<enum>I</enum><header>Fund governance</header> <section id="H496048B346FB485FFFF056B7823178F"><enum>101.</enum><header>Independent directors</header> <subsection id="H8BB5C2B741B2E869E04C45A492C43CE"><enum>(a)</enum><header>Independent fund boards</header><text>Section 10(a) of the <act-name parsable-cite="ICA40">Investment Company Act of 1940</act-name> (<external-xref legal-doc="usc" parsable-cite="usc/15/80a-10">15 U.S.C. 80a–10(a)</external-xref>) is amended—</text> <paragraph id="H9930351043D0ACD437A46B868E3CE19"><enum>(1)</enum><text>by striking <quote>shall have</quote> and inserting the following:</text> <quoted-block display-inline="yes-display-inline" id="H8B7516BE494E7B78B61393BEC719CBF"><text>shall—</text> <paragraph id="H5C0F02DF477EABC7F5E48D8A31F2B88"><enum>(1)</enum><text>have</text></paragraph><after-quoted-block>;</after-quoted-block></quoted-block></paragraph> <paragraph id="H9105A1D24708F8112BBFCE9888B4EAB"><enum>(2)</enum><text>by striking <quote>60 per centum</quote> and inserting <quote>25 percent</quote>;</text></paragraph> <paragraph id="HB68730C249A6D860283AFFA4F5D1C00"><enum>(3)</enum><text>by striking the period at the end and inserting a semicolon; and</text></paragraph> <paragraph id="HF1F073DB46E8A32F2DA2469E28E90FC"><enum>(4)</enum><text>by adding at the end the following:</text> <quoted-block id="H7C21B5814F6B1975C89007A5A976A74"> <paragraph id="H0755A7C14072257B33341A81B333FEE"><enum>(2)</enum><text>have as chairman of its board of directors an interested person of such registered company; or</text></paragraph> <paragraph id="H0DE01EC340959F4E1CADB0BA762E9BE"><enum>(3)</enum><text>have as a member of its board of directors any person that is not an interested person of such registered investment company—</text> <subparagraph id="HC8231BDC433ECFABB94640B6C6E20FC"><enum>(A)</enum><text>who has served without being approved or elected by the shareholders of such registered investment company at least once every 5 years; and</text></subparagraph> <subparagraph id="HFABEF06A4CA32F21D46FD587E847DC4"><enum>(B)</enum><text>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.</text></subparagraph></paragraph><after-quoted-block>.</after-quoted-block></quoted-block></paragraph></subsection> <subsection id="H7F16E4A94B0DE55AB9ED8E82E66B4FE"><enum>(b)</enum><header>Action by independent directors</header><text>Section 10 of the <act-name parsable-cite="ICA40">Investment Company Act of 1940</act-name> (<external-xref legal-doc="usc" parsable-cite="usc/15/80a-10">15 U.S.C. 80a–10</external-xref>) is amended by adding at the end the following:</text> <quoted-block act-name="Investment Company Act of 1940" id="H16FDA27C41819C985AA6A0B2FBBC4CA"> <subsection id="HD5FAA65D4E9A26228AD94887F0082D2"><enum>(i)</enum><header>Independent committee</header> <paragraph id="HD2D4AE214EC46A7657310F8C10F26EC"><enum>(1)</enum><header>In general</header><text>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—</text> <subparagraph id="HE887CE964CAA89355EB5EFB9D820826"><enum>(A)</enum><text>selecting persons to be nominated for election to the board of directors;</text></subparagraph> <subparagraph id="HA44844154C79E130A511A994B25FDDE"><enum>(B)</enum><text>adopting qualification standards for the nomination of directors; and</text></subparagraph> <subparagraph id="HA4061EB0446335D70DFC5997D6FFED2"><enum>(C)</enum><text>determining the compensation to be paid to directors.</text></subparagraph></paragraph> <paragraph id="HED8B660F4D0B9D9D95F959BAC773DAC"><enum>(2)</enum><header>Disclosure</header><text>The standards developed under paragraph (1)(B) shall be disclosed in the registration statement of the registered investment company.</text></paragraph></subsection><after-quoted-block>.</after-quoted-block></quoted-block></subsection> <subsection id="HBBF000B4495ECA277F99B5A991DAD21"><enum>(c)</enum><header>Definition of interested person</header><text>Section 2(a)(19) of the <act-name parsable-cite="ICA40">Investment Company Act of 1940</act-name> (<external-xref legal-doc="usc" parsable-cite="usc/15/80a-2">15 U.S.C. 80a–2</external-xref>) is amended—</text> <paragraph id="HCDA711F043B309A0DA012E8FDEE3551"><enum>(1)</enum><text>in subparagraph (A)—</text> <subparagraph id="H796B0E67489BB5A3C9BEF3BBDD47D59"><enum>(A)</enum><text>in clause (iv), by striking <quote>two</quote> and inserting <quote>5</quote>; and</text></subparagraph> <subparagraph id="H453288EC403B1A45089DC680722FA8A"><enum>(B)</enum><text>by striking clause (vii) and inserting the following:</text> <quoted-block id="H959597174C544AB60BCF8C9E104300E"> <clause id="HE59EEDBC4847CB865E2AF0AAA1F275F"><enum>(vii)</enum><text>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;</text></clause> <clause id="H160C3EF141C7F5236C324A9A8DA1D1C"><enum>(viii)</enum><text>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;</text></clause> <clause id="H2AEC522842500B889ED0219BB377B11"><enum>(ix)</enum><text>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—</text> <subclause id="HF2F82B3C4801982E7776D4B8B512300"><enum>(I)</enum><text>a material business relationship with the investment company or an affiliated person of such investment company;</text></subclause> <subclause id="H74C1704A48E35247353BE783DC10047"><enum>(II)</enum><text>a close familial relationship with any natural person who is an affiliated person of such investment company; or</text></subclause> <subclause id="H9FDF489644510E42F81565B7E40045D"><enum>(III)</enum><text>any other reason determined by the Commission.</text></subclause></clause><after-quoted-block>;</after-quoted-block></quoted-block></subparagraph></paragraph> <paragraph id="H7009F7C14CECEE7E1C0CCE85EBC767C"><enum>(2)</enum><text>in subparagraph (B)—</text> <subparagraph id="H8C3709EA45121516D51AE887817FA3C"><enum>(A)</enum><text>in clause (iv), by striking <quote>two</quote> and inserting <quote>5</quote>; and</text></subparagraph> <subparagraph id="HC5708FEE4197484BFDAE0D94DAA00D8"><enum>(B)</enum><text>by striking clause (vii) and inserting the following:</text> <quoted-block id="H1BACBDCC468A8B8D3E3B81AA3934BDF"> <clause id="H81D599C94EDAFB4F94C6978742E475F"><enum>(vii)</enum><text>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—</text> <subclause id="H62BC5B594A7179EB059419AFF418687"><enum>(I)</enum><text>a material business relationship with such investment adviser or principal underwriter or affiliated person of such investment adviser or principal underwriter;</text></subclause> <subclause id="H71E997194175FB3494A9AAB7BB4B2A0"><enum>(II)</enum><text>a close familial relationship with any natural person who is an affiliated person of such investment adviser or principal underwriter; or</text></subclause> <subclause id="H739C06574BF0B3D07D2E3C804EAD1DB"><enum>(III)</enum><text>any other reason as determined by the Commission.</text></subclause></clause><after-quoted-block>.</after-quoted-block></quoted-block></subparagraph></paragraph></subsection> <subsection id="HF857A1A24099CCA644EA6A88DFCC731"><enum>(d)</enum><header>Definition of significant service provider</header><text>Section 2(a) of the <act-name parsable-cite="ICA40">Investment Company Act of 1940</act-name> is amended by adding at the end the following:</text> <quoted-block act-name="Investment Company Act of 1940" id="H2EA768D24A21E0EBB469C3ABA4B1CA4"> <paragraph id="HCFC65637433AE4783CD072AA59D700A"><enum>(53)</enum><header>Significant service provider</header> <subparagraph id="HAF7C15804525CAF6CF23C2B828F2D06"><enum>(A)</enum><header>In general</header><text>Not later than 270 days after the date of enactment of the <short-title>Mutual Fund Reform Act of 2004</short-title>, the Commission shall issue final rules defining the term <term>significant service provider</term>.</text></subparagraph> <subparagraph id="HF17F11394EBDB96D8318EEB5D595162"><enum>(B)</enum><header>Requirements</header><text>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).</text></subparagraph></paragraph><after-quoted-block>.</after-quoted-block></quoted-block></subsection></section> <section id="HD3705BBB46CC9D4AB0D4AC90B3F7BDE"><enum>102.</enum><header>Study of director compensation and independence</header> <subsection id="H1F76F2F644C93F1C5D9B0BB2CD6004E"><enum>(a)</enum><header>In general</header><text>The Commission shall conduct a study of—</text> <paragraph id="HA02368FF4C5BA1B2BEECCAA4F4E9701"><enum>(1)</enum><text>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</text></paragraph> <paragraph id="H8FCDCE5348CBF1EE4C92FEAAC5422D1"><enum>(2)</enum><text>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 <act-name parsable-cite="ICA40">Investment Company Act of 1940</act-name>, 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 <quote>interested person</quote> for purposes of section 2 of the <act-name parsable-cite="ICA40">Investment Company Act of 1940</act-name>.</text></paragraph></subsection> <subsection id="HB92CB8A444812DDEFF771EB627F0B12"><enum>(b)</enum><header>Report</header><text>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—</text> <paragraph id="HE73142314C5DAE41FE0BCCA3B2D2FA1"><enum>(1)</enum><text>the Committee on Banking, Housing, and Urban Affairs of the Senate; and</text></paragraph> <paragraph id="HA36B20D04DB09BD104E1B2B0E73E00A"><enum>(2)</enum><text>the Committee on Financial Services of the House of Representatives.</text></paragraph></subsection></section> <section id="H1D65B0E44E3E13E736270D89F1FF93B"><enum>103.</enum><header>Fiduciary duties of directors</header><text display-inline="no-display-inline">Section 10 of the <act-name parsable-cite="ICA40">Investment Company Act of 1940</act-name> (<external-xref legal-doc="usc" parsable-cite="usc/15/80a-10">15 U.S.C. 80a–10</external-xref>), as amended by this Act, is amended by adding at the end the following:</text> <quoted-block act-name="Investment Company Act of 1940" id="HECCF0180434AD5C05452159F14A8E46"> <subsection id="HE61B8CAC4F50CC2AD51281885B7EC8E"><enum>(j)</enum><header>Fiduciary duty of directors</header> <paragraph id="HEDEF9D9F4C440EEB31D46FBD00E7D23"><enum>(1)</enum><header>In general</header><text>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.</text></paragraph> <paragraph id="H9108911A45B5622B4CE365AC6D68F07"><enum>(2)</enum><header>Rulemaking</header><text>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—</text> <subparagraph id="H57FD486F45D47B6048DCFC8879F4E88"><enum>(A)</enum><text>determine the extent to which independent and reliable sources of information are sufficient to discharge director responsibilities;</text></subparagraph> <subparagraph id="HBCC2307C4698F82ED27ED2A0D2D443E"><enum>(B)</enum><text>negotiate management and advisory fees with due regard for the actual cost of such services, including economies of scale;</text></subparagraph> <subparagraph id="H3262F02F497C072947B4D6A2A072B41"><enum>(C)</enum><text>evaluate the totality of fees with reference to the interests of shareholders;</text></subparagraph> <subparagraph id="H67A7E97B4EABC5B961D740B3E341FB2"><enum>(D)</enum><text>evaluate the quality of the management of the company and potentially superior alternatives;</text></subparagraph> <subparagraph id="HA9C484DF40EF94E648DF039D0317BED"><enum>(E)</enum><text>evaluate the quality, comprehensiveness, and clarity of disclosures to shareholders regarding costs;</text></subparagraph> <subparagraph id="H68D5A92F4762AC2E5485159AF0EF0A4"><enum>(F)</enum><text>evaluate any distribution or marketing plan of the company, including its costs and benefits;</text></subparagraph> <subparagraph id="H6DB1FFC24B31550663211D9A8723A54"><enum>(G)</enum><text>evaluate the size of the portfolio of the company and its suitability to the interests of shareholders;</text></subparagraph> <subparagraph id="H5B42392C4DE132EF601D9A9870C5F4E"><enum>(H)</enum><text>implement and monitor policies to ensure compliance with applicable securities laws; and</text></subparagraph> <subparagraph id="H7686415E4B556DB465CC60868053BED"><enum>(I)</enum><text>implement and monitor policies with respect to predatory trading practices.