[Congressional Bills 108th Congress]
[From the U.S. Government Publishing Office]
[S. 1958 Introduced in Senate (IS)]







108th CONGRESS
  1st Session
                                S. 1958

To prevent the practice of late trading by mutual funds, and for other 
                               purposes.


_______________________________________________________________________


                   IN THE SENATE OF THE UNITED STATES

                           November 25, 2003

 Mr. Daschle (for himself, Mr. Kerry, and Mr. Kennedy) introduced the 
 following bill; which was read twice and referred to the Committee on 
                  Banking, Housing, and Urban Affairs

_______________________________________________________________________

                                 A BILL


 
To prevent the practice of late trading by mutual funds, and for other 
                               purposes.

    Be it enacted by the Senate and House of Representatives of the 
United States of America in Congress assembled,

SEC. 1. SHORT TITLE; TABLE OF CONTENTS.

    (a) Short Title.--This Act may be cited as the ``Mutual Fund 
Investor Protection Act of 2003''.
    (b) Table of Contents.--The table of contents for this Act is as 
follows:

Sec. 1. Short title; table of contents.
Sec. 2. Definitions.
                   TITLE I--REGULATORY IMPROVEMENTS.

Sec. 101. Regulatory improvements.
                 TITLE II--MUTUAL FUND OVERSIGHT BOARD.

Sec. 201. Establishment; administrative provisions.
Sec. 202. Registration with the board.
Sec. 203. Auditing, quality control, and independence standards and 
                            rules.
Sec. 204. Inspections of registered mutual funds.
Sec. 205. Investigations and disciplinary proceedings.
Sec. 206. Commission oversight of the board.
Sec. 207. Funding.
Sec. 208. No preemption of State securities actions.
Sec. 209. Arbitration of investor claims in independent forum.

SEC. 2. DEFINITIONS.

    In this Act, the following definitions shall apply:
            (1) Board.--The term ``Board'' means the Mutual Fund 
        Oversight Board established under section 201.
            (2) Commission.--The term ``Commission means the Security 
        and Exchange Commission.
            (3) Mutual fund.--The term ``mutual fund'' means such 
        entities designated as mutual funds by regulation of the Mutual 
        Fund Oversight Board established under title II of this Act.
            (4) Registered mutual fund.----The term ``registered mutual 
        fund'' has the same meaning as in section 5 of the Investment 
        Company Act of 1940.
            (5) Securities laws.--The term ``securities laws'' has the 
        same meaning as in section 3 of the Securities Exchange Act of 
        1934.

                    TITLE I--REGULATORY IMPROVEMENTS

SEC. 101. REGULATORY IMPROVEMENTS.

    (a) Pricing of Shares.--The Investment Company Act of 1940 (15 
U.S.C. 80a-1 et seq.) is amended by inserting after section 11 the 
following:

``SEC. 11A. PRICING OF SECURITIES.

