies be subject to
ongoing review by the company or investment adviser;
and
(E) require, on an annual basis, a certification by
the chief executive officer of the company or
investment adviser that such policies are being adhered
to.
(2) Changes to policies.--Any policies adopted by a
registered open-end company or registered investment adviser
under paragraph (1) shall not be altered without the prior
approval of a majority of the shareholders of such company or
adviser.
SEC. 305. FORMAL POLICIES AND PROCEDURES RELATED TO MARKET TIMING.
(a) In General.--Not later than 180 days after the date of
enactment of this Act, the Securities and Exchange Commission shall, by
rule--
(1) require that each registered open-end investment
company and registered investment advisor establish formal
policies with respect to whether it permits market timing and short
term trading, and under what circumstances such practices will be
permitted;
(2) require such policies to be publicly disclosed in any
prospectus delivered by the company or investment advisor;
(3) require the adoption of internal procedures reasonably
designed to ensure compliance with such policies;
(4) require that such policies be subject to ongoing review
by the company or investment advisor; and
(5) require, on an annual basis, a certification by the
chief executive officer of the investment adviser, and chairman
of the board of directors and chief compliance officer of the
company that such policies are being adhered to by the
investment adviser or the company.
SEC. 306. PREVENTION OF LATE TRADES.
(a) Additional Rules Required.--Not later than 180 days after the
date of enactment of this Act, the Securities and Exchange Commission
shall issue rules to prevent transactions in the securities of any
registered open-end investment company in violation of section 22 of
the Investment Company Act of 1940 (15 U.S.C. 80a-22), including after-
hours trades that are executed at a price based on a net asset value
that was determined as of a time prior to the actual execution of the
transaction.
(b) Trades Collected by Intermediaries.--
(1) In general.--The rules established under subsection (a)
shall permit execution of after-hours trades that are provided
to the registered open-end investment company by a broker-
dealer, retirement plan administrator, insurance company, or
other intermediary, after the time as of which such net asset
value was determined, if the late trading and detection
procedures and policies of such intermediary are subject to
inspection by the Commission (in this subsection, a ``permitted
intermediary'').
(2) Rules.--The Commission, by rule, shall--
(A) require each permitted intermediary to certify
that it has policies and procedures in place to prevent
and detect late-trades, and that such policies have
been adhered to by the permitted intermediary;
(B) require each permitted intermediary to submit
an independent annual audit verifying that its policies
and procedures do not permit the acceptance of late
order trading; and
(C) provide that any intermediary that is not a
permitted intermediary shall be required to submit all
transactions to the open-end investment company before
the determination of the related net asset value.
SEC. 307. DISCLOSURE OF INSIDER TRANSACTIONS.
Not later than 180 days after the date of enactment of this Act,
the Securities and Exchange Commission shall, by rule, require--
(1) that any senior executive officer of an open-end
management investment company publicly disclose, prior to the
actual time of purchase, any intended sale or purchase of
securities of an open-end management investment company that
employs the same investment adviser as the company with whom
such senior executive officer is employed; and
(2) that any such securities purchased be held by the
senior executive officer for not less than 6 months.
TITLE IV--STRENGTHENING MUTUAL FUND INDUSTRY OVERSIGHT
SEC. 401. STUDY OF MUTUAL FUND OVERSIGHT BOARD.
(a) In General.--The General Accounting Office shall conduct a
study to determine the feasibility of, and assess what, if any,
benefits to shareholders, mutual fund governance and mutual fund
supervision would result from establishing a Mutual Fund Oversight
Board that would--
(1) have inspection, examination, and enforcement authority
over mutual fund boards of directors;
(2) be funded by assessments against mutual fund assets or
management fees;
(3) have members selected by Commission; and
(4) have rulemaking authority.
(b) Report.--Not later than 1 year after the date of enactment of
this Act, the General Accounting Office shall submit a report on the
study required under paragraph (1) 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. 402. STUDY OF COORDINATION OF ENFORCEMENT EFFORTS.
(a) In General.--The General Accounting Office shall conduct a
study of the coordination of enforcement efforts related to allegations
of misconduct by open-end management companies between the headquarters
of the Securities and Exchange Commission, the regional offices of the
Commission, and appropriate State regulatory and law enforcement
entities, such as State attorneys general and the North American
Securities Administrators Association.
