[Congressional Bills 108th Congress]
[From the U.S. Government Publishing Office]
[H.R. 2420 Referred in Senate (RFS)]

  1st Session
                                H. R. 2420


_______________________________________________________________________


                   IN THE SENATE OF THE UNITED STATES

                           November 20, 2003

Received; read twice and referred to the Committee on Banking, Housing, 
                           and Urban Affairs

_______________________________________________________________________

                                 AN ACT


 
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.

    (a) Short Title.--This Act may be cited as the ``Mutual Funds 
Integrity and Fee Transparency Act of 2003''.
    (b) Table of Contents.--

Sec. 1. Short title.
                TITLE I--INTEGRITY AND FEE TRANSPARENCY

Sec. 101. Improved transparency of mutual fund costs.
Sec. 102. Obligations regarding certain distribution and soft dollar 
                            arrangements.
Sec. 103. Mutual fund governance.
Sec. 104. Audit committee requirements for investment companies.
Sec. 105. Trading restrictions.
Sec. 106. Definition of no-load mutual fund.
Sec. 107. Informing directors of significant deficiencies.
Sec. 108. Exemption from in person meeting requirements.
Sec. 109. Proxy voting disclosure.
Sec. 110. Incentive compensation and mutual fund sales.
Sec. 111. Commission study and report regulating soft dollar 
                            arrangements.
Sec. 112. Study of arbitration claims.
         TITLE II--PREVENTION OF ABUSIVE MUTUAL FUND PRACTICES

Sec. 201. Prevention of fraud; internal compliance and control 
                            procedures.
Sec. 202. Ban on joint management of mutual funds and hedge funds.
Sec. 203. Short term trading by interested persons prohibited.
Sec. 204. Elimination of stale prices.
Sec. 205. Prevention of unfair after-hours trading.
Sec. 206. Report on adequacy of remedial actions.

                TITLE I--INTEGRITY AND FEE TRANSPARENCY

SEC. 101. 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 for each $1,000 of 
        investment in the company, of the operating expenses of the 
        company that are borne by shareholders.
            (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, and the 
        ownership interest of such individuals in the securities of the 
        company.
            (3) The portfolio turnover rate of the company, set forth 
        in a manner that facilitates comparison among investment 
        companies, and a description of the implications of a high 
        turnover rate for portfolio transaction costs and performance.
            (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) Appropriate Disclosure Document.--
            (1) In general.--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.
            (2) Exceptions.--Notwithstanding paragraph (1), the 
        disclosures required by paragraph (2) and (4) 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.
    (c) Concept Release Required.--
            (1) In general.--The Commission shall issue a concept 
        release examining the issue of portfolio transaction costs 
        incurred by investment companies, including commission, spread, 
        opportunity, and market impact costs, with respect to trading 
        of portfolio securities and how such costs may be disclosed to 
        mutual fund investors in a manner that will enable investors to 
        compare such costs among funds.
            (2) Report and recommendations required.--The Commission 
        shall submit a report on the findings from the concept release 
        required by paragraph (1), as well as legislative and 
        regulatory recommendations, if any, 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 270 days after the date of enactment of this Act.
    (d) Additional Requirement for Fee Statement.--
            (1) In general.--Not later than 270 days after the date of 
        enactment of this Act, the Commission shall prescribe a rule to 
        require, with respect to an open-end management investment 
        company, in the quarterly statement or other periodic report, 
        or other appropriate disclosure document, a statement informing 
        shareholders that such shareholders have paid fees on their 
        investments, that such fees have been deducted from the amounts 
        shown on the statements, and where such shareholders may find 
        additional information regarding the amount of these fees.
            (2) Appropriate disclosure document.--The statement 
        required by paragraph (1) shall not be considered to be made in 
        an appropriate disclosure document unless such statement is--
                    (A) made in each periodic statement to a 
                shareholder that discloses the value of the holdings of 
                the shareholder in the securities of the company; and
                    (B) prominently displayed, in a location in close 
                proximity to the statement of the shares account value.
    (e) Reducing Burdens on Small Funds.--In prescribing rules under 
this section, the Commission shall give consideration to methods for 
reducing for small investment companies the burdens of making the 
disclosures required by such rules, consistent with the public interest 
and the protection of investors.