    ``On any calendar day, the purchaser of the securities of a 
registered open-end company shall be required to place an order to 
purchase such securities prior to the time at which the registered 
open-end company sets the price of the securities for that day in order 
to purchase the securities at that price.''.
    (b) Penalties.--
            (1) Securities act of 1933.--Section 24 of the Securities 
        Act of 1933 (15 U.S.C. 77x) is amended--
                    (A) by striking ``Any person'' and inserting the 
                following:
    ``(a) In General.--Except as provided under subsection (b), any 
person''; and
                    (B) by adding at the end the following:
    ``(b) Open-End Companies.--Any person who willfully violates 
section 17(a) with respect to the offer or sale of any security of a 
registered open-end company (as that term is defined under section 5 of 
the Investment Company Act of 1940) shall, upon conviction, be fined 
not more than $1,000,000, imprisoned for not more than 20 years, or 
both.''.
            (2) Securities exchange act of 1934.--Section 32(a) of the 
        Securities Exchange Act of 1934 (15 U.S.C. 78ff(a)) is 
        amended--
                    (A) by striking ``(a) Any person'' and inserting 
                the following:
    ``(a) Willful Violations.--
            ``(1) In general.--Except as provided under paragraphs (2) 
        and (3), any person''; and
                    (B) by adding at the end the following:
            ``(2) Open-end companies; brokerage transactions.--
                    ``(A) In general.--A person shall, upon conviction, 
                be subject to the penalties in subparagraph (B) if such 
                person willfully violates--
                            ``(i) section 10(b), with respect to the 
                        purchase or sale of the securities of a 
                        registered open-end company (as that term is 
                        defined under section 5 of the Investment 
                        Company Act of 1940); or
                            ``(ii) section 17(a) of the Securities Act 
                        of 1933.
                    ``(B) Penalties.--Any person convicted of a 
                violation described in subparagraph (A) shall be fined 
                not more than $10,000,000, imprisoned for not more than 
                25 years, or both, or, if the person is not a natural 
                person, fined not more than $50,000,000.
            ``(3) Lifetime ban.--Any natural person who engages in a 
        violation described in paragraph (2) shall be prohibited from 
        participating in any sale or offer to sell securities for the 
        life of such person.''.
            (3) Investment company act of 1940.--Section 49 of the 
        Investment Company Act of 1940 (15 U.S.C. 80a-48) is amended--
                    (A) by striking ``Any person'' and inserting the 
                following:
    ``(a) In General.--Except as provided under subsection (b), any 
person''; and
                    (B) by adding at the end the following:
    ``(b) Open-End Companies.--Any person who willfully violates 
section 22(a) with respect to the securities of a registered open-end 
company shall, upon conviction, be fined not more than $1,000,000, 
imprisoned not more than 20 years, or both.''.
    (c) RICO Enforcement.--Section 1961(1) of title 18, United States 
Code, is amended--
            (1) in subparagraph (E), by striking ``or'' at the end; and
            (2) by striking the semicolon at the end and inserting ``, 
        (G) any act that violates section 17(a) of the Securities Act 
        of 1933, with respect to the sale of or an offer to sell 
        securities of a registered open-end company (as that term is 
        defined under section 5 of the Investment Company Act of 1940), 
        (H) section 10(b) or 17(a) of the Securities Exchange Act of 
        1934, with respect to the purchase or sale of the securities of 
        such a registered open-end company, or (I) section 22(c) of the 
        Investment Company Act of 1940, with respect to the valuation 
        of the securities of such a registered open-end company;''.
    (d) Disclosure of Market Timing Policies.--Section 24 of the 
Investment Company Act of 1940 (15 U.S.C. 80a-24) is amended by adding 
at the end the following:
    ``(h) Market Timing Policies.--Each prospectus distributed by a 
registered open-end company shall disclose--
            ``(1) the policies of the registered open-end company with 
        respect to the timing of the pricing of its shares; and
            ``(2) the steps taken by the registered open-end company to 
        prevent the abuse of such pricing policies.''.
    (e) Director and Chairman Independence.--Section 10(a) of the 
Investment Company Act of 1940 (15 U.S.C. 80a-10) is amended--
            (1) by striking ``60 per centum'' and inserting ``one-
        fourth''; and
            (2) by adding at the end the following:
    ``(i) Chairman.--No registered investment company have as chairman 
of such board an interested person of such registered company. Such 
chairman shall have access to all information, including but not 
limited to any outside advisory, management, marketing, or investment 
service fees paid by the investment company.''.
    (f) Definition of Interested Person.--Section 2(a)(19) of the 
Investment Company Act of 1940 (15 U.S.C. 80a-2(a)(19)) is amended--
            (1) in subparagraph (A)--
                    (A) by striking clauses (v) and (vi) and inserting 
                the following:
                            ``(v) any natural person who is a member of 
                        a class of persons who the Commission, by rule 
                        or regulation, determines are unlikely to 
                        exercise an appropriate degree of independence 
                        as a result of--
                                    ``(I) a material business or 
                                professional relationship with the 
                                company or any affiliated person of the 
                                company; or
                                    ``(II) a close familial 
                                relationship with any natural person 
                                who is an affiliated person of the 
                                company,''; and
                    (B) by redesignating clause (vii) as clause (vi); 
                and
            (2) in subparagraph (B)--
                    (A) by striking clauses (v) and (vi) and inserting 
                the following:
                            ``(v) any natural person who is a member of 
                        a class of persons who the Commission, by rule 
                        or regulation, determines are unlikely to 
                        exercise an appropriate degree of independence 
                        as a result of--
                                    ``(I) a material business or 
                                professional relationship with such 
                                investment adviser or principal 
                                underwriter (or affiliated person 
                                thereof); or
                                    ``(II) a close familial 
                                relationship with a natural person who 
                                is such investment adviser or principal 
                                underwriter (or affiliated person 
                                thereof),''; and
                    (B) by redesignating clause (v) as clause (vi).
    (g) Fiduciary Duty of Board of Directors.--
            (1) In general.--Not later than 270 days after enactment of 
        this Act, the Securities and Exchange Commission shall publish 
        regulations to require that the board of directors of a 
        registered investment company shall have a fiduciary duty--
                    (A) to demonstrate that the negotiated advisory, 
                management, marketing, and investment service fees that 
                are reasonable and are in the best interest of their 
                shareholders. This may be accomplished by obtaining 
                multiple bids, an independent evaluation or appraisal, 
                including a provision in all fee contracts preventing 
                contractors from charging rates in excess of those paid 
by other clients, and any other means practicable to ensure that 
shareholders are not overcharged for any services provided to the 
registered investment company; and
                    (B) to provide a report to the Commission, which 
                shall also be disclosed in any prospectus delivered to 
                shareholders of the company, on any significant or 
                material business or professional relationship with any 