</text></subparagraph></paragraph></subsection><after-quoted-block>.</after-quoted-block></quoted-block></section> <section id="H5E41FCC049110AA3968696A57DF75A3"><enum>104.</enum><header>Fiduciary duty of investment adviser</header><text display-inline="no-display-inline">Section 36 of the <act-name parsable-cite="ICA40">Investment Company Act of 1940</act-name> (<external-xref legal-doc="usc" parsable-cite="usc/15/80a-35">15 U.S.C. 80a–35(b)</external-xref>) is amended—</text> <paragraph id="HA2A94717456B34C6AC1679AE10D500D"><enum>(1)</enum><text>by redesignating subsection (c) as subsection (d); and</text></paragraph> <paragraph id="H74584B9D47F21DA03958A880B313C21"><enum>(2)</enum><text>by inserting after subsection (b) the following:</text> <quoted-block id="H5811DADC47F1FBBAAD183F92E4F2636"> <subsection id="H6535C1514D8E0B2CB4B699A558B2DC2"><enum>(c)</enum><header>Duties with respect to compensation and provision of information</header><text>For purposes of subsections (a) and (b), the fiduciary duty of an investment adviser—</text> <paragraph id="H749872F747AAE7F505CE76B85CDCAD9"><enum>(1)</enum><text>with respect to any compensation received, may require reasonable reference to the actual costs of the adviser and economies of scale; and</text></paragraph> <paragraph id="HFFBA762F4A18F0D91B6E6B801E0046C"><enum>(2)</enum><text>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.</text></paragraph></subsection><after-quoted-block>.</after-quoted-block></quoted-block></paragraph></section> <section id="H6557DBCE4E2AEB50B73D7094D449EAA"><enum>105.</enum><header>Termination of fund adviser</header><text display-inline="no-display-inline">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.</text></section> <section id="H16A9DCAC4D1DF47B74BD489B6486A17"><enum>106.</enum><header>Independent accounting and auditing</header> <subsection id="HB6592B034123FED2B350F7A93BC9B5D"><enum>(a)</enum><header>Amendments</header><text>Section 32 of the <act-name parsable-cite="ICA40">Investment Company Act of 1940</act-name> (<external-xref legal-doc="usc" parsable-cite="usc/15/80a-31">15 U.S.C. 80a–31</external-xref>) is amended—</text> <paragraph id="H706E9FDD45A04EC61E6A668C7EA684B"><enum>(1)</enum><text>in subsection (a)—</text> <subparagraph id="H4BC388B54C905C653ED4FC80A5845C6"><enum>(A)</enum><text>by striking paragraphs (1) and (2) and inserting the following:</text> <quoted-block id="HF48776374566D6C8F231B18FB1DEDCB"> <paragraph id="HCBFAC1DC4F647CF5740B9294F5FD58D"><enum>(1)</enum><text>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;</text></paragraph> <paragraph id="HCAAF4B374249B45E91E7E494E3DAA06"><enum>(2)</enum><text>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;</text></paragraph><after-quoted-block>; and</after-quoted-block></quoted-block></subparagraph> <subparagraph id="H3D5191F2494542C11A295A99C9550B2"><enum>(B)</enum><text>by adding at the end the following: <quote>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.</quote>; and</text></subparagraph></paragraph> <paragraph id="H5D23D68047519305B39B59BC2ECBECC"><enum>(2)</enum><text>by adding at the end the following:</text> <quoted-block id="H068C809A4869A8EE74D836976FFC244"> <subsection id="H53188835487CB646BBD2BBA2311BD5B"><enum>(d)</enum><header>Audit committee requirements</header> <paragraph id="H0E874D25465C48289DE7F4877700D2C"><enum>(1)</enum><header>Requirements as prerequisite to filing financial statements</header><text>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.</text></paragraph> <paragraph id="H2A8B8AE14368E5411B6E31B113C7E38"><enum>(2)</enum><header>Responsibility relating to independent public accountants</header><text>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.</text></paragraph> <paragraph id="H5CA06BFC48826FCF0072DCA2EE1E3B2"><enum>(3)</enum><header>Independence</header> <subparagraph id="H8BBE687E4F8F7C97F4A0839D8555C84"><enum>(A)</enum><header>In general</header><text>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.</text></subparagraph> <subparagraph id="H0951334C4D289DADEC544794DA48604"><enum>(B)</enum><header>Criteria</header><text>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—</text> <clause id="H935E35204CEDA311057C7E88DA12E1E"><enum>(i)</enum><text>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</text></clause> <clause id="HF7C6105D40C17AE07093B1A30981CFB"><enum>(ii)</enum><text>be an interested person of the registered investment company.</text></clause></subparagraph></paragraph> <paragraph id="H409FA97E4A5ACF1CD7E8F5AE3900CAB"><enum>(4)</enum><header>Complaints</header><text>The audit committee of the registered investment company shall establish procedures for—</text> <subparagraph id="HEDE0210E46A29A4774D7BCB273AEDD7"><enum>(A)</enum><text>the receipt, retention, and treatment of complaints received by the registered investment company regarding accounting, internal accounting controls, or auditing matters; and</text></subparagraph> <subparagraph id="H90D81BF843D543A5D4B77984D0104C1"><enum>(B)</enum><text>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.</text></subparagraph></paragraph> <paragraph id="HA961B94440ADB2ACCFBB71AEA132F69"><enum>(5)</enum><header>Authority to engage advisers</header><text>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.</text></paragraph> <paragraph id="HB34B1C4B4C844F017BE87D897718FE2"><enum>(6)</enum><header>Funding</header><text>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—</text> <subparagraph id="HE0A6FB7B483B92CE9689F38885B541E"><enum>(A)</enum><text>to the independent public accountant employed by the registered investment company for the purpose of rendering or issuing the audit report; and</text></subparagraph> <subparagraph id="H865EC0EF4424D921D22AACA0005EDEE"><enum>(B)</enum><text>to any advisers employed by the audit committee under paragraph (5).</text></subparagraph></paragraph> <paragraph id="HAFD3FE30478E74BBA8D2E799CCBF774"><enum>(7)</enum><header>Audit committee</header><text>For purposes of this subsection, the term <term>audit committee</term> means—</text> <subparagraph id="H64A52422467C43E692A64B87A2725A6"><enum>(A)</enum><text>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</text></subparagraph> <subparagraph id="H7D3940BE47BD271251A5C3BB5E20DAC"><enum>(B)</enum><text>if no such committee exists with respect to a registered investment company, the entire board of directors of the company.</text></subparagraph></paragraph></subsection><after-quoted-block>.</after-quoted-block></quoted-block></paragraph></subsection> <subsection id="H155E544F464405B47975098B2EE1D3D"><enum>(b)</enum><header>Conforming amendment</header><text>Section 10A(m) of the <act-name parsable-cite="SEA34">Securities Exchange Act of 1934</act-name> (<external-xref legal-doc="usc" parsable-cite="usc/15/78j-1">15 U.S.C. 78j–1(m)</external-xref>) is amended by adding at the end the following:</text> <quoted-block act-name="Securities Exchange Act of 1934" id="H8FE9D2B74FE41517679DA983FF20B8D"> <paragraph id="HE99C7E354E85A4DF17BB40AD1D6B1FB"><enum>(7)</enum><header>Exemption for investment companies</header><text>Effective one year after the date of enactment of the <short-title>Mutual Fund Reform Act of 2004</short-title>, for purposes of this subsection, the term <term>issuer</term> shall not include any investment company that is registered under section 8 of the <act-name parsable-cite="ICA40">Investment Company Act of 1940</act-name>.</text></paragraph><after-quoted-block>.</after-quoted-block></quoted-block></subsection> <subsection id="HED4C7C4C4EB549075AB494BF9BA2A90"><enum>(c)</enum><header>Implementation</header><text>The Commission shall issue final regulations to carry out section 32(d) of the <act-name parsable-cite="ICA40">Investment Company Act of 1940</act-name>, as added by subsection (a) of this section.</text></subsection></section> <section id="H4C7D5DF2417368BE45AE958035874CF"><enum>107.</enum><header>Prevention of fraud; internal compliance and control procedures</header> <subsection id="H4A0FDB054A8213AB5A371C8E40CB3FA"><enum>(a)</enum><header>Detection and prevention of fraud</header><text>Section 17(j) of the <act-name parsable-cite="ICA40">Investment Company Act of 1940</act-name> (<external-xref legal-doc="usc" parsable-cite="usc/15/80a-17">15 U.S.C. 80a–17(j)</external-xref>) is amended to read as follows:</text> <quoted-block act-name="Investment Company Act of 1940" id="H3128F984496EB2ABA99554A259D557B"> <subsection id="H9C721D7C465632A5F6E9F4BCCC6237D"><enum>(j)</enum><header>Detection and prevention of fraud</header> <paragraph id="H8191F0414113626CBFEF5BB72C99BD8"><enum>(1)</enum><header>Commission rules to prohibit fraud, deception, and manipulation</header><text>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.</text></paragraph> <paragraph id="H794F9FFD461F9996943DF5BB99C0067"><enum>(2)</enum><header>Codes of ethics</header><text>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.</text></paragraph> <paragraph id="H4F553D334E065892FBB51DB2CD61952"><enum>(3)</enum><header>Additional compliance procedures</header><text>The rules adopted under paragraph (1) shall—</text> <subparagraph id="H92094EE9427D66113EAA629250C249B"><enum>(A)</enum><text>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 <act-name parsable-cite="SA33">Securities Act of 1933</act-name> (<external-xref legal-doc="usc" parsable-cite="usc/15/78a">15 U.S.C. 78a et seq.</external-xref>), the <act-name parsable-cite="SEA34">Securities Exchange Act of 1934</act-name> (<external-xref legal-doc="usc" parsable-cite="usc/15/78a">15 U.S.C. 78a et seq.</external-xref>), the Sarbanes-Oxley Act of 2002 (<external-xref legal-doc="usc" parsable-cite="usc/15/7201">15 U.S.C. 7201 et seq.</external-xref>) and amendments made by that Act, the Trust Indenture Act of 1939 (<external-xref legal-doc="usc" parsable-cite="usc/15/77aaa">15 U.S.C. 77aaa et seq.</external-xref>), the <act-name parsable-cite="IAA40">Investment Advisers Act of 1940</act-name> (<external-xref legal-doc="usc" parsable-cite="usc/15/80b">15 U.S.C. 80b et seq.</external-xref>), the Securities Investor Protection Act of 1970 (<external-xref legal-doc="usc" parsable-cite="usc/15/78aaa">15 U.S.C. 78aaa et seq.