[Congressional Bills 108th Congress]
[From the U.S. Government Publishing Office]
[H.R. 4505 Introduced in House (IH)]






108th CONGRESS
  2d Session
                                H. R. 4505

  To improve the governance and regulation of mutual funds under the 
                securities laws, and for other purposes.


_______________________________________________________________________


                    IN THE HOUSE OF REPRESENTATIVES

                              June 3, 2004

 Mr. Gillmor introduced the following bill; which was referred to the 
                    Committee on Financial Services

_______________________________________________________________________

                                 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. 101. Independent directors.
Sec. 102. Study of director compensation and independence.
Sec. 103. Fiduciary duties of directors.
Sec. 104. Fiduciary duty of investment adviser.
Sec. 105. Termination of fund advisers.
Sec. 106. Independent accounting and auditing.
Sec. 107. Prevention of fraud; internal compliance and control 
                            procedures.
                      TITLE II--FUND TRANSPARENCY

Sec. 201. Cost consolidation and clarity.
Sec. 202. Advisor compensation and ownership of fund shares.
Sec. 203. Point of sale and additional disclosure of broker 
                            compensation.
Sec. 204. Breakpoint discounts.
Sec. 205. Portfolio turnover ratio.
Sec. 206. Proxy voting policies and record.
Sec. 207. Customer information from account intermediaries.
Sec. 208. Advertising.
                TITLE III--FUND REGULATION AND OVERSIGHT

Sec. 301. Prohibition of asset-based distribution expenses.
Sec. 302. Prohibition on revenue sharing, directed brokerage, and soft 
                            dollar arrangements.
Sec. 303. Market timing.
Sec. 304. Elimination of stale prices.
Sec. 305. Prohibition of short term trading; mandatory redemption fees.
Sec. 306. Prevention of after-hours trading.
Sec. 307. Ban on joint management of mutual funds and hedge funds.
Sec. 308. Selective disclosures.
                           TITLE IV--STUDIES

Sec. 401. Study of adviser conflict of interest.
Sec. 402. Study of coordination of enforcement efforts.
Sec. 403. Study of Commission organizational structure.
Sec. 404. Trends in arbitration clauses.
Sec. 405. Hedge fund regulation.
Sec. 406. 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. 101. 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. 102. 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. 103. 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. 104. 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. 105. 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. 106. 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. 107. 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. 201. 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. 202. 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. 203. 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. 204. 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. 205. 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. 206. 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. 207. 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. 208. 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. 301. 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. 302. 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. 303. 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. 304. 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. 305. 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. 306. 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. 307. 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. 308. 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. 401. 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. 402. 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. 403. 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. 404. 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. 405. 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. 406. 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.
                                 <all>