                advisory, management, marketing, investment, or other 
                service provided to the registered investment company 
                to ensure that such services are provided in the best 
                interest of their shareholders.
    (h) Improved Transparency of Mutual Fund Costs.--
            (1) Regulation revision required.--Not later than 270 days 
        after the date of enactment of this Act, the Securities and 
        Exchange Commission shall revise regulation under the 
        Securities Act of 1933, the Securities Exchange Act of 1934, or 
        the Investment Company Act of 1940, or any combination thereof, 
        to require, consistent with the protection of investors and the 
        public interest, improved disclosure with respect to any 
        registered investment company, in the quarterly statement or 
        other periodic report to shareholders or other appropriate 
        disclosure document, of--
                    (A) the estimated amount, in dollars, of the 
                operating expenses of the company, including any 
                advisory, management, marketing, and investment service 
                fees, that are born by the shareholders, and the amount 
                born by each shareholder of the company, based on the 
                investment of each shareholder in the company;
                    (B) the structure of, or method used to determine, 
                the compensation of individuals employed by the 
                investment adviser of the company to manage the 
                portfolio of the company, and the ownership interest of 
                such individuals in the securities of the company;
                    (C) the portfolio turnover rate of the company, set 
                forth in a manner that facilitates comparison among 
                investment companies, and a description of the 
                implications of a high turnover rate for portfolio 
                transaction costs and performance;
                    (D) information concerning any payments of 
                commissions for effecting securities transactions to a 
                member of an exchange, broker, or dealer who--
                            (i) furnishes advice, either directly or 
                        through publications or writings, as to the 
                        value of securities, the advisability of 
                        investing in, purchasing, or selling 
                        securities, and the availability of securities 
                        or purchasers or sellers of securities;
                            (ii) furnishes analyses and reports 
                        concerning issuers, industries, securities, 
                        economic factors and trends, portfolio 
                        strategy, and the performance of accounts; and
                            (iii) facilitates the sale or distribution 
                        of the shares of the company;
                    (E) information concerning payments by any person 
                other than the company that are intended to facilitate 
                the sale and distribution of the shares of the company; 
                and
                    (F) information concerning discounts on front-end 
                sales loads for which investors may be eligible 
                including the minimum purchase amounts required for 
                such discounts.
            (2) Appropriate disclosure document.--
                    (A) In general.--For the purposes of paragraph (1), 
                a disclosure shall not be considered to be made in an 
                appropriate disclosure document if the disclosure is 
                made exclusively in a prospectus or statement of 
                additional information, or both such documents.
                    (B) Exceptions.--Notwithstanding subparagraph (A), 
                the disclosures required by subparagraphs (B) and (D) 
                of paragraph (1) may be considered to be made in an 
                appropriate disclosure document if the disclosure is 
                made exclusively in a prospectus or statement of 
                additional information, or both such documents.
            (3) Concept release required.--
                    (A) In general.--The Commission shall issue a 
                concept release examining the issue of portfolio 
                transaction costs incurred by investment companies 
                including commission, spread, opportunity, and market 
                impact costs, with respect to trading of portfolio 
                securities and any advisory, management, marketing, and 
                investment service fees paid by investment companies 
                and how such costs may be disclosed to mutual fund 
                investors in a manner that will enable investors to 
                compare such costs among funds.
                    (B) Report and recommendations required.--Not later 
                than 270 days after the date of enactment of this Act, 
                the Commission shall submit a report on the findings 
                from the concept release required under subparagraph 
                (A), as well as any legislative and regulatory 
                recommendations, if any, to the Committee on Banking, 
                Housing, and Urban Affairs of the Senate and the 
                Committee on Financial Services of the House of 
                Representatives.
            (4) Additional requirement for fee statement.--
                    (A) In general.--Not later than 270 days after the 
                date of enactment of this Act, the Commission shall 
                prescribe a rule to require, with respect to any 
                registered investment company, in the quarterly 
                statement or other periodic report, or other 
                appropriate disclosure document, a statement informing 
                shareholders of what amount of fees they have paid on 
                each $1,000 of their investments over the past 365 
                days, that such fees have been deducted from the 
                amounts shown on the statements, and where such 
                shareholders may find additional information regarding 
                the amount of these fees.
                    (B) Appropriate disclosure document.--The statement 
                required by subparagraph (A) shall not be considered to 
                be made in an appropriate disclosure document unless 
such statement is--
                            (i) made in each periodic statement to a 
                        shareholder that discloses the value of the 
                        holdings of the shareholder in the securities 
                        of the company; and
                            (ii) prominently displayed, in a location 
                        in close proximity to the statement of the 
                        shares account value.
            (5) Reducing burdens on small funds.--In prescribing rules 
        under this subsection, the Commission shall give consideration 
        to methods for reducing for small investment companies the 
        burdens of making disclosures by requiring such rules, 
        consistent with the public interest and the protection of 
        investors.
    (i) Short-Term Trading by Interested Persons Prohibited.--
            (1) Short-term trading prohibited.--Section 17 of the 
        Investment Company Act of 1940 (15 U.S.C. 80a-17) is amended by 
        adding at the end the following:
    ``(k) Short-Term Trading Prohibited.--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 affiliated person, investment adviser, or principal 
underwriter, to engage in short-term transactions, as such term is 
defined by the Commission by rule, in any securities of which such 
company, or any affiliate of such company, is the issuer, except that 
this subsection shall not prohibit transactions in money market funds, 
or other funds the investment policy of which expressly permits short-
term transactions, or such other categories of registered investment 
companies as the Commission shall specify by rule.''.
    (j) Mutual Fund Compliance Officer.--Not later than 270 days after 
the date of enactment of this Act, the Commission shall, by rule, 
require each registered investment company to appoint a compliance 
officer to ensure that such company is complying with all relevant 
rules and regulations, consistent with the protection of investors and 
the public interest. Each compliance officer of a registered investment 
company shall report only to directors that are not interested persons 
of the company, as such term is defined in section 2(a)(19) of the 
Investment Company Act of 1940 (15 U.S.C. 80a-2(a)(19)).