</external-xref>), subchapter II of <external-xref legal-doc="usc-chapter" parsable-cite="usc-chapter/31/53">chapter 53</external-xref> of title 31, United States Code, chapter 2 of title I of <external-xref legal-doc="public-law" parsable-cite="pl/91/508">Public Law 91–508</external-xref> (<external-xref legal-doc="usc" parsable-cite="usc/12/1951">12 U.S.C. 1951 et seq.</external-xref>), or section 21 of the <act-name parsable-cite="FDIA">Federal Deposit Insurance Act</act-name> (<external-xref legal-doc="usc" parsable-cite="usc/12/1829b">12 U.S.C. 1829b</external-xref>);</text></subparagraph> <subparagraph id="HE66C1C5E49A275BF8829D7A301C9C5F"><enum>(B)</enum><text>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</text></subparagraph> <subparagraph id="HA51B8EF246A562BA5AAF128F50CF601"><enum>(C)</enum><text>require each registered investment company to appoint a chief compliance officer to be responsible for overseeing such policies and procedures—</text> <clause id="HBF43A8A1402E67636C98BD837EA7051"><enum>(i)</enum><text>whose compensation shall be approved by the members of the board of directors of the company who are not interested persons of the company;</text></clause> <clause id="HF906884E4DBFB91399A75BA4586BA02"><enum>(ii)</enum><text>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</text></clause> <clause id="H659681244F8F1D5E158D43A49FE195D"><enum>(iii)</enum><text>whose report to such members shall include any violations or waivers of, and any other significant issues arising under, such policies and procedures.</text></clause></subparagraph></paragraph> <paragraph id="HEDFB6B6F478296F938EAC9AA1522DEA"><enum>(4)</enum><header>Certifications</header><text>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—</text> <subparagraph id="H6AD8E4BD442F416D9130868F74EA5CA"><enum>(A)</enum><text>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;</text></subparagraph> <subparagraph id="HED2B303D4604005E5A3A6AB1E2B5AC0"><enum>(B)</enum><text>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;</text></subparagraph> <subparagraph id="HB35203F14A2FB5368E29F49C2EAAEEB"><enum>(C)</enum><text>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;</text></subparagraph> <subparagraph id="H2D7A13694AF8907C710542B5806C6FF"><enum>(D)</enum><text>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</text></subparagraph> <subparagraph id="H1F3C0352431C8F023C5546887B22EAC"><enum>(E)</enum><text>the company has established and enforces a code of ethics, as required by paragraph (2).</text></subparagraph></paragraph></subsection><after-quoted-block>.</after-quoted-block></quoted-block></subsection> <subsection id="H0179B2EF4C9CC68A8AE019979069F36"><enum>(b)</enum><header>Whistleblower protection</header><text><external-xref legal-doc="usc" parsable-cite="usc/18/1514A">Section 1514A(a)</external-xref> of title 18, United States Code, is amended by striking the matter preceding paragraph (1) and inserting the following:</text> <quoted-block id="HD0E53CC04478164ADE82EB9EC19E4E5"> <subsection id="H1378F361472F877991CA22AACFC804C"><enum>(a)</enum><header>Whistleblower protection for employees of publicly traded companies and registered investment companies</header><text>No company with a class of securities registered under section 12 of the <act-name parsable-cite="SEA34">Securities Exchange Act of 1934</act-name> (<external-xref legal-doc="usc" parsable-cite="usc/15/78l">15 U.S.C. 78l</external-xref>), or that is required to file reports under section 15(d) of the Securities and Exchange Act of 1934 (<external-xref legal-doc="usc" parsable-cite="usc/15/78o">15 U.S.C. 78o(d)</external-xref>), or that is an investment adviser, principal underwriter, or significant service provider (as such terms are defined under section 2(a) of the <act-name parsable-cite="ICA40">Investment Company Act of 1940</act-name> (<external-xref legal-doc="usc" parsable-cite="usc/15/80a-2">15 U.S.C. 80a–2(a)</external-xref>) of an investment company which is registered under section 8 of the <act-name parsable-cite="ICA40">Investment Company Act of 1940</act-name>, 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—</text></subsection><after-quoted-block>.</after-quoted-block></quoted-block></subsection></section>

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

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).

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.

<enum>I</enum><header>Fund governance</header> <section id="H496048B346FB485FFFF056B7823178F"><enum>101.</enum><header>Independent directors</header> <subsection id="H8BB5C2B741B2E869E04C45A492C43CE"><enum>(a)</enum><header>Independent fund boards</header><text>Section 10(a) of the <act-name parsable-cite="ICA40">Investment Company Act of 1940</act-name> (<external-xref legal-doc="usc" parsable-cite="usc/15/80a-10">15 U.S.C. 80a–10(a)</external-xref>) is amended—</text> <paragraph id="H9930351043D0ACD437A46B868E3CE19"><enum>(1)</enum><text>by striking <quote>shall have</quote> and inserting the following:</text> <quoted-block display-inline="yes-display-inline" id="H8B7516BE494E7B78B61393BEC719CBF"><text>shall—</text> <paragraph id="H5C0F02DF477EABC7F5E48D8A31F2B88"><enum>(1)</enum><text>have</text></paragraph><after-quoted-block>;</after-quoted-block></quoted-block></paragraph> <paragraph id="H9105A1D24708F8112BBFCE9888B4EAB"><enum>(2)</enum><text>by striking <quote>60 per centum</quote> and inserting <quote>25 percent</quote>;</text></paragraph> <paragraph id="HB68730C249A6D860283AFFA4F5D1C00"><enum>(3)</enum><text>by striking the period at the end and inserting a semicolon; and</text></paragraph> <paragraph id="HF1F073DB46E8A32F2DA2469E28E90FC"><enum>(4)</enum><text>by adding at the end the following:</text> <quoted-block id="H7C21B5814F6B1975C89007A5A976A74"> <paragraph id="H0755A7C14072257B33341A81B333FEE"><enum>(2)</enum><text>have as chairman of its board of directors an interested person of such registered company; or</text></paragraph> <paragraph id="H0DE01EC340959F4E1CADB0BA762E9BE"><enum>(3)</enum><text>have as a member of its board of directors any person that is not an interested person of such registered investment company—</text> <subparagraph id="HC8231BDC433ECFABB94640B6C6E20FC"><enum>(A)</enum><text>who has served without being approved or elected by the shareholders of such registered investment company at least once every 5 years; and</text></subparagraph> <subparagraph id="HFABEF06A4CA32F21D46FD587E847DC4"><enum>(B)</enum><text>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.</text></subparagraph></paragraph><after-quoted-block>.</after-quoted-block></quoted-block></paragraph></subsection> <subsection id="H7F16E4A94B0DE55AB9ED8E82E66B4FE"><enum>(b)</enum><header>Action by independent directors</header><text>Section 10 of the <act-name parsable-cite="ICA40">Investment Company Act of 1940</act-name> (<external-xref legal-doc="usc" parsable-cite="usc/15/80a-10">15 U.S.C. 80a–10</external-xref>) is amended by adding at the end the following:</text> <quoted-block act-name="Investment Company Act of 1940" id="H16FDA27C41819C985AA6A0B2FBBC4CA"> <subsection id="HD5FAA65D4E9A26228AD94887F0082D2"><enum>(i)</enum><header>Independent committee</header> <paragraph id="HD2D4AE214EC46A7657310F8C10F26EC"><enum>(1)</enum><header>In general</header><text>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—</text> <subparagraph id="HE887CE964CAA89355EB5EFB9D820826"><enum>(A)</enum><text>selecting persons to be nominated for election to the board of directors;</text></subparagraph> <subparagraph id="HA44844154C79E130A511A994B25FDDE"><enum>(B)</enum><text>adopting qualification standards for the nomination of directors; and</text></subparagraph> <subparagraph id="HA4061EB0446335D70DFC5997D6FFED2"><enum>(C)</enum><text>determining the compensation to be paid to directors.</text></subparagraph></paragraph> <paragraph id="HED8B660F4D0B9D9D95F959BAC773DAC"><enum>(2)</enum><header>Disclosure</header><text>The standards developed under paragraph (1)(B) shall be disclosed in the registration statement of the registered investment company.</text></paragraph></subsection><after-quoted-block>.</after-quoted-block></quoted-block></subsection> <subsection id="HBBF000B4495ECA277F99B5A991DAD21"><enum>(c)</enum><header>Definition of interested person</header><text>Section 2(a)(19) of the <act-name parsable-cite="ICA40">Investment Company Act of 1940</act-name> (<external-xref legal-doc="usc" parsable-cite="usc/15/80a-2">15 U.S.C. 80a–2</external-xref>) is amended—</text> <paragraph id="HCDA711F043B309A0DA012E8FDEE3551"><enum>(1)</enum><text>in subparagraph (A)—</text> <subparagraph id="H796B0E67489BB5A3C9BEF3BBDD47D59"><enum>(A)</enum><text>in clause (iv), by striking <quote>two</quote> and inserting <quote>5</quote>; and</text></subparagraph> <subparagraph id="H453288EC403B1A45089DC680722FA8A"><enum>(B)</enum><text>by striking clause (vii) and inserting the following:</text> <quoted-block id="H959597174C544AB60BCF8C9E104300E"> <clause id="HE59EEDBC4847CB865E2AF0AAA1F275F"><enum>(vii)</enum><text>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;</text></clause> <clause id="H160C3EF141C7F5236C324A9A8DA1D1C"><enum>(viii)</enum><text>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;</text></clause> <clause id="H2AEC522842500B889ED0219BB377B11"><enum>(ix)</enum><text>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—</text> <subclause id="HF2F82B3C4801982E7776D4B8B512300"><enum>(I)</enum><text>a material business relationship with the investment company or an affiliated person of such investment company;</text></subclause> <subclause id="H74C1704A48E35247353BE783DC10047"><enum>(II)</enum><text>a close familial relationship with any natural person who is an affiliated person of such investment company; or</text></subclause> <subclause id="H9FDF489644510E42F81565B7E40045D"><enum>(III)</enum><text>any other reason determined by the Commission.</text></subclause></clause><after-quoted-block>;</after-quoted-block></quoted-block></subparagraph></paragraph> <paragraph id="H7009F7C14CECEE7E1C0CCE85EBC767C"><enum>(2)</enum><text>in subparagraph (B)—</text> <subparagraph id="H8C3709EA45121516D51AE887817FA3C"><enum>(A)</enum><text>in clause (iv), by striking <quote>two</quote> and inserting <quote>5</quote>; and</text></subparagraph> <subparagraph id="HC5708FEE4197484BFDAE0D94DAA00D8"><enum>(B)</enum><text>by striking clause (vii) and inserting the following:</text> <quoted-block id="H1BACBDCC468A8B8D3E3B81AA3934BDF"> <clause id="H81D599C94EDAFB4F94C6978742E475F"><enum>(vii)</enum><text>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—</text> <subclause id="H62BC5B594A7179EB059419AFF418687"><enum>(I)</enum><text>a material business relationship with such investment adviser or principal underwriter or affiliated person of such investment adviser or principal underwriter;</text></subclause> <subclause id="H71E997194175FB3494A9AAB7BB4B2A0"><enum>(II)</enum><text>a close familial relationship with any natural person who is an affiliated person of such investment adviser or principal underwriter; or</text></subclause> <subclause id="H739C06574BF0B3D07D2E3C804EAD1DB"><enum>(III)</enum><text>any other reason as determined by the Commission.