[Congressional Bills 108th Congress]
[From the U.S. Government Publishing Office]
[S. 2059 Introduced in Senate (IS)]
108th CONGRESS
2d Session
S. 2059
To improve the governance and regulation of mutual funds under the
securities laws, and for other purposes.
_______________________________________________________________________
IN THE SENATE OF THE UNITED STATES
February 10, 2004
Mr. Fitzgerald (for himself, Mr. Levin, and Ms. Collins) introduced the
following bill; which was read twice and referred to the Committee on
Banking, Housing, and Urban Affairs
_______________________________________________________________________
A BILL
To improve the governance and regulation of mutual funds under the
securities laws, and for other purposes.
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 Reform
Act of 2004''.
(b) Table of Contents.--The table of contents for this Act is as
follows:
Sec. 1. Short title; table of contents.
Sec. 2. Definitions.
Sec. 3. Rulemaking.
TITLE I--FUND GOVERNANCE
Sec. 110. Independent directors.
Sec. 111. Study of director compensation and independence.
Sec. 112. Fiduciary duties of directors.
Sec. 113. Fiduciary duty of investment adviser.
Sec. 114. Termination of fund advisers.
Sec. 115. Independent accounting and auditing.
Sec. 116. Prevention of fraud; internal compliance and control
procedures.
TITLE II--FUND TRANSPARENCY
Sec. 210. Cost consolidation and clarity.
Sec. 211. Advisor compensation and ownership of fund shares.
Sec. 212. Point of sale and additional disclosure of broker
compensation.
Sec. 213. Breakpoint discounts.
Sec. 214. Portfolio turnover ratio.
Sec. 215. Proxy voting policies and record.
Sec. 216. Customer information from account intermediaries.
Sec. 217. Advertising.
TITLE III--FUND REGULATION AND OVERSIGHT
Sec. 310. Prohibition of asset-based distribution expenses.
Sec. 311. Prohibition on revenue sharing, directed brokerage, and soft
dollar arrangements.
Sec. 312. Market timing.
Sec. 313. Elimination of stale prices.
Sec. 314. Prohibition of short term trading; mandatory redemption fees.
Sec. 315. Prevention of after-hours trading.
Sec. 316. Ban on joint management of mutual funds and hedge funds.
Sec. 317. Selective disclosures.
TITLE IV--STUDIES
Sec. 410. Study of adviser conflict of interest.
Sec. 411. Study of coordination of enforcement efforts.
Sec. 412. Study of Commission organizational structure.
Sec. 413. Trends in arbitration clauses.
Sec. 414. Hedge fund regulation.
Sec. 415. Investor education and the Internet.
SEC. 2. DEFINITIONS.
In this Act, the following definitions shall apply:
(1) Commission.--The term ``Commission'' means the
Securities and Exchange Commission.
(2) Investment adviser.--The term ``investment adviser''
has the same meaning as in section 2(a)(20) of the Investment
Company Act of 1940 (15 U.S.C. 80a-2(a)(20)).
(3) Investment company--The term ``investment company'' has
the same meaning as in section 3 of the Investment Company Act
of 1940 (15 U.S.C. 80-3).
(4) Registered investment company.--The term ``registered
investment company'' means an investment company that is
registered under section 8 of the Investment Company Act of
1940 (15 U.S.C. 80a-8).
SEC. 3. RULEMAKING.
(a) Timing.--Unless otherwise specified in this Act or the
amendments made by this Act, the Commission shall issue, in final form,
all rules and regulations required by this Act and the amendments made
by this Act not later than 180 days after the date of enactment of this
Act.
(b) Authority To Define Terms.--The Commission may, in issuing
rules and regulations under this Act or the amendments made by this
Act, define any term used in this Act or such amendments that is not
otherwise defined for purposes of this Act or such amendment, as the
Commission determines necessary and appropriate.
(c) Exemption Authority.--The Commission may, in issuing rules and
regulations under this Act or the amendments made by this Act, exempt
any investment company or other person from the application of such
rules, as the Commission determines is necessary and appropriate, in
the public interest or for the protection of investors.