                 TITLE II--MUTUAL FUND OVERSIGHT BOARD

SEC. 201. ESTABLISHMENT; ADMINISTRATIVE PROVISIONS.

    (a) Establishment of Board.--There is established the Mutual Fund 
Oversight Board, to oversee the conduct of mutual funds and related 
matters, in order to protect the interests of investors. The Board 
shall be a body corporate, operate as a nonprofit corporation, and have 
succession until dissolved by an Act of Congress.
    (b) Status.--The Board shall not be an agency or establishment of 
the United States Government, and, except as otherwise provided in this 
title, shall be subject to, and have all of the powers conferred upon a 
nonprofit corporation by the District of Columbia Nonprofit Corporation 
Act. Each member and person employed by the Board shall be deemed to be 
an officer or employee of, or agent for, the Federal Government by 
reason of such service.
    (c) Duties of the Board.--The Board shall, subject to action by the 
Commission under section 206, and once a determination is made by the 
Commission under subsection (d) of this section--
            (1) register mutual funds in accordance with section 202;
            (2) establish or adopt, or both, by rule, internal 
        auditing, quality control, ethics, independence, and other 
        standards relating to the conduct of mutual funds, in 
        accordance with section 203;
            (3) conduct inspections of mutual funds, in accordance with 
        section 204 and the rules of the Board;
            (4) conduct investigations and disciplinary proceedings 
        concerning, and impose appropriate sanctions where justified 
        upon, mutual funds and associated persons of such mutual funds, 
        in accordance with section 205;
            (5) perform such other duties and functions as the Board 
        determines are necessary or appropriate to promote high 
        professional standards among, and improve the quality of 
        services offered by, mutual funds, in order to protect 
        investors, or to further the public interest;
            (6) enforce compliance with this title, the rules of the 
        Board, professional standards, and the securities laws relating 
        to mutual funds and associated persons thereof; and
            (7) set the budget and manage the operations of the Board 
        and the staff of the Board.
    (d) Commission Determination.--The members of the Board shall take 
such action (including hiring of staff, proposal of rules, and adoption 
of initial and transitional auditing and other professional standards) 
as may be necessary or appropriate to enable the Commission to 
determine, not later than 270 days after the date of enactment of this 
Act, that the Board is so organized and has the capacity to carry out 
the requirements of this title, and to enforce compliance with this 
title by registered mutual funds and associated persons thereof.
    (e) Board Membership.--
            (1) Composition.--The Board shall have 5 members, appointed 
        in accordance with paragraph (3), from among prominent 
        individuals of integrity and reputation who have a demonstrated 
        commitment to the interests of investors and the public, and an 
        understanding of the responsibilities for and nature of the 
        financial services offered by registered mutual funds.
            (2) Full-time independent service.--Each member of the 
        Board shall serve on a full-time basis, and may not, concurrent 
        with service on the Board, be employed by any other person or 
        engage in any other professional or business activity. No 
        member of the Board may share in any of the profits of, or 
receive payments from, a mutual fund (or any other person, as 
determined by rule of the Commission), other than fixed continuing 
payments, subject to such conditions as the Commission may impose, 
under standard arrangements for the retirement of employees of mutual 
funds.
            (3) Appointment of board members.--
                    (A) Initial board.--Not later than 90 days after 
                the date of enactment of this Act, the Commission, 
                after consultation with the Chairman of the Board of 
                Governors of the Federal Reserve System and the 
                Secretary of the Treasury, shall appoint the 
                chairperson and other initial members of the Board.
                    (B) Vacancies.--A vacancy on the Board shall not 
                affect the powers of the Board, but shall be filled in 
                the same manner as provided for appointments under this 
                section.
            (4) Term of service.--
                    (A) In general.--The term of service of each Board 
                member shall be 5 years, and until a successor is 
                appointed, except that--
                            (i) the terms of office of the initial 
                        Board members (other than the chairperson) 
                        shall expire in annual increments, 1 on each of 
                        the first 4 anniversaries of the initial date 
                        of appointment; and
                            (ii) any Board member appointed to fill a 
                        vacancy occurring before the expiration of the 
                        term for which the predecessor was appointed 
                        shall be appointed only for the remainder of 
                        that term.
                    (B) Term limitation.--No person may serve as a 
                member of the Board, or as chairperson of the Board, 
                for more than 2 terms, whether or not such terms of 
                service are consecutive.
            (5) Removal from office.--A member of the Board may be 
        removed by the Commission from office, in accordance with 
        section 206(d)(3), for good cause shown before the expiration 
        of the term of that member.
    (f) Powers of the Board.--In addition to any authority granted to 
the Board under this title, the Board shall have the power, subject to 
section 206--
            (1) to sue and be sued, complain and defend, in its 
        corporate name and through its own counsel, with the approval 
        of the Commission, in any Federal, State, or other court;
            (2) to conduct its operations and maintain offices, and to 
        exercise all other rights and powers authorized by this title, 
        in any State, without regard to any qualification, licensing, 
        or other provision of law in effect in such State (or a 
        political subdivision thereof);
            (3) to lease, purchase, accept gifts or donations of, or 
        otherwise acquire, improve, use, sell, exchange, or convey, all 
        of or an interest in any property, wherever situated;
            (4) to appoint such employees, accountants, attorneys, and 
        other agents as may be necessary or appropriate, and to 
        determine their qualifications, define their duties, and fix 
        their salaries or other compensation (at a level that is 
        comparable to private sector self-regulatory, accounting, 
        technical, supervisory, or other staff or management 
        positions);
            (5) to allocate, assess, and collect support fees 
        established pursuant to section 209, for the Board, and other 
        fees and charges imposed under this title; and
            (6) to enter into contracts, execute instruments, incur 
        liabilities, and do any and all other acts and things 
        necessary, appropriate, or incidental to the conduct of its 
        operations and the exercise of its obligations, rights, and 
        powers imposed or granted by this title.
    (g) Rules of the Board.--The rules of the Board shall, subject to 
the approval of the Commission--
            (1) provide for the operation and administration of the 
        Board, the exercise of its authority, and the performance of 
        its responsibilities under this title;
            (2) permit, as the Board determines necessary or 
        appropriate, delegation by the Board of any of its functions to 
        an individual member or employee of the Board, or to a division 
        of the Board, including functions with respect to hearing, 
        determining, ordering, certifying, reporting, or otherwise 
        acting as to any matter, except that--
                    (A) the Board shall retain a discretionary right to 
                review any action pursuant to any such delegated 
                function, upon its own motion;
                    (B) a person shall be entitled to a review by the 
                Board with respect to any matter so delegated, and the 
                decision of the Board upon such review shall be deemed 
                to be the action of the Board for all purposes 
                (including appeal or review thereof); and
                    (C) if the right to exercise a review described in 
                subparagraph (A) is declined, or if no such review is 
                sought within the time stated in the rules of the 
                Board, then the action taken by the holder of such 
                delegation shall for all purposes, including appeal or 
                review thereof, be deemed to be the action of the 
                Board;
            (3) establish ethics rules and standards of conduct for 
        Board members and staff, including a bar on practice before the 
        Board (and the Commission, with respect to Board-related 
        matters) of 1 year for former members of the Board, and 
        appropriate periods (not to exceed 1 year) for former staff of 
        the Board; and
            (4) provide as otherwise required by this title.
    (h) Annual Report to the Commission.--
            (1) In general.--The Board shall submit an annual report 
        (including its audited financial statements) to the Commission.
            (2) Submission to congress.--Not later than 30 days after 
        the date of receipt of a report under paragraph (1), the 
        Commission shall transmit a copy of that report to--
                    (A) the Committee on Banking, Housing, and Urban 
                Affairs of the Senate; and
                    (B) the Committee on Financial Services of the 
                House of Representatives.