</text></subclause></clause><after-quoted-block>.</after-quoted-block></quoted-block></subparagraph></paragraph></subsection> <subsection id="HF857A1A24099CCA644EA6A88DFCC731"><enum>(d)</enum><header>Definition of significant service provider</header><text>Section 2(a) of the <act-name parsable-cite="ICA40">Investment Company Act of 1940</act-name> is amended by adding at the end the following:</text> <quoted-block act-name="Investment Company Act of 1940" id="H2EA768D24A21E0EBB469C3ABA4B1CA4"> <paragraph id="HCFC65637433AE4783CD072AA59D700A"><enum>(53)</enum><header>Significant service provider</header> <subparagraph id="HAF7C15804525CAF6CF23C2B828F2D06"><enum>(A)</enum><header>In general</header><text>Not later than 270 days after the date of enactment of the <short-title>Mutual Fund Reform Act of 2004</short-title>, the Commission shall issue final rules defining the term <term>significant service provider</term>.</text></subparagraph> <subparagraph id="HF17F11394EBDB96D8318EEB5D595162"><enum>(B)</enum><header>Requirements</header><text>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).</text></subparagraph></paragraph><after-quoted-block>.</after-quoted-block></quoted-block></subsection></section> <section id="HD3705BBB46CC9D4AB0D4AC90B3F7BDE"><enum>102.</enum><header>Study of director compensation and independence</header> <subsection id="H1F76F2F644C93F1C5D9B0BB2CD6004E"><enum>(a)</enum><header>In general</header><text>The Commission shall conduct a study of—</text> <paragraph id="HA02368FF4C5BA1B2BEECCAA4F4E9701"><enum>(1)</enum><text>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</text></paragraph> <paragraph id="H8FCDCE5348CBF1EE4C92FEAAC5422D1"><enum>(2)</enum><text>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 <act-name parsable-cite="ICA40">Investment Company Act of 1940</act-name>, 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 <quote>interested person</quote> for purposes of section 2 of the <act-name parsable-cite="ICA40">Investment Company Act of 1940</act-name>.</text></paragraph></subsection> <subsection id="HB92CB8A444812DDEFF771EB627F0B12"><enum>(b)</enum><header>Report</header><text>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—</text> <paragraph id="HE73142314C5DAE41FE0BCCA3B2D2FA1"><enum>(1)</enum><text>the Committee on Banking, Housing, and Urban Affairs of the Senate; and</text></paragraph> <paragraph id="HA36B20D04DB09BD104E1B2B0E73E00A"><enum>(2)</enum><text>the Committee on Financial Services of the House of Representatives.</text></paragraph></subsection></section> <section id="H1D65B0E44E3E13E736270D89F1FF93B"><enum>103.</enum><header>Fiduciary duties of directors</header><text display-inline="no-display-inline">Section 10 of the <act-name parsable-cite="ICA40">Investment Company Act of 1940</act-name> (<external-xref legal-doc="usc" parsable-cite="usc/15/80a-10">15 U.S.C. 80a–10</external-xref>), as amended by this Act, is amended by adding at the end the following:</text> <quoted-block act-name="Investment Company Act of 1940" id="HECCF0180434AD5C05452159F14A8E46"> <subsection id="HE61B8CAC4F50CC2AD51281885B7EC8E"><enum>(j)</enum><header>Fiduciary duty of directors</header> <paragraph id="HEDEF9D9F4C440EEB31D46FBD00E7D23"><enum>(1)</enum><header>In general</header><text>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.</text></paragraph> <paragraph id="H9108911A45B5622B4CE365AC6D68F07"><enum>(2)</enum><header>Rulemaking</header><text>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—</text> <subparagraph id="H57FD486F45D47B6048DCFC8879F4E88"><enum>(A)</enum><text>determine the extent to which independent and reliable sources of information are sufficient to discharge director responsibilities;</text></subparagraph> <subparagraph id="HBCC2307C4698F82ED27ED2A0D2D443E"><enum>(B)</enum><text>negotiate management and advisory fees with due regard for the actual cost of such services, including economies of scale;</text></subparagraph> <subparagraph id="H3262F02F497C072947B4D6A2A072B41"><enum>(C)</enum><text>evaluate the totality of fees with reference to the interests of shareholders;</text></subparagraph> <subparagraph id="H67A7E97B4EABC5B961D740B3E341FB2"><enum>(D)</enum><text>evaluate the quality of the management of the company and potentially superior alternatives;</text></subparagraph> <subparagraph id="HA9C484DF40EF94E648DF039D0317BED"><enum>(E)</enum><text>evaluate the quality, comprehensiveness, and clarity of disclosures to shareholders regarding costs;</text></subparagraph> <subparagraph id="H68D5A92F4762AC2E5485159AF0EF0A4"><enum>(F)</enum><text>evaluate any distribution or marketing plan of the company, including its costs and benefits;</text></subparagraph> <subparagraph id="H6DB1FFC24B31550663211D9A8723A54"><enum>(G)</enum><text>evaluate the size of the portfolio of the company and its suitability to the interests of shareholders;</text></subparagraph> <subparagraph id="H5B42392C4DE132EF601D9A9870C5F4E"><enum>(H)</enum><text>implement and monitor policies to ensure compliance with applicable securities laws; and</text></subparagraph> <subparagraph id="H7686415E4B556DB465CC60868053BED"><enum>(I)</enum><text>implement and monitor policies with respect to predatory trading practices.</text></subparagraph></paragraph></subsection><after-quoted-block>.</after-quoted-block></quoted-block></section> <section id="H5E41FCC049110AA3968696A57DF75A3"><enum>104.</enum><header>Fiduciary duty of investment adviser</header><text display-inline="no-display-inline">Section 36 of the <act-name parsable-cite="ICA40">Investment Company Act of 1940</act-name> (<external-xref legal-doc="usc" parsable-cite="usc/15/80a-35">15 U.S.C. 80a–35(b)</external-xref>) is amended—</text> <paragraph id="HA2A94717456B34C6AC1679AE10D500D"><enum>(1)</enum><text>by redesignating subsection (c) as subsection (d); and</text></paragraph> <paragraph id="H74584B9D47F21DA03958A880B313C21"><enum>(2)</enum><text>by inserting after subsection (b) the following:</text> <quoted-block id="H5811DADC47F1FBBAAD183F92E4F2636"> <subsection id="H6535C1514D8E0B2CB4B699A558B2DC2"><enum>(c)</enum><header>Duties with respect to compensation and provision of information</header><text>For purposes of subsections (a) and (b), the fiduciary duty of an investment adviser—</text> <paragraph id="H749872F747AAE7F505CE76B85CDCAD9"><enum>(1)</enum><text>with respect to any compensation received, may require reasonable reference to the actual costs of the adviser and economies of scale; and</text></paragraph> <paragraph id="HFFBA762F4A18F0D91B6E6B801E0046C"><enum>(2)</enum><text>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.</text></paragraph></subsection><after-quoted-block>.</after-quoted-block></quoted-block></paragraph></section> <section id="H6557DBCE4E2AEB50B73D7094D449EAA"><enum>105.</enum><header>Termination of fund adviser</header><text display-inline="no-display-inline">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.</text></section> <section id="H16A9DCAC4D1DF47B74BD489B6486A17"><enum>106.</enum><header>Independent accounting and auditing</header> <subsection id="HB6592B034123FED2B350F7A93BC9B5D"><enum>(a)</enum><header>Amendments</header><text>Section 32 of the <act-name parsable-cite="ICA40">Investment Company Act of 1940</act-name> (<external-xref legal-doc="usc" parsable-cite="usc/15/80a-31">15 U.S.C. 80a–31</external-xref>) is amended—</text> <paragraph id="H706E9FDD45A04EC61E6A668C7EA684B"><enum>(1)</enum><text>in subsection (a)—</text> <subparagraph id="H4BC388B54C905C653ED4FC80A5845C6"><enum>(A)</enum><text>by striking paragraphs (1) and (2) and inserting the following:</text> <quoted-block id="HF48776374566D6C8F231B18FB1DEDCB"> <paragraph id="HCBFAC1DC4F647CF5740B9294F5FD58D"><enum>(1)</enum><text>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;</text></paragraph> <paragraph id="HCAAF4B374249B45E91E7E494E3DAA06"><enum>(2)</enum><text>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;</text></paragraph><after-quoted-block>; and</after-quoted-block></quoted-block></subparagraph> <subparagraph id="H3D5191F2494542C11A295A99C9550B2"><enum>(B)</enum><text>by adding at the end the following: <quote>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.</quote>; and</text></subparagraph></paragraph> <paragraph id="H5D23D68047519305B39B59BC2ECBECC"><enum>(2)</enum><text>by adding at the end the following:</text> <quoted-block id="H068C809A4869A8EE74D836976FFC244"> <subsection id="H53188835487CB646BBD2BBA2311BD5B"><enum>(d)</enum><header>Audit committee requirements</header> <paragraph id="H0E874D25465C48289DE7F4877700D2C"><enum>(1)</enum><header>Requirements as prerequisite to filing financial statements</header><text>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.</text></paragraph> <paragraph id="H2A8B8AE14368E5411B6E31B113C7E38"><enum>(2)</enum><header>Responsibility relating to independent public accountants</header><text>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.</text></paragraph> <paragraph id="H5CA06BFC48826FCF0072DCA2EE1E3B2"><enum>(3)</enum><header>Independence</header> <subparagraph id="H8BBE687E4F8F7C97F4A0839D8555C84"><enum>(A)</enum><header>In general</header><text>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.</text></subparagraph> <subparagraph id="H0951334C4D289DADEC544794DA48604"><enum>(B)</enum><header>Criteria</header><text>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—</text> <clause id="H935E35204CEDA311057C7E88DA12E1E"><enum>(i)</enum><text>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</text></clause> <clause id="HF7C6105D40C17AE07093B1A30981CFB"><enum>(ii)</enum><text>be an interested person of the registered investment company.</text></clause></subparagraph></paragraph> <paragraph id="H409FA97E4A5ACF1CD7E8F5AE3900CAB"><enum>(4)</enum><header>Complaints</header><text>The audit committee of the registered investment company shall establish procedures for—</text> <subparagraph id="HEDE0210E46A29A4774D7BCB273AEDD7"><enum>(A)</enum><text>the receipt, retention, and treatment of complaints received by the registered investment company regarding accounting, internal accounting controls, or auditing matters; and</text></subparagraph> <subparagraph id="H90D81BF843D543A5D4B77984D0104C1"><enum>(B)</enum><text>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.</text></subparagraph></paragraph> <paragraph id="HA961B94440ADB2ACCFBB71AEA132F69"><enum>(5)</enum><header>Authority to engage advisers</header><text>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.</text></paragraph> <paragraph id="HB34B1C4B4C844F017BE87D897718FE2"><enum>(6)</enum><header>Funding</header><text>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—</text> <subparagraph id="HE0A6FB7B483B92CE9689F38885B541E"><enum>(A)</enum><text>to the independent public accountant employed by the registered investment company for the purpose of rendering or issuing the audit report; and</text></subparagraph> <subparagraph id="H865EC0EF4424D921D22AACA0005EDEE"><enum>(B)</enum><text>to any advisers employed by the audit committee under paragraph (5).