TITLE I--FUND GOVERNANCE
SEC. 110. INDEPENDENT DIRECTORS.
(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 not 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) 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;
``(B) adopting qualification standards for the
nomination of directors; and
``(C) determining the compensation to be paid to
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 Reform Act of
2004, the 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. 111. STUDY OF DIRECTOR COMPENSATION AND INDEPENDENCE.
(a) In General.--The Commission shall conduct a study of--
(1) whether any limits should be placed upon the amount of
compensation paid by a registered investment company or any
affiliate of such company to a director thereof; and
(2) whether a director of a registered investment company
who is otherwise not an interested person of a registered
investment company, as defined in section 2(a)(19) of the
Investment Company Act of 1940, as amended by this Act, but
serves as a director of multiple registered investment
companies, or receives substantial compensation from the
investment adviser of any such company, should be considered an
``interested person'' for purposes of section 2 of the
Investment Company Act of 1940.
(b) Report.--Not later than 1 year after the date of enactment of
this Act, the Commission shall submit a report regarding the study
conducted 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. 112. FIDUCIARY DUTIES OF DIRECTORS.
Section 10 of the Investment Company Act of 1940 (15 U.S.C. 80a-
10), as amended by this Act, is amended by adding at the end the
following:
``(j) Fiduciary Duty of Directors.--
``(1) In general.--The members of the board of directors of
a registered investment company shall have a fiduciary duty to
act with loyalty and care, in the best interests of the
shareholders.
``(2) Rulemaking.--The Commission shall promulgate rules to
clarify the scope of the fiduciary duty under paragraph (1),
which rules shall, at a minimum, require the directors of a
registered investment company to--
``(A) determine the extent to which independent and
reliable sources of information are sufficient to
discharge director responsibilities;
``(B) negotiate management and advisory fees with
due regard for the actual cost of such services,
including economies of scale;
``(C) evaluate the totality of fees with reference
to the interests of shareholders;
``(D) evaluate the quality of the management of the
company and potentially superior alternatives;
``(E) evaluate the quality, comprehensiveness, and
clarity of disclosures to shareholders regarding costs;
``(F) evaluate any distribution or marketing plan
of the company, including its costs and benefits;
``(G) evaluate the size of the portfolio of the
company and its suitability to the interests of
shareholders;
``(H) implement and monitor policies to ensure
compliance with applicable securities laws; and
``(I) implement and monitor policies with respect
to predatory trading practices.''.
SEC. 113. FIDUCIARY DUTY OF INVESTMENT ADVISER.
Section 36 of the Investment Company Act of 1940 (15 U.S.C. 80a-
35(b)) is amended--
(1) by redesignating subsection (c) as subsection (d); and
(2) by inserting after subsection (b) the following:
``(c) Duties With Respect To Compensation and Provision of
Information.--For purposes of subsections (a) and (b), the fiduciary
duty of an investment adviser--
``(1) with respect to any compensation received, may
require reasonable reference to the actual costs of the adviser
and economies of scale; and
``(2) shall include a duty to supply such material
information as is necessary for the independent directors of a
registered investment company with whom the adviser is employed
to review and govern such company.''.
SEC. 114. TERMINATION OF FUND ADVISER.
The Commission shall promulgate such rules as it determines
necessary in the public interest or for the protection of investors to
facilitate the process through which the independent directors of a
registered investment company may terminate the services of the
investment adviser of such company in the good faith exercise of their
fiduciary duties, without undue exposure to financial or litigation
risk.
SEC. 115. INDEPENDENT ACCOUNTING AND AUDITING.
(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 investment 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: ``The
Commission, by rule, regulation, or order, may exempt a
registered management company or registered face-amount
certificate company otherwise 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 investment
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 the registered investment 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 investment 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 investment 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
investment company or the investment adviser or
principal underwriter of the registered
investment company; or
``(ii) be an interested person of the
registered investment company.