SEC. 202. REGISTRATION WITH THE BOARD.

    (a) Mandatory Registration.--Beginning 180 days after the date of 
the determination of the Commission under section 201(d), it shall be 
unlawful for any mutual fund to conduct business if that mutual fund is 
not registered with the Board under this section.
    (b) Applications for Registration.--
            (1) Form of application.--A mutual fund shall use such form 
        as the Board may prescribe, by rule, to apply for registration 
        under this section.
            (2) Contents of applications.--Each mutual fund shall 
        submit, as part of its application for registration, in such 
        detail as the Board shall specify--
                    (A) the policies of each mutual fund regarding, and 
                efforts taken by that mutual fund to eliminate, market 
                timing practices;
                    (B) the annual fees received by the mutual fund;
                    (C) such other current financial information for 
                the most recently completed fiscal year of the mutual 
                fund as the Board may reasonably request;
                    (D) a statement of the quality control policies of 
                the mutual fund;
                    (E) the policies of each mutual fund regarding, and 
                efforts taken by that mutual fund to eliminate, late 
                trading practices; and
                    (F) information relating to criminal, civil, or 
                administrative actions or disciplinary proceedings 
                pending against the mutual fund or any associated 
                person of the mutual fund in connection with the 
                conduct of the mutual fund; and
                    (G) such other information as the rules of the 
                Board or the Commission shall specify as necessary or 
                appropriate in the public interest or for the 
                protection of investors.
            (3) Consents.--Each application for registration under this 
        subsection shall include--
                    (A) a consent executed by the mutual fund to 
                cooperation in and compliance with any request for 
                testimony or the production of documents made by the 
                Board in the furtherance of its authority and 
                responsibilities under this title (and an agreement to 
                secure and enforce similar consents from each of the 
                associated persons of the mutual fund as a condition of 
                their continued employment by or other association with 
                such mutual fund); and
                    (B) a statement that such mutual fund understands 
                and agrees that cooperation and compliance, as 
                described in the consent required by subparagraph (A), 
                and the securing and enforcement of such consents from 
                its associated persons, in accordance with the rules of 
                the Board, shall be a condition to the continuing 
                effectiveness of the registration of the mutual fund 
                with the Board.
    (c) Action on Applications.--
            (1) Timing.--The Board shall approve a completed 
        application for registration not later than 45 days after the 
        date of receipt of the application, in accordance with the 
        rules of the Board, unless the Board, prior to such date, 
        issues a written notice of disapproval to, or requests more 
        information from, the prospective registrant.
            (2) Treatment.--A written notice of disapproval of a 
        completed application under paragraph (1) for registration 
        shall be treated as a disciplinary sanction for purposes of 
        sections 205(d) and 206(c).
    (d) Periodic Reports.--Each registered mutual fund shall submit an 
annual report to the Board, and may be required to report more 
frequently, as necessary to update the information contained in its 
application for registration under this section, and to provide to the 
Board such additional information as the Board or the Commission may 
specify, in accordance with subsection (b)(2).
    (e) Public Availability.--Registration applications and annual 
reports required by this subsection, or such portions of such 
applications or reports as may be designated under rules of the Board, 
shall be made available for public inspection, subject to rules of the 
Board or the Commission, and to applicable laws relating to the 
confidentiality of proprietary, personal, or other information 
contained in such applications or reports, provided that, in all 
events, the Board shall protect from public disclosure information 
reasonably identified by the subject mutual fund as proprietary 
information.
    (f) Registration and Annual Fees.--The Board shall assess and 
collect a registration fee and an annual fee from each registered 
mutual fund, in amounts that are sufficient to recover the costs of 
processing and reviewing applications and annual reports.

SEC. 203. AUDITING, QUALITY CONTROL, AND INDEPENDENCE STANDARDS AND 
              RULES.