</text></subparagraph></paragraph> <paragraph id="HAFD3FE30478E74BBA8D2E799CCBF774"><enum>(7)</enum><header>Audit committee</header><text>For purposes of this subsection, the term <term>audit committee</term> means—</text> <subparagraph id="H64A52422467C43E692A64B87A2725A6"><enum>(A)</enum><text>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</text></subparagraph> <subparagraph id="H7D3940BE47BD271251A5C3BB5E20DAC"><enum>(B)</enum><text>if no such committee exists with respect to a registered investment company, the entire board of directors of the company.</text></subparagraph></paragraph></subsection><after-quoted-block>.</after-quoted-block></quoted-block></paragraph></subsection> <subsection id="H155E544F464405B47975098B2EE1D3D"><enum>(b)</enum><header>Conforming amendment</header><text>Section 10A(m) of the <act-name parsable-cite="SEA34">Securities Exchange Act of 1934</act-name> (<external-xref legal-doc="usc" parsable-cite="usc/15/78j-1">15 U.S.C. 78j–1(m)</external-xref>) is amended by adding at the end the following:</text> <quoted-block act-name="Securities Exchange Act of 1934" id="H8FE9D2B74FE41517679DA983FF20B8D"> <paragraph id="HE99C7E354E85A4DF17BB40AD1D6B1FB"><enum>(7)</enum><header>Exemption for investment companies</header><text>Effective one year after the date of enactment of the <short-title>Mutual Fund Reform Act of 2004</short-title>, for purposes of this subsection, the term <term>issuer</term> shall not include any investment company that is registered under section 8 of the <act-name parsable-cite="ICA40">Investment Company Act of 1940</act-name>.</text></paragraph><after-quoted-block>.</after-quoted-block></quoted-block></subsection> <subsection id="HED4C7C4C4EB549075AB494BF9BA2A90"><enum>(c)</enum><header>Implementation</header><text>The Commission shall issue final regulations to carry out section 32(d) of the <act-name parsable-cite="ICA40">Investment Company Act of 1940</act-name>, as added by subsection (a) of this section.</text></subsection></section> <section id="H4C7D5DF2417368BE45AE958035874CF"><enum>107.</enum><header>Prevention of fraud; internal compliance and control procedures</header> <subsection id="H4A0FDB054A8213AB5A371C8E40CB3FA"><enum>(a)</enum><header>Detection and prevention of fraud</header><text>Section 17(j) of the <act-name parsable-cite="ICA40">Investment Company Act of 1940</act-name> (<external-xref legal-doc="usc" parsable-cite="usc/15/80a-17">15 U.S.C. 80a–17(j)</external-xref>) is amended to read as follows:</text> <quoted-block act-name="Investment Company Act of 1940" id="H3128F984496EB2ABA99554A259D557B"> <subsection id="H9C721D7C465632A5F6E9F4BCCC6237D"><enum>(j)</enum><header>Detection and prevention of fraud</header> <paragraph id="H8191F0414113626CBFEF5BB72C99BD8"><enum>(1)</enum><header>Commission rules to prohibit fraud, deception, and manipulation</header><text>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.</text></paragraph> <paragraph id="H794F9FFD461F9996943DF5BB99C0067"><enum>(2)</enum><header>Codes of ethics</header><text>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.</text></paragraph> <paragraph id="H4F553D334E065892FBB51DB2CD61952"><enum>(3)</enum><header>Additional compliance procedures</header><text>The rules adopted under paragraph (1) shall—</text> <subparagraph id="H92094EE9427D66113EAA629250C249B"><enum>(A)</enum><text>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 <act-name parsable-cite="SA33">Securities Act of 1933</act-name> (<external-xref legal-doc="usc" parsable-cite="usc/15/78a">15 U.S.C. 78a et seq.</external-xref>), the <act-name parsable-cite="SEA34">Securities Exchange Act of 1934</act-name> (<external-xref legal-doc="usc" parsable-cite="usc/15/78a">15 U.S.C. 78a et seq.</external-xref>), the Sarbanes-Oxley Act of 2002 (<external-xref legal-doc="usc" parsable-cite="usc/15/7201">15 U.S.C. 7201 et seq.</external-xref>) and amendments made by that Act, the Trust Indenture Act of 1939 (<external-xref legal-doc="usc" parsable-cite="usc/15/77aaa">15 U.S.C. 77aaa et seq.</external-xref>), the <act-name parsable-cite="IAA40">Investment Advisers Act of 1940</act-name> (<external-xref legal-doc="usc" parsable-cite="usc/15/80b">15 U.S.C. 80b et seq.</external-xref>), the Securities Investor Protection Act of 1970 (<external-xref legal-doc="usc" parsable-cite="usc/15/78aaa">15 U.S.C. 78aaa et seq.</external-xref>), subchapter II of <external-xref legal-doc="usc-chapter" parsable-cite="usc-chapter/31/53">chapter 53</external-xref> of title 31, United States Code, chapter 2 of title I of <external-xref legal-doc="public-law" parsable-cite="pl/91/508">Public Law 91–508</external-xref> (<external-xref legal-doc="usc" parsable-cite="usc/12/1951">12 U.S.C. 1951 et seq.</external-xref>), or section 21 of the <act-name parsable-cite="FDIA">Federal Deposit Insurance Act</act-name> (<external-xref legal-doc="usc" parsable-cite="usc/12/1829b">12 U.S.C. 1829b</external-xref>);</text></subparagraph> <subparagraph id="HE66C1C5E49A275BF8829D7A301C9C5F"><enum>(B)</enum><text>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</text></subparagraph> <subparagraph id="HA51B8EF246A562BA5AAF128F50CF601"><enum>(C)</enum><text>require each registered investment company to appoint a chief compliance officer to be responsible for overseeing such policies and procedures—</text> <clause id="HBF43A8A1402E67636C98BD837EA7051"><enum>(i)</enum><text>whose compensation shall be approved by the members of the board of directors of the company who are not interested persons of the company;</text></clause> <clause id="HF906884E4DBFB91399A75BA4586BA02"><enum>(ii)</enum><text>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</text></clause> <clause id="H659681244F8F1D5E158D43A49FE195D"><enum>(iii)</enum><text>whose report to such members shall include any violations or waivers of, and any other significant issues arising under, such policies and procedures.</text></clause></subparagraph></paragraph> <paragraph id="HEDFB6B6F478296F938EAC9AA1522DEA"><enum>(4)</enum><header>Certifications</header><text>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—</text> <subparagraph id="H6AD8E4BD442F416D9130868F74EA5CA"><enum>(A)</enum><text>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;</text></subparagraph> <subparagraph id="HED2B303D4604005E5A3A6AB1E2B5AC0"><enum>(B)</enum><text>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;</text></subparagraph> <subparagraph id="HB35203F14A2FB5368E29F49C2EAAEEB"><enum>(C)</enum><text>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;</text></subparagraph> <subparagraph id="H2D7A13694AF8907C710542B5806C6FF"><enum>(D)</enum><text>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</text></subparagraph> <subparagraph id="H1F3C0352431C8F023C5546887B22EAC"><enum>(E)</enum><text>the company has established and enforces a code of ethics, as required by paragraph (2).</text></subparagraph></paragraph></subsection><after-quoted-block>.</after-quoted-block></quoted-block></subsection> <subsection id="H0179B2EF4C9CC68A8AE019979069F36"><enum>(b)</enum><header>Whistleblower protection</header><text><external-xref legal-doc="usc" parsable-cite="usc/18/1514A">Section 1514A(a)</external-xref> of title 18, United States Code, is amended by striking the matter preceding paragraph (1) and inserting the following:</text> <quoted-block id="HD0E53CC04478164ADE82EB9EC19E4E5"> <subsection id="H1378F361472F877991CA22AACFC804C"><enum>(a)</enum><header>Whistleblower protection for employees of publicly traded companies and registered investment companies</header><text>No company with a class of securities registered under section 12 of the <act-name parsable-cite="SEA34">Securities Exchange Act of 1934</act-name> (<external-xref legal-doc="usc" parsable-cite="usc/15/78l">15 U.S.C. 78l</external-xref>), or that is required to file reports under section 15(d) of the Securities and Exchange Act of 1934 (<external-xref legal-doc="usc" parsable-cite="usc/15/78o">15 U.S.C. 78o(d)</external-xref>), or that is an investment adviser, principal underwriter, or significant service provider (as such terms are defined under section 2(a) of the <act-name parsable-cite="ICA40">Investment Company Act of 1940</act-name> (<external-xref legal-doc="usc" parsable-cite="usc/15/80a-2">15 U.S.C. 80a–2(a)</external-xref>) of an investment company which is registered under section 8 of the <act-name parsable-cite="ICA40">Investment Company Act of 1940</act-name>, 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—</text></subsection><after-quoted-block>.</after-quoted-block></quoted-block></subsection></section> <enum>II</enum><header>Fund transparency</header> <section id="H102DF9CA43F74F0E372F08A9CC45E74"><enum>201.</enum><header>Cost consolidation and clarity</header> <subsection id="HB378597E47C7C5C4E98CFF871CDAB91"><enum>(a)</enum><header>Expense ratio computation</header> <paragraph id="H85FD88ED41775324ED7582A9D71846D"><enum>(1)</enum><header>In general</header><text>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.</text></paragraph> <paragraph id="H82991CB54C781D0370624AB502635CB"><enum>(2)</enum><header>Separate disclosures</header><text>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.</text></paragraph></subsection> <subsection id="H1F377ED948154E4236131392B36DE20"><enum>(b)</enum><header>Transaction cost ratio</header><text>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.</text></subsection> <subsection id="H82F76528481E2FFF82FFDB92E4C0000"><enum>(c)</enum><header>Disclosure of expense ratio and transaction cost ratio</header><text>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—</text> <paragraph id="HC96CD7284288B51ADFE93A939B43ABE"><enum>(1)</enum><text>each annual report of the registered investment company;</text></paragraph> <paragraph id="H9F94D4104A8334ECBE72E592D4C555E"><enum>(2)</enum><text>any prospectus of the registered investment company, as part of a fee table; and</text></paragraph> <paragraph id="H7B40ADD449BFDCF3BDAB679D00DF61F"><enum>(3)</enum><text>such other filings with the Commission as the Commission determines appropriate.</text></paragraph></subsection> <subsection id="H0C2CC6834525CC35B63CA99F0857F8F"><enum>(d)</enum><header>Actual cost disclosure</header><text>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.</text></subsection> <subsection id="HABF42CA34AE7F295FD26C99C41FCFB5"><enum>(e)</enum><header>Definition of fees and expenses</header> <paragraph id="HA30296C047FC681498E18EBFAA3EB6A"><enum>(1)</enum><header>In general</header><text>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.</text></paragraph> <paragraph id="HDFC41EF2483DBDA1B450AEA9FA90A00"><enum>(2)</enum><header>New fees and expenses</header><text>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—</text> <subparagraph id="HE5056DFB4946800E3994588DF65D99B"><enum>(A)</enum><text>a particular registered investment company;</text></subparagraph> <subparagraph id="H64FF63C0457496C2AB5027AF71D078F"><enum>(B)</enum><text>specific types or categories of registered investment companies; or</text></subparagraph> <subparagraph id="H4C952B164E66CBDD51BB5D8000A0F7D"><enum>(C)</enum><text>registered investment companies in general.