``(4) Complaints.--The audit committee of the registered
investment company shall establish procedures for--
``(A) the receipt, retention, and treatment of
complaints received by the registered investment
company regarding accounting, internal accounting
controls, or auditing matters; and
``(B) the confidential, anonymous submission by
employees of the registered investment 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 investment 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 investment 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 investment 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 amongst 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) of the Securities
Exchange Act of 1934 (15 U.S.C. 78j-1(m)) is amended by adding at the
end the following:
``(7) Exemption for investment companies.--Effective one
year after the date of enactment of the Mutual Fund Reform Act
of 2004, 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.--The 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.
SEC. 116. PREVENTION OF FRAUD; INTERNAL COMPLIANCE AND CONTROL
PROCEDURES.
(a) Detection and Prevention of Fraud.--Section 17(j) 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 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 adopted under paragraph
(1) shall include requirements for the adoption of codes of
ethics by a registered investment company 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 adopted
under paragraph (1) shall--
``(A) require each registered investment company
and investment adviser to adopt and implement general
policies and procedures reasonably designed to prevent
violations of this title, 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.) and amendments made by
that Act, the Trust Indenture Act of 1939 (15 U.S.C.
77aaa 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 registered investment company
and registered investment adviser to review such
policies and procedures annually for their adequacy and
the effectiveness of their implementation; and
``(C) require each registered investment company to
appoint a chief compliance officer to be responsible
for overseeing such policies and procedures--
``(i) whose compensation shall be approved
by the members of the board of directors of the
company who are not interested persons of the
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
not 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.
``(4) Certifications.--The rules adopted under paragraph
(1) shall require each senior executive officer, or such
officers designated by the Commission, of an investment adviser
of a registered investment company to certify in each 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 this title and the rules and
regulations issued under this title, and the company is
in compliance with such procedures;
``(B) procedures are in place to ensure that, if
the shares of the company are offered as different
classes of shares, such classes are designed in the
interests of shareholders, and could reasonably be an
appropriate investment option for a shareholder;
``(C) procedures are in place to ensure that
information about the portfolio securities of the
company is not disclosed in violation of the securities
laws or the code of ethics of the company;
``(D) the members of the board of directors who are
not interested persons of the company have reviewed and
approved the compensation of the portfolio manager of
the company in connection with their consideration of
the investment advisory contract under section 15(c);
and
``(E) the company has established and enforces a
code of ethics, as required by paragraph (2).''.
(b) Whistleblower Protection.--Section 1514A(a) of title 18, United
States Code, is amended by striking the matter preceding paragraph (1)
and inserting the following:
``(a) Whistleblower Protection for Employees of Publicly Traded
Companies and Registered Investment Companies.--No company with a class
of securities registered under section 12 of the Securities Exchange
Act of 1934 (15 U.S.C. 78l), or that is required to file reports under
section 15(d) of the Securities and Exchange Act of 1934 (15 U.S.C.
78o(d)), or that is an investment adviser, principal underwriter, or
significant service provider (as such terms are defined under section
2(a) of the Investment Company Act of 1940 (15 U.S.C. 80a-2(a)) of an
investment company which is registered under section 8 of the
Investment Company Act of 1940, or any officer, employee, contractor,
subcontractor, or agent of such company, may discharge, demote,
suspend, threaten, harass, or in any other manner discriminate against
an employee in the terms and conditions of employment because of any
lawful act done by the employee--''.
TITLE II--FUND TRANSPARENCY
SEC. 210. COST CONSOLIDATION AND CLARITY.
(a) Expense Ratio Computation.--
(1) In general.--The Commission shall, by rule, develop a
standardized method of calculating the expense ratio of a
registered investment company that accounts for as many
operating costs to shareholders of such companies as is
practicable.
(2) Separate disclosures.--In developing the method of
calculation required under paragraph (1), if the Commission
determines that the inclusion of certain costs in such
calculation will lead to a significant risk of confusing or
misleading shareholders, the Commission shall develop separate
standardized methods for the calculation and disclosure of such
costs.
(b) Transaction Cost Ratio.--The Commission shall, by rule, develop
a standardized method of computing the transaction cost ratio of a
registered investment company that practicably and fairly accounts for
actual transaction costs to shareholders, including, at a minimum,
brokerage commissions and bid-ask spread costs. Such computation, if
necessary for ease of administration, may be based upon a fair method
of estimation or a standardized derivation from easily ascertainable
information.