    (a) Auditing, Quality Control, and Ethics Standards.--
            (1) In general.--The Board shall, by rule, establish such 
        internal auditing and quality control standards, and such 
        ethics standards to be used by registered mutual funds in 
        conducting their business, as required by this title or the 
        rules of the Commission, or as may be necessary or appropriate 
        in the public interest or for the protection of investors.
            (2) Rule requirements.--In carrying out paragraph (1), the 
        Board--
                    (A) shall include in the internal auditing 
                standards that it adopts, requirements that each 
                registered mutual fund shall--
                            (i) prepare, and maintain for a period of 
                        not less than 7 years, audit work papers, and 
                        other information related to any internal audit 
                        report, in sufficient detail to support the 
                        conclusions reached in such report; and
                            (ii) provide a concurring or second 
                        executive officer review and approval of such 
                        audit report (and other related information), 
                        and concurring approval in its issuance, by a 
                        qualified person (as prescribed by the Board) 
                        associated with the mutual fund, other than the 
                        person in charge of the audit, or by an 
independent reviewer (as prescribed by the Board); and
                    (B) shall include in the quality control standards 
                that it adopts with respect to the issuance of audit 
                reports, requirements applicable to every registered 
                mutual fund relating to--
                            (i) monitoring of professional ethics and 
                        quality standards;
                            (ii) consultation within such mutual fund 
                        on auditing questions;
                            (iii) supervision of internal audit work;
                            (iv) hiring, professional development, and 
                        advancement of audit personnel;
                            (v) internal inspection; and
                            (vi) such other requirements as the Board 
                        may prescribe, subject to paragraph (1).
            (3) Authority to adopt other standards.--
                    (A) In general.--The Board--
                            (i) may adopt as its rules, subject to 
                        section 206, any portion of any statement of 
                        professional standards that the Board 
                        determines satisfy the requirements of 
                        paragraph (1), and that were proposed by 1 or 
                        more professional groups that shall be 
                        designated or recognized by the Board, by rule, 
                        for such purpose, pursuant to this paragraph or 
                        1 or more advisory groups convened pursuant to 
                        paragraph (4); and
                            (ii) notwithstanding clause (i), shall 
                        retain full authority to modify, supplement, 
                        revise, or subsequently amend, modify, or 
                        repeal, in whole or in part, any portion of any 
                        statement described in clause (i).
                    (B) Initial and transitional standards.--The Board 
                shall adopt standards described in subparagraph (A)(i) 
                as initial or transitional standards, to the extent the 
                Board determines necessary, prior to a determination of 
                the Commission under section 201(d), and such standards 
                shall be separately approved by the Commission at the 
                time of that determination, without regard to the 
                procedures required by section 206 that otherwise would 
                apply to the approval of rules of the Board.
            (4) Advisory groups.--The Board shall convene, or authorize 
        its staff to convene, such expert advisory groups as may be 
        appropriate, which may include representatives of the mutual 
        fund industry and other experts, as well as representatives of 
        other interested groups, subject to such rules as the Board may 
        prescribe to prevent conflicts of interest, to make 
        recommendations concerning the content (including proposed 
        drafts) of auditing, quality control, ethics, independence, or 
        other standards required to be established under this section.
    (b) Independence Standards and Rules.--The Board shall establish 
such rules ensuring compliance with section 10 of the Investment 
Company Act of 1940, as may be necessary or appropriate in the public 
interest or for the protection of investors.
    (c) Cooperation With Designated Professional Groups of Mutual Funds 
and Advisory Groups.--
            (1) In general.--The Board shall--
                    (A) cooperate on an ongoing basis with professional 
                groups designated under subsection (a)(3)(A) and 
                advisory groups convened under subsection (a)(4) in the 
                examination of the need for changes in any standards 
                subject to its authority under subsection (a);
                    (B) recommend issues for inclusion on the agendas 
                of such designated professional groups or advisory 
                groups; and
                    (C) take such other steps as it deems appropriate 
                to increase the effectiveness of the standard setting 
                process.
            (2) Board responses.--The Board shall respond in a timely 
        fashion to requests from designated professional groups and 
        advisory groups referred to in paragraph (1) for any changes in 
        standards over which the Board has authority.
    (d) Evaluation of Standard Setting Process.--The Board shall 
include in the annual report required by section 201(h) the results of 
its standard setting responsibilities during the period to which the 
report relates, including a discussion of the work of the Board with 
any designated professional groups and advisory groups described in 
paragraphs (3)(A) and (4) of subsection (a), and its pending issues 
agenda for future standard setting projects.

SEC. 204. INSPECTIONS OF REGISTERED MUTUAL FUNDS.

    (a) In General.--The Board shall conduct a continuing program of 
inspections, at such intervals as are established under the rules of 
the Board to assess the degree of compliance of each registered mutual 
fund and associated persons of that mutual fund with this title, the 
rules of the Board, the rules of the Commission, or professional 
standards.
    (b) Inspection Frequency.--
            (1) In general.--Subject to paragraph (2), inspections 
        required by this section shall be conducted annually with 
        respect to each registered mutual fund that is the basis for 
        any difference between these 2 standards.
            (2) Adjustments to schedules.--The Board may, by rule, 
        adjust the inspection schedules set under paragraph (1) if the 
        Board finds that different inspection schedules are consistent 
        with the purposes of this title, the public interest, and the 
        protection of investors.
    (c) Procedures.--The Board shall, in each inspection under this 
section, and in accordance with its rules for such inspections--
            (1) identify any act or practice or omission to act by the 
        registered mutual fund, or by any associated person thereof, 
        revealed by such inspection that may be in violation of this 
        title, the rules of the Board, the rules of the Commission, the 
        quality control policies of the mutual fund, or professional 
        standards;
            (2) report any such act, practice, or omission, if 
        appropriate, to the Commission and each appropriate State 
        regulatory authority; and
            (3) begin a formal investigation or take appropriate 
        disciplinary action, if any, with respect to any such 
        violation, in accordance with this title and the rules of the 
        Board.
    (d) Conduct of Inspections.--In conducting an inspection of a 
registered mutual fund under this section, the Board shall--
            (1) inspect and review internal audits performed by the 
        mutual fund;
            (2) evaluate the sufficiency of the quality control system 
        of the mutual fund, and the manner of the documentation and 
        communication of that system by the mutual fund; and
            (3) perform such other testing of the internal audit, 
        supervisory, and quality control procedures of the mutual fund 
        as are necessary or appropriate in light of the purpose of the 
        inspection and the responsibilities of the Board.
    (e) Record Retention.--The rules of the Board may require the 
retention by registered mutual funds for inspection purposes of 
records, the retention of which is not otherwise required by section 
203 or the rules issued thereunder.
    (f) Procedures for Review.--
            (1) Review and response.--The rules of the Board shall 
        provide a procedure for the review of and response to a draft 
        inspection report by the registered mutual fund under 
        inspection.
            (2) Action on response.--The Board shall take such action 
        with respect to such response as it considers appropriate 
        (including revising the draft report or continuing or 
        supplementing its inspection activities before issuing a final 
        report, as appropriate). The text of any such response, 
        appropriately redacted to protect information reasonably 
        identified by the mutual fund as confidential, shall be 
        attached to and made part of the inspection report.
    (g) Report.--A written report of the findings of the Board for each 
inspection under this section, subject to subsection (h), shall be--
            (1) transmitted, in appropriate detail, to the Commission 
        and each appropriate State regulatory authority, accompanied by 
        any letter or comments by the Board or the inspector, and any 
        letter of response from the registered mutual fund; and
            (2) made available in appropriate detail to the public 
        (subject to section 205(b)(5)(A), and to the protection of such 
        confidential and proprietary information as the Board may 
        determine to be appropriate, or as may be required by law), 
        except that no portion of the inspection report that deals with 
        criticisms of or potential defects in the quality control 
        systems of the mutual fund under inspection shall be made 
        public if those criticisms or defects are addressed by the 
        mutual fund, to the satisfaction of the Board, not later than 
        12 months after the date of the inspection report.
    (h) Interim Commission Review.--
            (1) Reviewable matters.--A registered mutual fund may seek 
        review by the Commission, pursuant to such rules as the 
        Commission shall promulgate, if the mutual fund--
                    (A) has provided the Board with a response, 
                pursuant to rules issued by the Board under subsection 
                (f), to the substance of particular items in a draft 
                inspection report, and disagrees with the assessments 
                contained in any final report prepared by the Board 
                following such response; or
                    (B) disagrees with the determination of the Board 
                that criticisms or defects identified in an inspection 
                report have not been addressed to the satisfaction of 
                the Board within 12 months after the date of the 
                inspection report, for purposes of subsection (g)(2).
            (2) Treatment of review.--Any decision of the Commission 
        with respect to a review under paragraph (1) shall not be 
        reviewable under section 25 of the Securities Exchange Act of 
        1934 (15 U.S.C. 78y), or deemed to be ``final agency action'' 
        for purposes of section 704 of title 5, United States Code.
            (3) Timing.--Review under paragraph (1) may be sought 
        during the 30-day period following the date of the event giving 
        rise to the review under subparagraph (A) or (B) of paragraph 
        (1).