</text></subparagraph></paragraph></subsection> <subsection id="H316312234C8F30284677BAAECAEB4A5"><enum>(f)</enum><header>Cost structures</header><text>The Commission shall promulgate such rules or regulations as are necessary—</text> <paragraph id="H416CC97F45FA0FBFB481A1B574CA05E"><enum>(1)</enum><text>to promote the standardization and simplification of the disclosure of the cost structures of registered investment companies; and</text></paragraph> <paragraph id="HF64422624DC5EFEEF0D9C1B12BE4FBD"><enum>(2)</enum><text>to ensure that the shareholders of such registered investment companies receive all material information regarding such costs—</text> <subparagraph id="H212C17EF4200364625F493A2BABECFA"><enum>(A)</enum><text>in a nonmisleading manner; and</text></subparagraph> <subparagraph id="HD6EEB37F41CFC471F35FCB91FAB8AF0"><enum>(B)</enum><text>in such form and prominence as to facilitate, to the extent practicable, ease of comprehension and comparison of such costs.</text></subparagraph></paragraph></subsection> <subsection id="H253B40614472FA6879F6A9A69F75C26"><enum>(g)</enum><header>Descriptions of fees, expenses, and costs</header><text>The Commission shall, by rule, require—</text> <paragraph id="H76C291AC4D115C96C834C1BFBAE195B"><enum>(1)</enum><text>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;</text></paragraph> <paragraph id="H6CB6F81B40D19D7AF7841097DB11E5B"><enum>(2)</enum><text>a clear definition of each such fee, expense, or cost; and</text></paragraph> <paragraph id="HA197EE6E46753D0C6ACDF2B71B15C2C"><enum>(3)</enum><text>information as to where shareholders may find out more information concerning such fees, expenses, or costs.</text></paragraph></subsection></section> <section id="H8D31FD3C442265D0A33E1381F602E4C"><enum>202.</enum><header>Advisor compensation and ownership of fund shares</header> <subsection id="HDA5B08404A81EFD176AEE89AA2AAEB5"><enum>(a)</enum><header>Compensation of investment adviser</header><text>The Commission shall, by rule, require—</text> <paragraph id="HA40C36EA4B2AC430A776CB9EEF9B2D3"><enum>(1)</enum><text>the disclosure to the shareholders of a registered investment company of—</text> <subparagraph id="H6708ADB44292FD2FC65FF489D6B9256"><enum>(A)</enum><text>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</text></subparagraph> <subparagraph id="H9927A9C1456AF84B47388BAB05F5DB3"><enum>(B)</enum><text>the ownership interest in such company of the portfolio manager or portfolio management team; and</text></subparagraph></paragraph> <paragraph id="H3F7D32984FB52C5581012182AAE3D5F"><enum>(2)</enum><text>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.</text></paragraph></subsection> <subsection id="HE8E70CF24EB92D0A801DBAA1F06F800"><enum>(b)</enum><header>Form of disclosure</header><text>The disclosures required under subparagraphs (A) and (B) of subsection (a)(1) shall be made by a registered investment company in—</text> <paragraph id="H479662E84FAAFADD223D878F654BA90"><enum>(1)</enum><text>the registration statement of the company; and</text></paragraph> <paragraph id="H525AC4F0485811EDAEF160869777E5F"><enum>(2)</enum><text>any other filings with the Commission that the Commission determines appropriate.</text></paragraph></subsection></section> <section id="HFA92BCDD45AF3562E2A0FCA4D2F3E8D"><enum>203.</enum><header>Point of sale and additional disclosure of broker compensation</header><text display-inline="no-display-inline">Section 15(b) of the <act-name parsable-cite="SEA34">Securities Exchange Act of 1934</act-name> (<external-xref legal-doc="usc" parsable-cite="usc/15/78o">15 U.S.C. 78o(b)</external-xref>) is amended by adding at the end the following:</text> <quoted-block act-name="Securities Exchange Act of 1934" id="H9BADA17A4E1D2947E9AAFE83A575E00"> <paragraph id="H6427435846867341195E2684E67450E"><enum>(11)</enum><header>Broker disclosures in mutual fund transactions</header> <subparagraph id="H115136DB44AF04F48B4E489F33F3C4E"><enum>(A)</enum><header>In general</header><text>Each broker shall disclose in writing to each person that purchases the shares of an investment company registered under section 8 of the <act-name parsable-cite="ICA40">Investment Company Act of 1940</act-name> (<external-xref legal-doc="usc" parsable-cite="usc/15/80a-8">15 U.S.C. 80a–8</external-xref>)—</text> <clause id="H3C265F304EFD510B88CD6794EDCFA8D"><enum>(i)</enum><text>the source and amount of any compensation received or to be received by the broker in connection with such transaction; and</text></clause> <clause id="H0D211A3A4FF7658DDE5D9587C92E4D6"><enum>(ii)</enum><text>such other information as the Commission determines appropriate.</text></clause></subparagraph> <subparagraph id="H96A6C05B4341F7BCFCA435928CA8F00"><enum>(B)</enum><header>Timing of disclosure</header><text>The disclosures required under subparagraph (A) shall be made at or before the time of the purchase transaction.</text></subparagraph> <subparagraph id="H11EA99414B000032CDAAB99CAB8EFD6"><enum>(C)</enum><header>Limitation</header><text>The disclosures required under subparagraph (A) may not be made exclusively in—</text> <clause id="H8D02B809477A1AD9AC0DDF9DF1CADFE"><enum>(i)</enum><text>a registration statement or prospectus of the registered investment company; or</text></clause> <clause id="H330D9890428DF7C8E7EF068D7E32E8E"><enum>(ii)</enum><text>any other filing of a registered investment company with the Commission.</text></clause></subparagraph></paragraph><after-quoted-block>.</after-quoted-block></quoted-block></section> <section id="HE9AC3AA2464865500CDB5A965D168FF"><enum>204.</enum><header>Breakpoint discounts</header><text display-inline="no-display-inline">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.</text></section> <section id="H46F8547E459DDD2A29CF15955C81DE5"><enum>205.</enum><header>Portfolio turnover ratio</header><text display-inline="no-display-inline">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.</text></section> <section id="H25DAC87D4D9F82FD9AF349889F1CD84"><enum>206.</enum><header>Proxy voting policies and record</header><text display-inline="no-display-inline">Section 30 of the <act-name parsable-cite="ICA40">Investment Company Act of 1940</act-name> (<external-xref legal-doc="usc" parsable-cite="usc/15/80a-29">15 U.S.C. 80a–29</external-xref>) is amended by adding at the end the following:</text> <quoted-block act-name="Investment Company Act of 1940" id="H204CF2FC434A621D1093F79EA157DEA"> <subsection id="HC96D334E45C91D7C5B61D29B8179BC0"><enum>(k)</enum><header>Proxy voting disclosure</header> <paragraph id="H1C34A5704107C874A1269C938234B44"><enum>(1)</enum><header>In general</header><text>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.</text></paragraph> <paragraph id="HB5BCC23E4A4BB27FC00BC797DCFC32F"><enum>(2)</enum><header>Notice in financial statements</header><text>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—</text> <subparagraph id="H72F156C349C2C514887F4C8600A6EDD"><enum>(A)</enum><text>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</text></subparagraph> <subparagraph id="H8D2FADE54592F1FB6AEAFF8AABF4B24"><enum>(B)</enum><text>on the website of the Commission.</text></subparagraph></paragraph></subsection><after-quoted-block>.</after-quoted-block></quoted-block></section> <section id="HAE6BF376496816C1966561AB5F00CCA"><enum>207.</enum><header>Customer information from account intermediaries</header> <subsection id="HADD135C349A566C8FCB704A9DB9B88F"><enum>(a)</enum><header>In general</header><text>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.</text></subsection> <subsection id="HE043132A47754C96B782A8B1D9D268D"><enum>(b)</enum><header>Requirements</header><text>The information provided by a registered investment company under subsection (a) shall include, at a minimum—</text> <paragraph id="HBBD488C04C569D139020FFBFD4DE96A"><enum>(1)</enum><text>the name under which the account is opened with the intermediary;</text></paragraph> <paragraph id="H83836F064C940F45C59CC9B745EFDFA"><enum>(2)</enum><text>the taxpayer identification number of such person;</text></paragraph> <paragraph id="H34A7CB4446C3F64319464088AE5C12E"><enum>(3)</enum><text>the mailing address of such person; and</text></paragraph> <paragraph id="H9512CB214359FAE5908661AC007FEAE"><enum>(4)</enum><text>individual transaction data for all purchases, redemptions, transfers, and exchanges by or on behalf of such person.</text></paragraph></subsection> <subsection id="H21F55DDA408EF8DE239ACC8AFBEFCA2"><enum>(c)</enum><header>Privacy of information</header><text>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.</text></subsection></section> <section id="HFF85766D4E1A83E8714F4A900000FAD"><enum>208.</enum><header>Advertising</header> <subsection id="HDAB168394C7399EE464232818CD8E00"><enum>(a)</enum><header>Performance advertising</header><text>The Commission shall promulgate such rules as the Commission determines necessary with respect to the advertising of a registered investment company regarding—</text> <paragraph id="HB384E8334F25D546D25B14A7E40567D"><enum>(1)</enum><text>unrepresentative short-term performance;</text></paragraph> <paragraph id="HD4EEECF2475505737AA44BAAB9B2B41"><enum>(2)</enum><text>performance based upon an undisclosed or improbable event; and</text></paragraph> <paragraph id="HAF07A9EF44F07F4DF17F73B53308DCA"><enum>(3)</enum><text>performance based upon incomplete or misleading data.</text></paragraph></subsection> <subsection id="HC2CC14A04CF10E7DDA18548AFDFAF93"><enum>(b)</enum><header>Dollar and time-weighted returns</header> <paragraph id="H8BEE07B04B8DB9D62F0D35AB57DA842"><enum>(1)</enum><header>In general</header><text>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—</text> <subparagraph id="H346DDBA94DE7A9901AF1A8A38CBC092"><enum>(A)</enum><text>the preceding fiscal year;</text></subparagraph> <subparagraph id="H772B9E2045711A202B9B47A3DCD1B8C"><enum>(B)</enum><text>the preceding 5 fiscal years;</text></subparagraph> <subparagraph id="HA899941C4BE6D91ED828759DC5E5888"><enum>(C)</enum><text>the preceding 10 fiscal years; and</text></subparagraph> <subparagraph id="HE6D97F1F486F6F4D118356A55E4EE40"><enum>(D)</enum><text>the life of the company.</text></subparagraph></paragraph> <paragraph id="H7C532F954715D6BBD09AF38588E1098"><enum>(2)</enum><header>Exception</header><text>The Commission may omit or require additional disclosures required under paragraph (1) for such time periods as the Commission determines necessary.</text></paragraph> <paragraph id="H72B42D11401A1CDE83BB3B99B7D7333"><enum>(3)</enum><header>Commission use of benchmarks</header><text>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.</text></paragraph></subsection> <subsection id="HA3900E5F44AB3C029185DE92A6BFA8D"><enum>(c)</enum><header>Subsidized yields</header><text>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.</text></subsection></section> <enum>III</enum><header>Fund regulation and oversight</header> <section id="H49A03FC04CC5E7786CBE018D826DBA3"><enum>301.