(c) Disclosure of Expense Ratio and Transaction Cost Ratio.--The
Commission shall, by rule, require the prominent disclosure of the
expense ratio and the transaction cost ratio of a registered company,
both separately and as a total investment cost ratio, in--
(1) each annual report of the registered investment
company;
(2) any prospectus of the registered investment company, as
part of a fee table; and
(3) such other filings with the Commission as the
Commission determines appropriate.
(d) Actual Cost Disclosure.--The Commission shall, by rule,
require, on at least an annual basis, the prominent disclosure in the
shareholder account statement of a registered investment company of the
actual dollar amount of the projected annual costs of each shareholder
of the company, based upon the asset value of the shareholder at the
time of the disclosure.
(e) Definition of Fees and Expenses.--
(1) In general.--The Commission shall, by rule, define all
specific allowable types or categories of fees and expenses
that may be borne by the shareholders of a registered
investment company.
(2) New fees and expenses.--No new fee or expense, other
than any defined under paragraph (1), shall be borne by the
shareholders of a registered investment company, unless the
Commission finds that such new fee or expense fairly reflects
the services provided to, or is in the best interests of the
shareholders of--
(A) a particular registered investment company;
(B) specific types or categories of registered
investment companies; or
(C) registered investment companies in general.
(f) Cost Structures.--The Commission shall promulgate such rules or
regulations as are necessary--
(1) to promote the standardization and simplification of
the disclosure of the cost structures of registered investment
companies; and
(2) to ensure that the shareholders of such registered
investment companies receive all material information regarding
such costs--
(A) in a nonmisleading manner; and
(B) in such form and prominence as to facilitate,
to the extent practicable, ease of comprehension and
comparison of such costs.
(g) Descriptions of Fees, Expenses, and Costs.--The Commission
shall, by rule, require--
(1) the disclosure, in any annual or periodic report filed
with the Commission or any prospectus delivered to the
shareholders of a registered investment company, of all types
of fees, expenses, or costs borne by shareholders;
(2) a clear definition of each such fee, expense, or cost;
and
(3) information as to where shareholders may find out more
information concerning such fees, expenses, or costs.
SEC. 211. ADVISOR COMPENSATION AND OWNERSHIP OF FUND SHARES.
(a) Compensation of Investment Adviser.--The Commission shall, by
rule, require--
(1) the disclosure to the shareholders of a registered
investment company of--
(A) the amount and structure of, or the method used
to determine, the compensation paid by the registered
investment company to the portfolio manager or
portfolio management team of the investment adviser;
and
(B) the ownership interest in such company of the
portfolio manager or portfolio management team; and
(2) the disclosure to the board of directors of the
registered investment company of all transactions in the
securities of the company by the portfolio manager or
management team of the investment adviser of such company.
(b) Form of Disclosure.--The disclosures required under
subparagraphs (A) and (B) of subsection (a)(1) shall be made by a
registered investment company in--
(1) the registration statement of the company; and
(2) any other filings with the Commission that the
Commission determines appropriate.
SEC. 212. POINT OF SALE AND ADDITIONAL DISCLOSURE OF BROKER
COMPENSATION.
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) Broker disclosures in mutual fund transactions.--
``(A) In general.--Each broker shall disclose in
writing to each person that purchases the shares of an
investment company registered under section 8 of the
Investment Company Act of 1940 (15 U.S.C. 80a-8)--
``(i) the source and amount of any
compensation received or to be received by the
broker in connection with such transaction; and
``(ii) such other information as the
Commission determines appropriate.
``(B) Timing of disclosure.--The disclosures
required under subparagraph (A) shall be made at or
before the time of the purchase transaction.
``(C) Limitation.--The disclosures required under
subparagraph (A) may not be made exclusively in--
``(i) a registration statement or
prospectus of the registered investment
company; or
``(ii) any other filing of a registered
investment company with the Commission.''.
SEC. 213. BREAKPOINT DISCOUNTS.