SEC. 102. OBLIGATIONS REGARDING CERTAIN DISTRIBUTION AND SOFT DOLLAR 
              ARRANGEMENTS.

    (a) Reporting Requirement.--Section 15 of the Investment Company 
Act 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 review 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 review 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) 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.''.
    (b) Contractual Records.--Within 270 days after the date of 
enactment of this Act, the Securities and Exchange Commission shall, by 
rule prescribed pursuant to section 28(e) of the Securities Exchange 
Act of 1934 (15 U.S.C. 78bb(e)), require that--
            (1) if any research services (as such term is defined in 
        section 15(g)(5)(B) of the Investment Company Act of 1940, as 
        amended by subsection (a) of this section)--
                    (A) are provided by a member of an exchange, 
                broker, or dealer who effects securities transactions 
                in an account, and
                    (B) are prepared or provided by a party that is 
                unaffiliated with such member, broker, or dealer,
        any person exercising investment discretion with respect to 
        such account shall maintain a copy of the written contract 
        between the person preparing such research and the member of an 
        exchange, broker, or dealer; and
            (2) such contract shall describe the nature and value of 
        the services provided.

SEC. 103. MUTUAL FUND GOVERNANCE.

    (a) Director Independence.--Section 10(a) of the Investment Company 
Act of 1940 (15 U.S.C. 80a-10) is amended by striking ``60 per centum'' 
and inserting ``one-third''.
    (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. 104. 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 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 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 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. 105. TRADING RESTRICTIONS.

    Subsection (e) of section 22 of the Investment Company Act of 1940 
(15 U.S.C. 80a-22(e)) is amended to read as follows:
    ``(e) Trading Restrictions.--
            ``(1) Prohibition and exceptions.--No registered investment 
        company shall suspend the right of redemption, or postpone the 
        date of payment or satisfaction upon redemption of any 
        redeemable security in accordance with its terms for more than 
        seven days after the tender of such security to the company or 
        its agents designated for that purpose for redemption, except--
                    ``(A) for any period (i) during which the principal 
                market for the securities in which the company invests 
                is closed, other than customary week-end and holiday 
                closings; or (ii) during which trading on such exchange 
                is restricted;
                    ``(B) for any period during which an emergency 
                exists as a result of which (i) disposal by the company 
                of securities owned by it is not reasonably 
                practicable; or (ii) it is not reasonably practicable 
                for such company fairly to determine the value of its 
                net assets; or
                    ``(C) for such other periods as the Commission may 
                by order permit for the protection of security holders 
                of the company.
            ``(2) Commission rules.--The Commission shall by rules and 
        regulations--
                    ``(A) determine the conditions under which trading 
                shall be deemed to be restricted;
                    ``(B) determine the conditions under which an 
                emergency shall be deemed to exist; and
                    ``(C) provide for the determination by each 
                company, subject to such limitations as the Commission 
                shall determine are necessary and appropriate for the 
                protection of investors, of the principal market for 
                the securities in which the company invests.''.

SEC. 106. DEFINITION OF NO-LOAD MUTUAL FUND.

    Within 270 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 Commission's rules (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. 107. 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 new subsection:
    ``(f) Informing Directors of Significant Deficiencies.--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.''.

SEC. 108. EXEMPTION FROM IN PERSON MEETING REQUIREMENTS.

    Section 15(c) of the of the Investment Company Act of 1940 (15 
U.S.C. 80a-15(c)) is amended by adding at the end the following new 
sentence: ``The Commission, by rule, regulation, or order, may exempt a 
registered investment company subject to this subsection from the 
requirement that the votes of its directors be cast at a meeting in 
person when such a requirement is impracticable, subject to such 
conditions as the Commission may require.''.

SEC. 109. PROXY VOTING DISCLOSURE.