</enum><header>Prohibition of asset-based distribution expenses</header> <subsection id="HA897AB69403EFC00A1A6F3B600E007C"><enum>(a)</enum><header>Repeal of rule 12b–1</header> <paragraph id="HC10E64254A16AC635E32BCA0F876148"><enum>(1)</enum><header>In general</header><text>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 <act-name parsable-cite="ICA40">Investment Company Act of 1940</act-name> (<external-xref legal-doc="usc" parsable-cite="usc/15/80a-12">15 U.S.C. 80a–12</external-xref>), is repealed, and shall have no force or effect.</text></paragraph> <paragraph id="H1113D87241CAE1B00962B2B7CE1E2E4"><enum>(2)</enum><header>Preservation of actions</header><text>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).</text></paragraph></subsection> <subsection id="HA7F358874C717257BDD62698DF99E54"><enum>(b)</enum><header>Payment of distribution expenses from management fee</header><text>Section 12 of the <act-name parsable-cite="ICA40">Investment Company Act of 1940</act-name> (<external-xref legal-doc="usc" parsable-cite="usc/15/80a-12">15 U.S.C. 80a–12</external-xref>) is amended by adding at the end the following:</text> <quoted-block act-name="Investment Company Act of 1940" id="H152917C542A7562C892AF7BAE8BD3D5"> <subsection id="H4EAA5C6E40045031062D389765EDD5D"><enum>(h)</enum><header>Payment of distribution expenses</header><text>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.</text></subsection><after-quoted-block>.</after-quoted-block></quoted-block></subsection> <subsection id="HF2D4DCFA40E82B88CE5B578DFB6F8FA"><enum>(c)</enum><header>Sums expended promoting sale of securities</header><text>The Commission shall, by rule—</text> <paragraph id="H00768F9D427281A91E15E9A5CCF82E0"><enum>(1)</enum><text>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;</text></paragraph> <paragraph id="H4F40D8714478CD5D96B84D98AD5B0B7"><enum>(2)</enum><text>require that such sums be accounted for and identified in the expense ratio of any such company; and</text></paragraph> <paragraph id="H464BE9D7465B8B2CBAE3A3A9AF82CA3"><enum>(3)</enum><text>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.</text></paragraph></subsection> <subsection id="H69FD0D8D4DD5742B39C508A82CA900B"><enum>(d)</enum><header>Prohibition of asset-based fees</header><text>Section 12 of the <act-name parsable-cite="ICA40">Investment Company Act of 1940</act-name> (<external-xref legal-doc="usc" parsable-cite="usc/15/80a-12">15 U.S.C. 80a–12</external-xref>), as amended by subsection (a), is amended by adding at the end the following:</text> <quoted-block act-name="Investment Company Act of 1940" id="H1FD968E749A18D8ABD504683BEFEE00"> <subsection id="H946FE5064F4C67A0B86C7C8F927184E"><enum>(i)</enum><header>Asset-based fees</header> <paragraph id="H226CAF2940FCE39E722E3D8B79AE8FA"><enum>(1)</enum><header>In general</header><text>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.</text></paragraph> <paragraph id="H29DE900B4F9EE1B32D34E5AF87B6807"><enum>(2)</enum><header>Definition of asset-based fees</header><text>The Commission shall, by rule, define the term <term>asset-based fees</term> for purposes of this subsection.</text></paragraph></subsection><after-quoted-block>.</after-quoted-block></quoted-block></subsection></section> <section id="HC15FB71B424F3A737B7524B853AA2B1"><enum>302.</enum><header>Prohibition on revenue sharing, directed brokerage, and soft dollar arrangements</header> <subsection id="H9AA0DC374DBDBE12FD773299A8B42D9"><enum>(a)</enum><header>In general</header><text>The <act-name parsable-cite="ICA40">Investment Company Act of 1940</act-name> (<external-xref legal-doc="usc" parsable-cite="usc/15/80a-1">15 U.S.C. 80a–1 et seq.</external-xref>) is amended by inserting after section 12 the following:</text> <quoted-block act-name="Investment Company Act of 1940" id="H24C68CC8432860807FF6B1A9AE5551E"> <section id="HC5D963CA4701425F6849289FD6CD35C"><enum>12A.</enum><header>Prohibition on revenue sharing, directed brokerage, and soft dollar arrangements</header> <subsection id="HFBEF9C42456FEAB1FEC6ADAAB3200D8"><enum>(a)</enum><header>Revenue sharing arrangements</header><text>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.</text></subsection> <subsection id="H2895543B4F8B836DFE9F98B5F378245"><enum>(b)</enum><header>Directed brokerage arrangements</header><text>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.</text></subsection> <subsection id="H4EC7520C4CBCCFB6C0822E92E7695B4"><enum>(c)</enum><header>Soft-dollar arrangements</header><text>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.</text></subsection> <subsection id="HAD4D9CFB48D48B784759FE8D113999F"><enum>(d)</enum><header>Regulations respecting Section 28(E) of the <act-name parsable-cite="SEA34">Securities Exchange Act of 1934</act-name></header><text>The Commission shall, by rule, narrow the soft-dollar safe harbor under section 28(e) of the <act-name parsable-cite="SEA34">Securities Exchange Act of 1934</act-name> (<external-xref legal-doc="usc" parsable-cite="usc/15/78bb">15 U.S.C. 78bb(e)(1)</external-xref>) 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.</text></subsection> <subsection id="H60437B8C4F96D9A44518F0B2E1B414C"><enum>(e)</enum><header>Definitions</header> <paragraph id="HFF87500B41694DCD159BE0BED36DACC"><enum>(1)</enum><header>In general</header><text>In this section—</text> <subparagraph id="H752CFE6B40ADC5FE3327B994C2DDC46"><enum>(A)</enum><text>the term <term>directed brokerage arrangement</term> 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;</text></subparagraph> <subparagraph id="H6630DED84E1E9A9DD30086BF3110FFD"><enum>(B)</enum><text>the term <term>revenue sharing arrangement</term> 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;</text></subparagraph> <subparagraph id="H6E7ACBFB402E8B57890A48B83FCFAC9"><enum>(C)</enum><text>the term <term>soft-dollar arrangement</term> 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</text></subparagraph> <subparagraph id="H9CBC64164473364AD7F48B9C25986DC"><enum>(D)</enum><text>the term <term>trade executions</term> has the meaning given that term by the Commission, by rule;</text></subparagraph></paragraph> <paragraph id="H87F69C4D4515C4A75074E0BBEAE08DE"><enum>(2)</enum><header>Regulations</header><text>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—</text> <subparagraph id="H2C88CD2B43744FABCB406F93FEFD180"><enum>(A)</enum><text>protecting the best interests of shareholders of a registered investment company;</text></subparagraph> <subparagraph id="H68C5C11A4754238B03211F82FC52EB3"><enum>(B)</enum><text>minimizing or eliminating conflicts with the best interests of shareholders of a registered investment company;</text></subparagraph> <subparagraph id="H99AE107C410CD15C6A2CE2BAFA53099"><enum>(C)</enum><text>enhancing market negotiation for and price competition in trade execution services, and products and services previously obtained under arrangements prohibited by this section;</text></subparagraph> <subparagraph id="H891117AE4907ACAF9DC755A1E0F2F68"><enum>(D)</enum><text>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</text></subparagraph> <subparagraph id="HCAB5459C49C18A55465522997788DDE"><enum>(E)</enum><text>providing reasonable safe harbors for conduct otherwise consistent with such purposes.</text></subparagraph></paragraph></subsection></section><after-quoted-block>.</after-quoted-block></quoted-block></subsection> <subsection id="H9C2E08444E0598E36B6DC7BCB617E1E"><enum>(b)</enum><header>Technical and conforming amendment</header><text>Section 28(e)(1) of the <act-name parsable-cite="SEA34">Securities Exchange Act of 1934</act-name> (<external-xref legal-doc="usc" parsable-cite="usc/15/78bb">15 U.S.C. 78bb(e)(1)</external-xref>) is amended by striking <quote>This section is exclusive</quote> and inserting <quote>Except as provided under section 12A of the <act-name parsable-cite="ICA40">Investment Company Act of 1940</act-name>, this section is exclusive</quote>.</text></subsection></section> <section id="HF7797F3345254514978EFC8ABC6ED4D"><enum>303.</enum><header>Market timing</header> <subsection id="HA8711604497EF7DB10967382505DCCC"><enum>(a)</enum><header>In general</header><text>The Commission shall, by rule, require—</text> <paragraph id="H1744D9F24B6CA8AA6439B5B0D7AC800"><enum>(1)</enum><text>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</text></paragraph> <paragraph id="HB19FFB6B4C3C9342134A5E8DF99AA6F"><enum>(2)</enum><text>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.</text></paragraph></subsection> <subsection id="H80F6F40847A7DEF4BA1E6BB84293A5D"><enum>(b)</enum><header>Fundamental investment policy</header><text>The policies required to be disclosed under paragraph (1) shall be deemed <quote>fundamental investment policies</quote> for purposes of sections 8(b)(3) and 13(a)(3) of the <act-name parsable-cite="ICA40">Investment Company Act of 1940</act-name> (<external-xref legal-doc="usc" parsable-cite="usc/15/80a-8">15 U.S.C. 80a–8(b)(3)</external-xref> and 80a–13(a)(3)).</text></subsection></section> <section id="HEC9D591A4174B5D9568BB1B94DE0012"><enum>304.</enum><header>Elimination of stale prices</header> <subsection id="H12CBEEFB4C71819DEB9A1DA01380DDA"><enum>(a)</enum><header>In general</header><text>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 <act-name parsable-cite="ICA40">Investment Company Act of 1940</act-name>, 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.</text></subsection> <subsection id="HACA39F9C4675056B422A86AC64B8885"><enum>(b)</enum><header>Content</header><text>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.</text></subsection></section> <section id="H900D7090442C6373C9D7B281C4F4EC6"><enum>305.</enum><header>Prohibition of short term trading; mandatory redemption fees</header> <subsection id="HE3916D0B48C269939AC3FCA359DCB95"><enum>(a)</enum><header>Short-term trading prohibited</header><text>Section 17 of the <act-name parsable-cite="ICA40">Investment Company Act of 1940</act-name> (<external-xref legal-doc="usc" parsable-cite="usc/15/80a-17">15 U.S.C. 80a–17</external-xref>) is amended by adding at the end the following:</text> <quoted-block act-name="Investment Company Act of 1940" id="HB86D6D894548C01E0CE26CB77CAFE2E"> <subsection id="HE91B37CF44DDB904CD9505B8C4CC870"><enum>(k)</enum><header>Short-term trading prohibited</header> <paragraph id="H7C58FE3242CD7AE3CD3112A14E75C8D"><enum>(1)</enum><header>Prohibition</header><text>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.</text></paragraph> <paragraph id="HF9CA46234125DA7DF56A8A91383252A"><enum>(2)</enum><header>Limitation</header><text>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.</text></paragraph> <paragraph id="H882DE44147D9607B1D35C7B617C60F5"><enum>(3)</enum><header>Definition</header><text>For purposes of this subsection, the term <term>short-term transaction</term> has the meaning given that term by the Commission, by rule.</text></paragraph></subsection><after-quoted-block>.</after-quoted-block></quoted-block></subsection> <subsection id="H082EC5CB470A22B9B009E7BDE8E4C97"><enum>(b)</enum><header>Mandatory redemption fees</header><text>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.