The Commission, by rule, shall require the disclosure by any
registered investment company, in any quarterly or other periodic
report filed with the Commission, information concerning discounts on
front-end sales loads for which shareholders may be eligible, including
the minimum purchase amounts required for such discounts.
SEC. 214. PORTFOLIO TURNOVER RATIO.
The Commission, by rule, shall require the disclosure, by any
registered investment company, in any quarterly or periodic report
filed with the Commission, and in any prospectus delivered to the
shareholders of such company, of the portfolio turnover ratio of the
company, and an explanation of its meaning and implications for cost
and performance. Such rules shall require the disclosures to be
prominently displayed within the appropriate document.
SEC. 215. PROXY VOTING POLICIES AND RECORD.
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) Proxy Voting Disclosure.--
``(1) In general.--Each registered investment company,
other than a small business investment company, shall file with
the Commission, not later than August 31 of each year, an
annual report, on a form prescribed by the Commission by rule,
containing the proxy voting record of the registrant and
policies of the company with respect to the voting of such
proxies for the most recent 12-month period ending on June 30.
``(2) Notice in financial statements.--The financial
statements of each registered investment company shall state
that information regarding how the company voted proxies and
proxy voting policies relating to portfolio securities during
the most recent 12-month period ending on June 30 is
available--
``(A) without charge, upon request, by calling a
specified toll-free (or collect) telephone number; or
on or through the company's website at a specified
Internet address, or both; and
``(B) on the website of the Commission.''.
SEC. 216. CUSTOMER INFORMATION FROM ACCOUNT INTERMEDIARIES.
(a) In General.--The Commission shall, by rule, require that each
account intermediary of a registered investment company provide to such
company, with respect to each account serviced by the intermediary,
such information as is necessary for the company to enforce its
investment, trading, and fee policies.
(b) Requirements.--The information provided by a registered
investment company under subsection (a) shall include, at a minimum--
(1) the name under which the account is opened with the
intermediary;
(2) the taxpayer identification number of such person;
(3) the mailing address of such person; and
(4) individual transaction data for all purchases,
redemptions, transfers, and exchanges by or on behalf of such
person.
(c) Privacy of Information.--The information provided under
subsection (a), and the use thereof, shall be subject to all Federal
and State laws with regard to privacy and proprietary information.
SEC. 217. ADVERTISING.
(a) Performance Advertising.--The Commission shall promulgate such
rules as the Commission determines necessary with respect to the
advertising of a registered investment company regarding--
(1) unrepresentative short-term performance;
(2) performance based upon an undisclosed or improbable
event; and
(3) performance based upon incomplete or misleading data.
(b) Dollar and Time-Weighted Returns.--
(1) In general.--Subject to paragraph (2), the Commission
shall, by rule, require each registered investment company to
disclose, in its annual report and any prospectus delivered to
shareholders, dollar-weighted returns and time-weighted returns
for each of--
(A) the preceding fiscal year;
(B) the preceding 5 fiscal years;
(C) the preceding 10 fiscal years; and
(D) the life of the company.
(2) Exception.--The Commission may omit or require
additional disclosures required under paragraph (1) for such
time periods as the Commission determines necessary.
(3) Commission use of benchmarks.--The Commission may
require, in the interest of facilitating non-misleading
disclosures, that any performance-related advertising by a
registered investment company be accompanied by such benchmarks
as the Commission may deem appropriate.
(c) Subsidized Yields.--The Commission shall, by rule, require that
any registered investment company that discloses in any publication a
subsidized yield to disclose in the same publication the amount and
duration of such subsidy.
TITLE III--FUND REGULATION AND OVERSIGHT
SEC. 310. PROHIBITION OF ASSET-BASED DISTRIBUTION EXPENSES.
(a) Repeal of Rule 12b-1.--
(1) In general.--Beginning 180 days after the date of
enactment of this Act (or such earlier time as the Commission
may elect), as in effect on the date of enactment of this Act,
section 270.12b-1 of chapter II of title 17 of the Code of
Federal Regulations, promulgated under section 12 of the
Investment Company Act of 1940 (15 U.S.C. 80a-12), is repealed,
and shall have no force or effect.