(b) Report.--Not later than 1 year after the date of enactment of
this Act, the General Accounting Office shall submit a report on the
study required under subsection (a) to Congress.
SEC. 403. REVIEW OF COMMISSION RESOURCES.
(a) In General.--The Securities and Exchange Commission shall
conduct a study on the allocation and adequacy of the supervision and
enforcement resources of the Commission dedicated to the oversight of
open-end management companies.
(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. 404. COMMISSION STUDY AND REPORT REGULATING SOFT DOLLAR
ARRANGEMENTS.
(a) Study Required.--
(1) In general.--The Commission shall conduct a study of
the use of soft dollar arrangements by investment advisers as
contemplated by section 28(e) of the Securities Exchange Act of
1934 (15 U.S.C. 78bb(e)).
(2) Areas of consideration.--The study required by this
section shall examine--
(A) the trends in the average amounts of soft
dollar commissions paid by investment advisers and
investment companies in the past 3 years;
(B) the types of services provided through soft
dollar arrangements;
(C) the benefits and disadvantages of the use of
soft dollars for investors, including the extent to
which use of soft dollar arrangements affects the
ability of mutual fund investors to evaluate and
compare the expenses of different mutual funds;
(D) the potential or actual conflicts of interest
(or both potential and actual conflicts) created by
soft dollar arrangements, including whether certain
potential conflicts are being managed effectively by
other laws and regulations specifically addressing
those situations, the role of the board of directors in
managing these potential or actual (or both) conflicts,
and the effectiveness of the board in this capacity;
(E) the transparency of such soft dollar
arrangements to investment company shareholders and
investment advisory clients of investment advisers, the
extent to which enhanced disclosure is necessary or
appropriate to enable investors to better understand
the impact of these arrangements, and an assessment of
whether the cost of any enhanced disclosure or other
regulatory change would result in benefits to the
investor; and
(F) whether such section 28(e) should be modified,
and whether other regulatory or legislative changes
should be considered and adopted to benefit investors.
(b) Report Required.--Not later than 1 year after the date of
enactment of this Act, the Commission shall submit a report on the
study required by subsection (a) to the Committee on Financial Services
of the House of Representatives and the Committee on Banking, Housing,
and Urban Affairs of the Senate.
SEC. 405. REPORT ON ADEQUACY OF REGULATORY RESPONSE TO LATE TRADING AND
MARKET TIMING.
(a) Report Required.--Not later than 180 days after the date of
enactment of this Act, the Securities and Exchange Commission shall
submit a report to the Committee on Financial Services of the House of
Representatives and the Committee on Banking, Housing, and Urban
Affairs of the Senate on market timing and late trading of mutual
funds.
(b) Required Contents of Report.--The report required by this
section shall include the following:
(1) The economic harm of market timing and late trading of
mutual fund shares on long-term mutual fund shareholders.
(2) The findings by the Commission's Office of Compliance,
Inspections and Examinations, and the actions taken by the
Commission's Division of Enforcement, regarding--
(A) illegal late trading practices;
(B) illegal market timing practices; and
(C) market timing practices that are not in
violation of prospectus disclosures.
(3) When the Commission became aware that the use of market
timing practices was harming long-term shareholders, and the
circumstances surrounding the Commission's discovery of that
activity.
(4) The steps the Commission has taken since becoming aware
of market timing practices to protect long-term mutual fund
investors.
(5) Any additional legislative or regulatory action that is
necessary to protect long-term mutual fund shareholders against
the detrimental effects of late trading and market timing
practices.
SEC. 406. STUDY OF ARBITRATION CLAIMS.
(a) Study Required.--The Securities and Exchange Commission shall
conduct a study of the increased rate of arbitration claims and
decisions involving mutual funds since 1995 for the purposes of
identifying trends in arbitration claim rates and, if applicable, the
causes of such increased rates and the means to avert such causes.
(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 by subsection (a) to the Committee on Financial
Services of the House of Representatives and the Committee on Banking,
Housing, and Urban Affairs of the Senate.
TITLE V--PROMOTING SHAREHOLDER LITERACY
SEC. 501. 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.
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