</text></subsection> <subsection id="H4B3F6B6648EBDBA948856D9E331F11B"><enum>(c)</enum><header>Increased redemption fees permitted for short-term trading</header><text>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.</text></subsection> <subsection id="H4F0778D646FE16CB04C141BAF073670"><enum>(d)</enum><header>Deadline for rules</header><text>The Commission shall prescribe rules to implement section 17(k) of the <act-name parsable-cite="ICA40">Investment Company Act of 1940</act-name>, as added by subsection (a) of this section, not later than 90 days after the date of enactment of this Act.</text></subsection></section> <section id="H2B09BD0640BD182298EE10B2ACCC5DB"><enum>306.</enum><header>Prevention of after-hours trading</header> <subsection id="H47EB40AA46060C91A2518C9D19A7DCC"><enum>(a)</enum><header>Additional rules required</header><text>The Commission shall issue rules to prevent transactions in the securities of any registered investment company in violation of section 22 of the <act-name parsable-cite="ICA40">Investment Company Act of 1940</act-name> (<external-xref legal-doc="usc" parsable-cite="usc/15/80a-22">15 U.S.C. 80a–22</external-xref>), 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.</text></subsection> <subsection id="H97D41D6B46202BB53045CAB998EEA39"><enum>(b)</enum><header>Trades collected by intermediaries</header><text>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.</text></subsection></section> <section id="H54DAB52341694E59DD317682A99DA0A"><enum>307.</enum><header>Ban on joint management of mutual funds and hedge funds</header> <subsection id="H94A6484544AA401CE879C8B26916BF4"><enum>(a)</enum><header>Amendment</header><text>Section 15 of the <act-name parsable-cite="ICA40">Investment Company Act of 1940</act-name> (<external-xref legal-doc="usc" parsable-cite="usc/15/80a-15">15 U.S.C. 80a–15</external-xref>) is amended by adding at the end the following:</text> <quoted-block act-name="Investment Company Act of 1940" id="HD2289B1742DB1207AFF4EEAE215EB8F"> <subsection id="H792C95624DA6CE130E2DA2A3E6B3CB9"><enum>(h)</enum><header>Ban on joint management of mutual funds and hedge funds</header> <paragraph id="H689FAB1D429990E7D42FA0A21808A57"><enum>(1)</enum><header>Prohibition of joint management</header><text>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.</text></paragraph> <paragraph id="H019FD25A484F75263DA31D8F1655D1B"><enum>(2)</enum><header>Exceptions</header><text>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—</text> <subparagraph id="HE74CAEE242C3F9A3781916B755FFD5F"><enum>(A)</enum><text>enhanced disclosure by the registered open-end investment company to shareholders of any conflicts of interest raised by such joint management; and</text></subparagraph> <subparagraph id="HBAAA6CC145260A8DD408D99D1E1EC14"><enum>(B)</enum><text>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.</text></subparagraph></paragraph> <paragraph id="H5FE9A97847C090456E7BDB9562FD5CB"><enum>(3)</enum><header>Definition</header><text>For purposes of this subsection, the term <term>portfolio manager</term> 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.</text></paragraph></subsection><after-quoted-block>.</after-quoted-block></quoted-block></subsection> <subsection id="HC567E5404703E82FEBA494819311B49"><enum>(b)</enum><header>Deadline for rules</header><text>The Commission shall prescribe rules to implement section 15(h) of the <act-name parsable-cite="ICA40">Investment Company Act of 1940</act-name>, as added by subsection (a) of this section, not later than 90 days after the date of enactment of this Act.</text></subsection></section> <section id="HEEAF844C4F586A079927FA94C42EF31"><enum>308.</enum><header>Selective disclosures</header> <subsection id="H92E1F50642DAECD7E65BEBAB98381CC"><enum>(a)</enum><header>In general</header><text>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.</text></subsection> <subsection id="HC34B87FF4ACD6A97F872C68B8742E9D"><enum>(b)</enum><header>Requirements</header><text>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 <act-name parsable-cite="SEA34">Securities Exchange Act of 1934</act-name> under the rules of the Commission.</text></subsection></section> <enum>IV</enum><header>Studies</header> <section id="HAD715F3349B6647A4819228ED4AD1CD"><enum>401.</enum><header>Study of adviser conflict of interest</header> <subsection id="H3A2EEFB640A4F1FA17659BB3CE8A71D"><enum>(a)</enum><header>In general</header><text>The Commission shall conduct a study of—</text> <paragraph id="HFAD0192F43E097689AF0CA81E783C7F"><enum>(1)</enum><text>the consequences of the inherent conflicts of interest confronting investment advisers employed by registered investment companies;</text></paragraph> <paragraph id="H86EFDB1B4C212D23C730049BCCE4BD6"><enum>(2)</enum><text>the extent to which legislative or regulatory measures could minimize such conflicts of interest; and</text></paragraph> <paragraph id="H8219A972423AF33F8F1C63AC16DF73C"><enum>(3)</enum><text>the extent to which legislative or regulatory measures could incentivize internal management of a registered investment company.</text></paragraph></subsection> <subsection id="H0AA01DDF4E376E2B95EE3BAEBF22E82"><enum>(b)</enum><header>Report</header><text>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—</text> <paragraph id="H5B9FCC274699B870404AA4A74FEA23F"><enum>(1)</enum><text>the Committee on Banking, Housing, and Urban Affairs of the Senate; and</text></paragraph> <paragraph id="H772F3D2D4E1F82F16AC1208E2823C2C"><enum>(2)</enum><text>the Committee on Financial Services of the House of Representatives.</text></paragraph></subsection></section> <section id="H4DA7EF0F4ED81EF0CBCC09B24611B07"><enum>402.</enum><header>Study of coordination of enforcement efforts</header> <subsection id="H7FFAEAC44D1FE50F77B87CA91198CD1"><enum>(a)</enum><header>In general</header><text>The Comptroller General of the United States, with the cooperation of the Commission, shall conduct a study of the coordination of enforcement efforts between—</text> <paragraph id="H2AE799934D3C175400A83F91D7072C3"><enum>(1)</enum><text>the headquarters of the Commission;</text></paragraph> <paragraph id="H5CFA2C3A4C1F010A6D0B93916188EB6"><enum>(2)</enum><text>the regional offices of the Commission; and</text></paragraph> <paragraph id="H3BC9704249792F1D82A08CA8DE00B2D"><enum>(3)</enum><text>State regulatory and law enforcement agencies.</text></paragraph></subsection> <subsection id="H525C02DF42562E2B5D94C4ACF51AD4D"><enum>(b)</enum><header>Report</header><text>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—</text> <paragraph id="HFB151B5F40C1D1BC4A29949200CD6B4"><enum>(1)</enum><text>the Committee on Banking, Housing, and Urban Affairs of the Senate; and</text></paragraph> <paragraph id="H525EF5804A48C380DC529BB4E8C3D2A"><enum>(2)</enum><text>the Committee on Financial Services of the House of Representatives.</text></paragraph></subsection></section> <section id="HBAA40FCB4B76E3ACA9488D9926A0500"><enum>403.</enum><header>Study of Commission organizational structure</header> <subsection id="H1022844F4CE4C0BEB238C2B4B54EA00"><enum>(a)</enum><header>In general</header><text>The Comptroller General of the United States, with the cooperation of the Commission, shall conduct a study of—</text> <paragraph id="H92AE6D764E8076FFEB64068A00A3DF7"><enum>(1)</enum><text>the current organizational structure of the Commission with respect to the regulation of investment companies;</text></paragraph> <paragraph id="HB86B72DE4F2CB4B39567B8B7BB73B05"><enum>(2)</enum><text>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;</text></paragraph> <paragraph id="HE5394C5B41DE8F7161CEE2A7FFB486E"><enum>(3)</enum><text>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</text></paragraph> <paragraph id="HC802812543F20080451FDD88A01BC6B"><enum>(4)</enum><text>whether a separate regulatory entity would improve or impair effective oversight.</text></paragraph></subsection> <subsection id="H6450A8B0469B1675965CC089266EB33"><enum>(b)</enum><header>Report</header><text>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—</text> <paragraph id="HB50CC4C94A2786E11E8285B7DDE4C43"><enum>(1)</enum><text>the Committee on Banking, Housing, and Urban Affairs of the Senate; and</text></paragraph> <paragraph id="H02BB516943570B33217909AD8C8857B"><enum>(2)</enum><text>the Committee on Financial Services of the House of Representatives.</text></paragraph></subsection></section> <section id="H6A8C4FD34C6492CF23A90C85A97D60B"><enum>404.</enum><header>Trends in arbitration clauses</header> <subsection id="HA8E1814C4207CD1C37AEBA946BB7007"><enum>(a)</enum><header>In general</header><text>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.</text></subsection> <subsection id="HCEFD9B654EEEF1D6A984BF8E92E0D00"><enum>(b)</enum><header>Report</header><text>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—</text> <paragraph id="H21D20B8D41D579A2B8A6BFA1E39791B"><enum>(1)</enum><text>the Committee on Banking, Housing, and Urban Affairs of the Senate; and</text></paragraph> <paragraph id="H048013DE4B1C603E0B58B8B9F3E9B1F"><enum>(2)</enum><text>the Committee on Financial Services of the House of Representatives.</text></paragraph></subsection></section> <section id="H3CDD8E874ADEB55106E11A9D59FFBCF"><enum>405.</enum><header>Hedge fund regulation</header> <subsection id="HC9E0B89E48D0D414283C1E898C7F4EB"><enum>(a)</enum><header>In general</header><text>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.</text></subsection> <subsection id="H34583E8E47B9FCA167F00F83D02CD00"><enum>(b)</enum><header>Report</header><text>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—</text> <paragraph id="H6C1F933344028C59118F05A433BBA07"><enum>(1)</enum><text>the Committee on Banking, Housing, and Urban Affairs of the Senate; and</text></paragraph> <paragraph id="H3AB692764C58ED643818A3A4C017A6D"><enum>(2)</enum><text>the Committee on Financial Services of the House of Representatives.</text></paragraph></subsection></section> <section id="H50D3BC5C44D1FE4AFA8E49BD650033D"><enum>406.</enum><header>Investor education and the Internet</header> <subsection id="HA71A8BB84C7625720E9B4B8A5B97F57"><enum>(a)</enum><header>In general</header><text>The Commission shall conduct a study of—</text> <paragraph id="H9D8317F945AC22D137FF8094772CBA8"><enum>(1)</enum><text>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;</text></paragraph> <paragraph id="HFF6030A5433E3414FA93868469F924D"><enum>(2)</enum><text>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</text></paragraph> <paragraph id="HF7C4CC8749C54C4A124DFD878D32D42"><enum>(3)</enum><text>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.</text></paragraph></subsection> <subsection id="HCEF0299F476D188AE27AB986F6CEDA4"><enum>(b)</enum><header>Report</header><text>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—</text> <paragraph id="H91C1726345FA7BE939605D874EDC26C"><enum>(1)</enum><text>the Committee on Banking, Housing, and Urban Affairs of the Senate; and</text></paragraph> <paragraph id="H9AE2BBDA45AE121F910029A2C731CE6"><enum>(2)</enum><text>the Committee on Financial Services of the House of Representatives.</text></paragraph></subsection></section>