(2) Preservation of actions.--Paragraph (1) shall have no
effect on any case pending or penalty imposed under section
270.12b-1 of the Code of Federal Regulations prior to the date
of repeal under paragraph (1).
(b) Payment of Distribution Expenses From Management Fee.--Section
12 of the Investment Company Act of 1940 (15 U.S.C. 80a-12) is amended
by adding at the end the following:
``(h) Payment of Distribution Expenses.--Notwithstanding any
provision of subsection (b), or any rule or regulation promulgated
thereunder, distribution expenses incurred by an investment adviser may
be paid out of the management fee received by the investment
adviser.''.
(c) Sums Expended Promoting Sale of Securities.--The Commission
shall, by rule--
(1) require that any sums expended by the investment
adviser of a registered investment company to promote or
facilitate the sale of the securities of such company be
disclosed to the board of directors of the company;
(2) require that such sums be accounted for and identified
in the expense ratio of any such company; and
(3) authorize the board of directors of any such company to
prohibit its investment adviser from using any compensation
received from the company for distribution expenses that the
board determines not to be in the best interest of the
shareholders of the company.
(d) Prohibition of Asset-Based Fees.--Section 12 of the Investment
Company Act of 1940 (15 U.S.C. 80a-12), as amended by subsection (a),
is amended by adding at the end the following:
``(i) Asset-Based Fees.--
``(1) In general.--It shall be unlawful for any registered
investment company to pay asset-based fees to any broker or
dealer in connection with the offer or sale of the securities
of such investment company.
``(2) Definition of asset-based fees.--The Commission
shall, by rule, define the term `asset-based fees' for purposes
of this subsection.''.
SEC. 311. PROHIBITION ON REVENUE SHARING, DIRECTED BROKERAGE, AND SOFT
DOLLAR ARRANGEMENTS.
(a) In General.--The Investment Company Act of 1940 (15 U.S.C. 80a-
1 et seq.) is amended by inserting after section 12 the following:
``SEC. 12A. PROHIBITION ON REVENUE SHARING, DIRECTED BROKERAGE, AND
SOFT DOLLAR ARRANGEMENTS.
``(a) Revenue Sharing Arrangements.--It shall be unlawful for any
investment adviser to enter into a revenue sharing arrangement with any
broker or dealer with respect to the securities of a registered
investment company.
``(b) Directed Brokerage Arrangements.--It shall be unlawful for
any registered investment company, or any affiliate of such company, to
enter into a directed brokerage arrangement with a broker or dealer.
``(c) Soft-Dollar Arrangements.--It shall be unlawful for any
registered investment company or registered investment adviser to enter
into a soft-dollar arrangement with any broker or dealer.
``(d) Regulations Respecting Section 28(E) of the Securities
Exchange Act of 1934.--The Commission shall, by rule, narrow the soft-
dollar safe harbor under section 28(e) of the Securities Exchange Act
of 1934 (15 U.S.C. 78bb(e)(1)) to promote such parity as the Commission
determines appropriate, and in the best interests of shareholders of a
registered investment company, between registered investment companies
governed by section 12A, and companies not covered by section 12A.
``(e) Definitions.--
``(1) In general.--In this section--
``(A) the term `directed brokerage arrangement'
means the direction of discretionary brokerage by an
investment company or an affiliate of that company, to
a broker or dealer in exchange for services other than
trade executions;
``(B) the term `revenue sharing arrangement' means
any direct or indirect payment made by an investment
adviser (or any affiliate of an investment adviser) to
a broker or dealer for the purpose of promoting the
sales of securities of a registered investment company,
other than any payment made directly by a shareholder
as a commission for the purchase of such securities;
``(C) the term `soft-dollar arrangement' means
payments to a broker or dealer for best trade
executions in exchange for, or which generate credits
for, services or products other than trade executions;
and
``(D) the term `trade executions' has the meaning
given that term by the Commission, by rule;
``(2) Regulations.--The Commission may, by rule, refine the
definitions under paragraph (1), define such other terms as the
Commission determines necessary, and otherwise tailor the
proscriptions set forth under this section to achieve the
purposes of--
``(A) protecting the best interests of shareholders
of a registered investment company;
``(B) minimizing or eliminating conflicts with the
best interests of shareholders of a registered
investment company;
``(C) enhancing market negotiation for and price
competition in trade execution services, and products
and services previously obtained under arrangements
prohibited by this section;
``(D) ensuring the transparency of transactions for
trade executions, and products and services previously
obtained under arrangements prohibited by this section,
and disclosure to shareholders of costs associated with
trade executions, and products and services previously
obtained under arrangements prohibited by this section,
that is simplified, clear, and comprehensible; and
``(E) providing reasonable safe harbors for conduct
otherwise consistent with such purposes.''.