    Section 30 of the Investment Company Act of 1940 (15 U.S.C. 80a-29) 
is amended by adding at the end the following new subsection:
    ``(k) Proxy Voting Disclosure.--Every registered management 
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 registrant's proxy voting record for the most recent 
twelve-month period ending on June 30. The financial statements of 
every such company shall state that information regarding how the 
company voted proxies relating to portfolio securities during the most 
recent 12-month period ending on June 30 is available--
            ``(1) 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
            ``(2) on the Commission's website.''.

SEC. 110. INCENTIVE COMPENSATION AND MUTUAL FUND SALES.

    (a) Commission Rule Required.--Within 270 days after the date of 
enactment of this Act, the Commission shall by rule prohibit, as a 
means reasonably designed to prevent fraudulent, deceptive, or 
manipulative acts and practices, the sale of the securities of an 
investment company or of municipal fund securities by a broker or 
dealer or by a municipal securities broker or dealer without the 
disclosure of--
            (1) 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;
            (2) 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;
            (3) any conflicts of interest that any associated person of 
        the investor's broker or dealer or municipal securities broker 
        or dealer may face due to the receipt of differential 
        compensation in connection with such sale; and
            (4) information about the estimated amount of any asset-
        based distribution expenses incurred, or to be incurred, by the 
        investment company in connection with the investor's purchase 
        of the securities.
    (b) Benchmarks.--In connection with the rule required by subsection 
(a), the Commission shall, to the extent practical, establish standards 
for such disclosures.
    (c) Definitions.--
            (1) Differential compensation.--For purposes of this 
        section, 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--
                    (A) 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
                    (B) 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.
            (2) Municipal fund security.--For purposes of this section, 
        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).

SEC. 111. 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.--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 one year after the date 
of enactment of this Act.

SEC. 112. 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.--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 not later than one 
year after the date of enactment of this Act.

         TITLE II--PREVENTION OF ABUSIVE MUTUAL FUND PRACTICES

SEC. 201. 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.--Such rules and regulations 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.--Such rules and 
        regulations 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--
                            ``(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.
            ``(4) Self-certification.--Such rules and regulations shall 
        require the members of the board of directors who are not 
        interested persons 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; and
                    ``(H) the company is in compliance with the 
                additional requirements of paragraph (3) of this 
                subsection.''.
    (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. 202. 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 new subsection:
    ``(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. 203. SHORT TERM TRADING BY INTERESTED PERSONS PROHIBITED.

    (a) Short Term Trading Prohibited.--Section 17 of the Investment 
Company Act of 1940 (15 U.S.C. 80a-17) is further amended by adding at 
the end the following new subsection:
    ``(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) Increased Redemption Fees Permitted for Short Term Trading.--
Within 90 days after the date of enactment of this Act, the Securities 
and Exchange Commission shall revise rule 11a-3 of its rules under the 
Investment Company Act of 1940 (17 CFR 270.11a-30), or other rules of 
the Commission, as necessary to permit an 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 prevent 
short term trading that is unfair to the shareholders of such company.
    (c) 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. 204. ELIMINATION OF STALE PRICES.

    Within 90 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.

SEC. 205. PREVENTION OF UNFAIR AFTER-HOURS TRADING.

    (a) Additional Rules Required.--Within 90 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.--Such rules shall permit 
execution of such after-hours trades that are provided to the 
registered open-end investment company by a broker-dealer, retirement 
plan administrator, or other intermediary, after the time as of which 
such net asset value was determined, if such trades are collected by 
such intermediaries subject to procedures that are--
            (1) designed to prevent the acceptance of trades by such 
        intermediaries after the time as of which net asset value was 
        determined; and
            (2) subject to an independent annual audit to verify that 
        the procedures do not permit the acceptance of trades after the 
        time as of which such net asset value was determined.
    (c) Independently Maintained Systems.--Such rules shall permit 
firms that utilize computer systems and procedures provided by 
unaffiliated entities to collect transactions to satisfy the 
independent audit requirements under subsection (b)(2) by means of an 
independent audit obtained by such unaffiliated entity.

SEC. 206. REPORT ON ADEQUACY OF REMEDIAL ACTIONS.

    (a) Report Required.--Within 180 days of enactment, 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.

            Passed the House of Representatives November 19, 2003.

            Attest:

                                                 JEFF TRANDAHL,

                                                                 Clerk.