[Congressional Bills 108th Congress]
[From the U.S. Government Publishing Office]
[H.R. 2420 Introduced in House (IH)]







108th CONGRESS
  1st Session
                                H. R. 2420

To improve transparency relating to the fees and costs that mutual fund 
  investors incur and to improve corporate governance of mutual funds.


_______________________________________________________________________


                    IN THE HOUSE OF REPRESENTATIVES

                             June 11, 2003

 Mr. Baker (for himself, Mr. Gillmor, Mr. Ose, Mr. Shays, Mr. Tiberi, 
 and Ms. Ginny Brown-Waite of Florida) introduced the following bill; 
       which was referred to the Committee on Financial Services

_______________________________________________________________________

                                 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.

    This Act may be cited as the ``Mutual Funds Integrity and Fee 
Transparency Act of 2003''.

SEC. 2. IMPROVED TRANSPARENCY OF MUTUAL FUND COSTS.

    (a) Regulation Revision Required.--Within 270 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 the following:
            (1) The estimated amount, in dollars, of the operating 
        expenses of the company that are borne by each shareholder.
            (2) The structure of, or method used to determine, the 
        compensation of individuals employed by the investment adviser 
        of the company to manage the portfolio of the company.
            (3) The portfolio transaction costs of the company, 
        including commissions paid with respect to the trading of 
        portfolio securities, set forth in a manner that facilitates 
        comparison among investment companies.
            (4) 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--
                    (A) 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;
                    (B) furnishes analyses and reports concerning 
                issuers, industries, securities, economic factors and 
                trends, portfolio strategy, and the performance of 
                accounts; or
                    (C) facilitates the sale and distribution of the 
                company's shares.
            (5) Information concerning payments by any person other 
        than the company that are intended to facilitate the sale and 
        distribution of the company's shares.
            (6) Information concerning discounts on front-end sales 
        loads for which investors may be eligible, including the 
        minimum purchase amounts required for such discounts.
    (b) Definition.--For purposes of subsection (a), 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.

SEC. 3. OBLIGATIONS REGARDING CERTAIN DISTRIBUTION AND SOFT DOLLAR 
              ARRANGEMENTS.

    Section 15 of the Investment Company of 1940 (15 U.S.C. 80a-15) is 
amended by adding at the end the following new subsection:
    ``(g) Obligations Regarding Certain Distribution and Soft Dollar 
Arrangements.--
            ``(1) Reporting requirements.--Each investment adviser to a 
        registered investment company shall, no 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 supervise the investment adviser's 
                direction of the company's brokerage transactions, 
                including directed brokerage arrangements and soft 
                dollar arrangements, and to determine that the 
                direction of such brokerage is in the best interests of 
                the shareholders of the company; and
                    ``(B) to supervise any revenue sharing arrangements 
                to ensure compliance with this Act and the rules 
adopted thereunder, and to determine that such revenue sharing 
arrangements are in the best interests of the shareholders of the 
company.
            ``(3) 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.
            ``(4) 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. 4. MUTUAL FUND GOVERNANCE.

    (a) Director and Chairman Independence.--Section 10(a) of the 
Investment Company Act of 1940 (15 U.S.C. 80a-10) is amended--
            (1) by striking ``60 per centum'' and inserting ``one-
        third''; and
            (2) by inserting ``, nor shall such registered company have 
        as chairman of such board an interested person of such 
        registered company'' before the period.
    (b) 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) by striking clause (vi) and redesignating 
                clause (vii) as clause (vi); and
                    (B) by amending clause (v) to read as follows:
                            ``(v) any natural person who is a member of 
                        a class of persons who the Commission, by rule 
                        or regulation, determines are unlikely to 
                        exercise an appropriate degree of independence 
                        as a result of--
                                    ``(I) a material business or 
                                professional relationship with the 
                                company or any affiliated person of the 
                                company, or
                                    ``(II) a close familial 
                                relationship with any natural person 
                                who is an affiliated person of the 
                                company,''; and
            (2) in subparagraph (B)--
                    (A) by striking clause (vi) and redesignating 
                clause (vii) as clause (vi); and
                    (B) by amending clause (v) to read as follows:
                            ``(v) any natural person who is a member of 
                        a class of persons who the Commission, by rule 
                        or regulation, determines are unlikely to 
                        exercise an appropriate degree of independence 
                        as a result of--
                                    ``(I) a material business or 
                                professional relationship with such 
                                investment adviser or principal 
                                underwriter (or affiliated person 
                                thereof), or
                                    ``(II) a close familial 
                                relationship with a natural person who 
                                is such investment adviser or principal 
                                underwriter (or affiliated person 
                                thereof).''.

SEC. 5. 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) by striking paragraphs (1) and (2) of subsection (a) 
        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
            (2) by adding at the end the following new subsection:
    ``(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 any affiliated person 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 affiliated 
                persons 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 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 is amended by adding at the end the following new 
paragraph:
            ``(7) Exemption for investment companies.--Effective one 
        year after the date of enactment of the Mutual Funds Integrity 
        and Fee Transparency 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.--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.

SEC. 6. 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 extent to which use of soft dollar 
                arrangements impairs the ability of mutual fund 
                investors to evaluate and compare the expenses of 
                different mutual funds;
                    (D) the conflicts of interest created by soft 
                dollar arrangements;
                    (E) the transparency of such soft dollar 
                arrangements to investment company shareholders and 
                investment advisory clients of investment advisers; and
                    (F) whether such section 28(e) should be repealed 
                or modified.
    (b) Report Required.--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, no later than 18 months after the date 
of enactment of this Act.
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