(b) Technical and Conforming Amendment.--Section 28(e)(1) of the
Securities Exchange Act of 1934 (15 U.S.C. 78bb(e)(1)) is amended by
striking ``This section is exclusive'' and inserting ``Except as
provided under section 12A of the Investment Company Act of 1940, this
section is exclusive''.
SEC. 312. MARKET TIMING.
(a) In General.--The Commission shall, by rule, require--
(1) the disclosure in any registration statement filed with
the Commission by a registered investment company of the market
timing policies of that company and the procedures adopted to
enforce such policies; and
(2) that any registered investment company that declines to
adopt restrictions on market timing disclose such fact in the
registration statement of the company, and in any advertising
or other publicly available documents, as the Commission
determines necessary.
(b) Fundamental Investment Policy.--The policies required to be
disclosed under paragraph (1) shall be deemed ``fundamental investment
policies'' for purposes of sections 8(b)(3) and 13(a)(3) of the
Investment Company Act of 1940 (15 U.S.C. 80a-8(b)(3) and 80a-
13(a)(3)).
SEC. 313. ELIMINATION OF STALE PRICES.
(a) In General.--Not later than 90 days after the date of enactment
of this Act, the Commission shall prescribe, by rule or regulation,
standards concerning the obligation of registered 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
portfolio securities of such a company, in order to prevent dilution of
the interests of long-term shareholders or as necessary in the public
interest or for the protection of shareholders.
(b) Content.--The rule or regulation prescribed under subsection
(a) shall identify, in addition to significant events, the conditions
or circumstances from which such an 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.
SEC. 314. PROHIBITION OF SHORT TERM TRADING; 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.--
``(1) Prohibition.--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 any
short-term transaction, in any securities issued by such
company, or any affiliate of such company.
``(2) Limitation.--This subsection does not prohibit any
transaction in a money market fund, or in funds, the investment
policy of which expressly permits short-term transactions, or
such other category of registered investment company as the
Commission shall specify, by rule.
``(3) Definition.--For purposes of this subsection, the
term `short-term transaction' has the meaning given that term
by the Commission, by rule.''.
(b) Mandatory Redemption Fees.--The Commission shall, by rule,
require any registered 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. In determining the
application of mandatory redemption fees, shares shall be considered in
the reverse order of their purchase.
(c) Increased Redemption Fees Permitted for Short-Term Trading.--
Not later than 90 days after the date of enactment of this Act, the
Commission shall permit a registered investment company to charge
redemption fees in excess of 2 percent upon the redemption of any
securities of such company that are redeemed within such period after
their purchase as the Commission specifies in such rule to deter short
term trading that is unfair to the shareholders of such company.
(d) Deadline for Rules.--The Commission shall prescribe rules to
implement section 17(k) of the Investment Company Act of 1940, as added
by subsection (a) of this section, not later than 90 days after the
date of enactment of this Act.
SEC. 315. PREVENTION OF AFTER-HOURS TRADING.
(a) Additional Rules Required.--The Commission shall issue rules to
prevent transactions in the securities of any registered 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.--The Commission shall
determine the circumstances under which to permit, subject to rules of
the Commission and an annual independent audit of such trades, the
execution of after-hours trades that are provided to a registered
investment company by a broker, dealer, retirement plan administrator,
insurance company, or other intermediary, after the time as of which
the net asset value was determined.