SEC. 205. INVESTIGATIONS AND DISCIPLINARY PROCEEDINGS.

    (a) In General.--The Board shall establish, by rule, subject to the 
requirements of this section, fair procedures for the investigation and 
disciplining of registered mutual funds and associated persons of such 
mutual funds.
    (b) Investigations.--
            (1) Authority.--In accordance with the rules of the Board, 
        the Board may conduct an investigation of any act or practice, 
        or omission to act, by a registered mutual fund, any associated 
        person of such mutual fund, or both, that may violate any 
        provision of this title, the rules of the Board, the provisions 
        of the securities laws relating to mutual funds, or 
        professional standards, regardless of how the act, practice, or 
        omission is brought to the attention of the Board.
            (2) Testimony and document production.--In addition to such 
        other actions as the Board determines to be necessary, the 
        rules of the Board may--
                    (A) require the testimony of the registered mutual 
                fund or of any person associated with a registered 
                mutual fund, with respect to any matter that the Board 
                considers relevant or material to an investigation;
                    (B) require the production of audit work papers and 
                any other document or information in the possession of 
                a registered mutual fund or any associated person 
                thereof, wherever domiciled, that the Board considers 
                relevant or material to the investigation, and may 
                inspect the books and records of such mutual fund or 
associated person to verify the accuracy of any documents or 
information supplied;
                    (C) request the testimony of, and production of any 
                document in the possession of, any other person, 
                including any client of a registered mutual fund that 
                the Board considers relevant or material to an 
                investigation under this section, with appropriate 
                notice, subject to the needs of the investigation, as 
                permitted under the rules of the Board; and
                    (D) provide for procedures to seek issuance by the 
                Commission, in a manner established by the Commission, 
                of a subpoena to require the testimony of, and 
                production of any document in the possession of, any 
                person, including any client of a registered mutual 
                fund, that the Board considers relevant or material to 
                an investigation under this section.
            (3) Noncooperation with investigations.--
                    (A) In general.--If a registered mutual fund or any 
                associated person thereof refuses to testify, produce 
                documents, or otherwise cooperate with the Board in 
                connection with an investigation under this section, 
                the Board may--
                            (i) suspend or bar such person from being 
                        associated with a registered mutual fund, or 
                        require the registered mutual fund to end such 
                        association;
                            (ii) suspend or revoke the registration of 
                        the mutual fund; and
                            (iii) invoke such other lesser sanctions as 
                        the Board considers appropriate, and as 
                        specified by rule of the Board.
                    (B) Procedure.--Any action taken by the Board under 
                this paragraph shall be subject to the terms of section 
                206(c).
            (4) Referral.--The Board may refer an investigation under 
        this section--
                    (A) to the Commission; and
                    (B) at the direction of the Commission, to--
                            (i) the Attorney General of the United 
                        States;
                            (ii) the attorney general of 1 or more 
                        States; and
                            (iii) the appropriate State regulatory 
                        authority.
            (5) Use of documents.--
                    (A) Confidentiality.--Except as provided in 
                subparagraph (B), all documents and information 
                prepared or received by or specifically for the Board, 
                and deliberations of the Board and its employees and 
                agents, in connection with an inspection under section 
                204 or with an investigation under this section, shall 
                be confidential and privileged as an evidentiary matter 
                (and shall not be subject to civil discovery or other 
                legal process) in any proceeding in any Federal or 
                State court or administrative agency, and shall be 
                exempt from disclosure, in the hands of an agency or 
                establishment of the Federal Government, under the 
                Freedom of Information Act (5 U.S.C. 552a), or 
                otherwise, unless and until presented in connection 
                with a public proceeding or released in accordance with 
                subsection (c).
                    (B) Availability to government agencies.--All 
                information referred to in subparagraph (A) may, in the 
                discretion of the Board, when determined by the Board 
                to be necessary to accomplish the purposes of this 
                title or to protect investors, and without the loss of 
                its status as confidential and privileged in the hands 
                of the Board, be made available to the Commission, the 
                Attorney General of the United States, to State 
                attorneys general in connection with any criminal 
                investigation, and to any appropriate State regulatory 
                authority, which shall maintain such information as 
                confidential and privileged.
            (6) Immunity.--Any employee of the Board engaged in 
        carrying out an investigation under this title shall be immune 
        from any civil liability arising out of such investigation in 
        the same manner and to the same extent as an employee of the 
        Federal Government in similar circumstances.
    (c) Disciplinary Procedures.--
            (1) Notification; recordkeeping.--The rules of the Board 
        shall provide that in any proceeding by the Board to determine 
        whether a registered mutual fund, or an associated person 
        thereof, should be disciplined, the Board shall--
                    (A) bring specific charges with respect to the 
                mutual fund or associated person;
                    (B) notify such mutual fund or associated person 
                of, and provide to the mutual fund or associated person 
                an opportunity to defend against, such charges; and
                    (C) keep a record of the proceedings.
            (2) Public hearings.--Hearings under this section shall be 
        open to the public, unless otherwise ordered by the Board for 
        good cause shown.
            (3) Supporting statement.--A determination by the Board to 
        impose a sanction under this subsection shall be supported by a 
        statement setting forth--
                    (A) each act or practice in which the registered 
                mutual fund, or associated person, has engaged (or 
                omitted to engage), or that forms a basis for all or a 
                part of such sanction;
                    (B) the specific provision of this title, the 
                securities laws, the rules of the Board, or 
                professional standards which the Board determines has 
                been violated; and
                    (C) the sanction imposed, including a justification 
                for that sanction.
            (4) Sanctions.--If the Board finds, based on all of the 
        facts and circumstances, that a registered mutual fund or 
        associated person thereof has engaged in any act or practice, 
        or omitted to act, in violation of this title, the rules of the 
        Board, the provisions of the securities laws relating to the 
preparation and issuance of audit reports and the obligations and 
liabilities of accountants with respect thereto, including the rules of 
the Commission issued under this title, or professional standards, the 
Board may impose such disciplinary or remedial sanctions as it 
determines appropriate, subject to applicable limitations under 
paragraph (5), including--
                    (A) temporary suspension or permanent revocation of 
                registration under this title;
                    (B) temporary or permanent suspension or bar of a 
                person from further association with any registered 
                mutual fund;
                    (C) temporary or permanent limitation on the 
                activities, functions, or operations of such mutual 
                fund or person (other than in connection with required 
                additional professional education or training);
                    (D) a civil money penalty for each such violation, 
                in an amount equal to--
                            (i) not more than $100,000 for a natural 
                        person or $2,000,000 for any other person; and
                            (ii) in any case to which paragraph (5) 
                        applies, not more than $750,000 for a natural 
                        person or $15,000,000 for any other person;
                    (E) censure;
                    (F) required additional professional education or 
                training; or
                    (G) any other appropriate sanction provided for in 
                the rules of the Board.
            (5) Intentional or other knowing conduct.--The sanctions 
        and penalties described in subparagraphs (A) through (C) and 
        (D)(ii) of paragraph (4) shall only apply to--
                    (A) intentional or knowing conduct, including 
                reckless conduct, that results in violation of the 
                applicable statutory, regulatory, or professional 
                standard; or
                    (B) repeated instances of negligent conduct, each 
                resulting in a violation of the applicable statutory, 
                regulatory, or professional standard.
            (6) Failure to supervise.--
                    (A) In general.--The Board may impose sanctions 
                under this section on a registered mutual fund or upon 
                the supervisory personnel of such mutual fund, if the 
                Board finds that--
                            (i) the mutual fund has failed reasonably 
                        to supervise an associated person, either as 
                        required by the rules of the Board relating to 
                        auditing or quality control standards, or 
                        otherwise, with a view to preventing violations 
                        of this Act, the rules of the Board, the 
                        provisions of the securities laws relating to 
                        mutual funds, including the rules of the 
                        Commission under this title, or professional 
                        standards; and
                            (ii) such associated person commits a 
                        violation of this title, or any of such rules, 
                        laws, or standards.
                    (B) Rule of construction.--No associated person of 
                a registered mutual fund shall be deemed to have failed 
                to reasonably supervise any other person for purposes 
                of subparagraph (A), if--
                            (i) there have been established in and for 
                        that mutual fund procedures, and a system for 
                        applying such procedures, that comply with 
                        applicable rules of the Board and that would 
                        reasonably be expected to prevent and detect 
                        any such violation by such associated person; 
                        and
                            (ii) such person has reasonably discharged 
                        the duties and obligations incumbent upon that 
                        person by reason of such procedures and system, 
                        and had no reasonable cause to believe that 
                        such procedures and system were not being 
                        complied with.
            (7) Effect of suspension.--It shall be unlawful for any 
        person that is suspended or barred from being associated with a 
        registered mutual fund under this subsection willfully to 
        become or remain associated with any registered mutual fund, or 
        for any registered mutual fund that knew, or, in the exercise 
        of reasonable care should have known, of the suspension or bar, 
        to permit such an association, without the consent of the Board 
        or the Commission.
    (d) Reporting of Sanctions.--
            (1) Recipients.--If the Board imposes a disciplinary 
        sanction, in accordance with this section, the Board shall 
        report the sanction to--
                    (A) the Commission;
                    (B) any appropriate State regulatory authorities; 
                and
                    (C) the public (once any stay on the imposition of 
                such sanction has been lifted).
            (2) Contents.--The information reported under paragraph (1) 
        shall include--
                    (A) the name of the sanctioned person;
                    (B) a description of the sanction and the basis for 
                its imposition; and
                    (C) such other information as the Board deems 
                appropriate.
    (e) Stay of Sanctions.--
            (1) In general.--Application to the Commission for review, 
        or the institution by the Commission of review, of any 
        disciplinary action of the Board shall operate as a stay of any 
        such disciplinary action, unless and until the Commission 
        orders (summarily or after notice and opportunity for hearing 
        on the question of a stay, which hearing may consist solely of 
        the submission of affidavits or presentation of oral arguments) 
        that no such stay shall continue to operate.
            (2) Expedited procedures.--The Commission shall establish 
        for appropriate cases an expedited procedure for consideration 
        and determination of the question of the duration of a stay 
        pending review of any disciplinary action of the Board under 
        this subsection.