SEC. 316. 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 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 shareholders,
provided that such rule, regulation, or order requires--
``(A) enhanced disclosure by the registered open-
end investment company to shareholders 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 Commission shall prescribe rules to
implement section 15(h) of the Investment Company Act of 1940, as added
by subsection (a) of this section, not later than 90 days after the
date of enactment of this Act.
SEC. 317. SELECTIVE DISCLOSURES.
(a) In General.--The Commission shall promulgate such rules as the
Commission determines necessary to prevent the selective disclosure by
a registered investment company of material information relating to the
portfolio of securities held by such company.
(b) Requirements.--The rules promulgated under subsection (a) shall
treat selective disclosures of material information by a registered
investment company in substantially the same manner as selective
disclosures by issuers of securities registered under section 12 of the
Securities Exchange Act of 1934 under the rules of the Commission.
TITLE IV--STUDIES
SEC. 410. STUDY OF ADVISER CONFLICT OF INTEREST.
(a) In General.--The Commission shall conduct a study of--
(1) the consequences of the inherent conflicts of interest
confronting investment advisers employed by registered
investment companies;
(2) the extent to which legislative or regulatory measures
could minimize such conflicts of interest; and
(3) the extent to which legislative or regulatory measures
could incentivize internal management of a registered
investment company.
(b) Report.--Not later than 1 year after the date of enactment of
this Act, the Commission shall submit a report on the results of 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. 411. STUDY OF COORDINATION OF ENFORCEMENT EFFORTS.
(a) In General.--The Comptroller General of the United States, with
the cooperation of the Commission, shall conduct a study of the
coordination of enforcement efforts between--
(1) the headquarters of the Commission;
(2) the regional offices of the Commission; and
(3) State regulatory and law enforcement agencies.
(b) Report.--Not later than 1 year after the date of enactment of
this Act, the Commission shall submit a report on the results of 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. 412. STUDY OF COMMISSION ORGANIZATIONAL STRUCTURE.
(a) In General.--The Comptroller General of the United States, with
the cooperation of the Commission, shall conduct a study of--
(1) the current organizational structure of the Commission
with respect to the regulation of investment companies;
(2) whether the organizational structure and resources of
the Commission sufficiently credit the importance of oversight
of investment companies to the 95 million investors in such
companies within the United States;
(3) whether certain organizational features of that
structure, such as the separation of regulatory and enforcement
functions, are sufficient to promote the optimal understanding
of the current practices of investment companies; and
(4) whether a separate regulatory entity would improve or
impair effective oversight.
(b) Report.--Not later than 1 year after the date of enactment of
this Act, the Comptroller General shall submit a report on the results
of 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. 413. TRENDS IN ARBITRATION CLAUSES.
(a) In General.--The Commission shall conduct a study on the trends
in arbitration clauses between brokers, dealers, and investors since
December 31, 1995, and alternative means to avert the filing of claims
in Federal or State courts.
(b) Report.--Not later than 1 year after the date of enactment of
this Act, the Commission shall submit a report on the results of 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. 414. HEDGE FUND REGULATION.
(a) In General.--The Commission shall conduct a study of whether
additional regulation of alternative investment vehicles, such as hedge
funds, is appropriate to deter the recurrence of trading abuses,
manipulation of registered investment companies by unregistered
investment companies, or other distortions that may harm investors in
registered investment companies.
(b) Report.--Not later than 1 year after the date of enactment of
this Act, the Commission shall submit a report on the results of 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. 415. INVESTOR EDUCATION AND THE INTERNET.
(a) In General.--The Commission shall conduct a study of--
(1) the means of enhancing the role of the Internet in
educating investors and providing timely information regarding
laws, regulations, enforcement proceedings, and individual
registered investment companies;
(2) the feasibility of mandating that each registered
investment company maintain a website on which shall be posted
filings of the registered investment company with the
Commission and any other material information related to the
registered investment company; and
(3) the means of ensuring that the EDGAR database
maintained by the Commission is user-friendly and contains a
search engine that facilitates the expeditious location of
material information.
(b) Report.--Not later than 1 year after the date of enactment of
this Act, the Commission shall submit a report on the results of 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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