SEC. 206. COMMISSION OVERSIGHT OF THE BOARD.

    (a) General Oversight Responsibility.--The Commission shall have 
oversight and enforcement authority over the Board, as provided in this 
title.
    (b) Rules of the Board.--
            (1) Definition.--In this section, the term ``proposed 
        rule'' means any proposed rule of the Board, and any 
        modification of any such rule.
            (2) Prior approval required.--No rule of the Board shall 
        become effective without prior approval of the Commission in 
        accordance with this section, other than as provided in section 
        203(a)(3)(B) with respect to initial or transitional standards.
            (3) Approval criteria.--The Commission shall approve a 
        proposed rule, if it finds that the rule is consistent with the 
        requirements of this title and the securities laws, or is 
        necessary in the public interest or for the protection of 
        investors.
            (4) Proposed rule procedures.--The provisions of paragraphs 
        (1) through (3) of section 19(b) of the Securities Exchange Act 
        of 1934 (15 U.S.C. 78s(b)) shall govern the proposed rules of 
        the Board, as fully as if the Board were a ``registered 
        securities association'' for purposes of that section 19(b), 
        except that, for purposes of this paragraph--
                    (A) the phrase ``consistent with the requirements 
                of this title and the rules and regulations thereunder 
                applicable to such organization'' in section 19(b)(2) 
                of that Act shall be deemed to read ``consistent with 
                the requirements of title II of the Mutual Fund 
                Investor Protection Act of 2003, and the rules and 
                regulations issued thereunder applicable to such 
                organization, or as necessary in the public interest or 
                for the protection of investors''; and
                    (B) the phrase ``otherwise in furtherance of the 
                purposes of this title'' in section 19(b)(3)(C) of that 
                Act shall be deemed to read ``otherwise in furtherance 
                of the purposes of title II of the Mutual Fund Investor 
                Protection Act of 2003''.
            (5) Commission authority to amend rules of the board.--The 
        provisions of section 19(c) of the Securities Exchange Act of 
        1934 (15 U.S.C. 78s(c)) shall govern the abrogation, deletion, 
        or addition to portions of the rules of the Board by the 
        Commission as fully as if the Board were a ``registered 
        securities association'' for purposes of that section 19(c), 
        except that the phrase ``to conform its rules to the 
        requirements of this title and the rules and regulations 
        thereunder applicable to such organization, or otherwise in 
        furtherance of the purposes of this title'' in section 19(c) of 
        that Act shall, for purposes of this paragraph, be deemed to 
        read ``to assure the fair administration of the Mutual Fund 
        Oversight Board, conform the rules promulgated by that Board to 
        the requirements of title II of the Mutual Fund Investor 
        Protection Act of 2002, or otherwise further the purposes of 
        that Act, the securities laws, and the rules and regulations 
        thereunder applicable to that Board''.
    (c) Commission Review of Disciplinary Action Taken by the Board.--
            (1) Notice of sanction.--The Board shall promptly file 
        notice with the Commission of any final sanction on any 
        registered mutual fund or on any associated person thereof, in 
        such form and containing such information as the Commission, by 
        rule, may prescribe.
            (2) Review of sanctions.--The provisions of sections 
        19(d)(2) and 19(e)(1) of the Securities Exchange Act of 1934 
        (15 U.S.C. 78s (d)(2) and (e)(1)) shall govern the review by 
        the Commission of final disciplinary sanctions imposed by the 
        Board (including sanctions imposed under section 205(b)(3) of 
        this title for noncooperation in an investigation of the 
        Board), as fully as if the Board were a self-regulatory 
        organization and the Commission were the appropriate regulatory 
        agency for such organization for purposes of those sections 
        19(d)(2) and 19(e)(1), except that, for purposes of this 
        paragraph--
                    (A) section 205(e) of this title (rather than that 
                section 19(d)(2)) shall govern the extent to which 
                application for, or institution by the Commission on 
                its own motion of, review of any disciplinary action of 
                the Board operates as a stay of such action;
                    (B) references in that section 19(e)(1) to 
                ``members'' of such an organization shall be deemed to 
                be references to registered mutual funds;
                    (C) the phrase ``consistent with the purposes of 
                this title'' in that section 19(e)(1) shall be deemed 
                to read ``consistent with the purposes of this title 
                and title II of the Mutual Fund Investor Protection Act 
                of 2002'';
                    (D) references to rules of the Municipal Securities 
                Rulemaking Board in that section 19(e)(1) shall not 
                apply; and
                    (E) the reference to section 19(e)(2) of the 
                Securities Exchange Act of 1934 shall refer instead to 
                section 206(c)(3) of this title.
            (3) Commission modification authority.--The Commission may 
        enhance, modify, cancel, reduce, or require the remission of a 
        sanction imposed by the Board upon a registered mutual fund or 
        associated person thereof, if the Commission, having due regard 
        for the public interest and the protection of investors, finds, 
        after a proceeding in accordance with this subsection, that the 
        sanction--
                    (A) is not necessary or appropriate in furtherance 
                of this title or the securities laws; or
                    (B) is excessive, oppressive, inadequate, or 
                otherwise not appropriate to the finding or the basis 
                on which the sanction was imposed.
    (d) Censure of the Board; Other Sanctions.--
            (1) Rescission of board authority.--The Commission, by 
        rule, consistent with the public interest, the protection of 
        investors, and the other purposes of this title and the 
        securities laws, may relieve the Board of any responsibility to 
        enforce compliance with any provision of this title, the 
        securities laws, the rules of the Board, or professional 
        standards.
            (2) Censure of the board; limitations.--The Commission may, 
        by order, as it determines necessary or appropriate in the 
        public interest, for the protection of investors, or otherwise 
        in furtherance of the purposes of this title or the securities 
        laws, censure or impose limitations upon the activities, 
        functions, and operations of the Board, if the Commission 
        finds, on the record, after notice and opportunity for a 
        hearing, that the Board--
                    (A) has violated or is unable to comply with any 
                provision of this title, the rules of the Board, or the 
                securities laws; or
                    (B) without reasonable justification or excuse, has 
                failed to enforce compliance with any such provision or 
                rule, or any professional standard by a registered 
                mutual fund or an associated person thereof.
            (3) Censure of board members; removal from office.--The 
        Commission may, as necessary or appropriate in the public 
        interest, for the protection of investors, or otherwise in 
        furtherance of the purposes of this title or the securities 
        laws, remove from office or censure any member of the Board, if 
        the Commission finds, on the record, after notice and 
        opportunity for a hearing, that such member--
                    (A) has willfully violated any provision of this 
                title, the rules of the Board, or the securities laws;
                    (B) has willfully abused the authority of that 
                member; or
                    (C) without reasonable justification or excuse, has 
                failed to enforce compliance with any such provision or 
                rule, or any professional standard by any registered 
                mutual fund or any associated person thereof.

SEC. 207. FUNDING.

    (a) In General.--The Board shall be funded as provided in this 
section.
    (b) Annual Budgets.--The Board shall establish a budget for each 
fiscal year, which shall be reviewed and approved according to 
procedures established by the Board, not less than 1 month prior to the 
commencement of the fiscal year to which the budget pertains. The 
budget of the Board shall be subject to approval by the Commission.
    (c) Sources and Uses of Funds.--The budget of the Board (reduced by 
any registration or annual fees received under section 202(e) for the 
year preceding the year for which the budget is being computed), for 
each fiscal year shall be payable from annual support fees, in 
accordance with subsection (d).
    (d) Annual Support Fee for the Board.--
            (1) Establishment of fee.--The Board shall establish, with 
        the approval of the Commission, a reasonable annual support fee 
        (or a formula for the computation thereof), as may be necessary 
        or appropriate to establish and maintain the Board.
            (2) Assessments.--The rules of the Board under paragraph 
        (1) shall provide for the equitable allocation, assessment, and 
        collection by the Board (or an agent appointed by the Board) of 
        the fee established under paragraph (1), among mutual funds, in 
        accordance with subsection (f), allowing for differentiation 
        among classes of mutual funds, as appropriate.
    (e) Allocation of Support Fees Among Mutual Funds.--Any amount due 
from mutual funds (or a particular class of mutual funds) under this 
section to fund the budget of the Board shall be allocated among and 
payable by each mutual fund (or each mutual fund in a particular class, 
as applicable) in an amount equal to the total of such amount, 
multiplied by a fraction--
            (1) the numerator of which is the average monthly equity 
        market capitalization of the mutual fund for the 12-month 
        period immediately preceding the beginning of the fiscal year 
        to which such budget relates; and
            (2) the denominator of which is the average monthly equity 
        market capitalization of all such mutual funds for such 12-
        month period.
    (f) Rule of Construction.--Nothing in this section shall be 
construed to render the Board subject to procedures in Congress to 
authorize or appropriate public funds, or to prevent such organization 
from utilizing additional sources of revenue for its activities, such 
as earnings from publication sales, provided that each additional 
source of revenue shall not jeopardize, in the judgment of the 
Commission, the actual and perceived independence of such organization.

SEC. 208. NO PREEMPTION OF STATE SECURITIES ACTIONS.

    No action taken by the Mutual Fund Oversight Board shall preempt 
any State securities investigation or enforcement action, or any State 
law, regulation, order, interpretation, or other action related to 
corporate governance or antitrust, provided such corporate governance 
or antitrust law, regulation, order, interpretation, or other action is 
of general applicability.

SEC. 209. ARBITRATION OF INVESTOR CLAIMS IN AN INDEPENDENT FORUM.

    Not later than 270 days after the date of enactment of this Act, 
the Commission shall prescribe rules under the Securities Act of 1933, 
the Securities Exchange Act of 1934, the Investment Company Act of 
1940, and the Investment Advisers Act of 1940, as appropriate, to be 
adopted by the Commission, any self-regulatory organization, or both, 
requiring that complainants who bring claims under such Acts shall have 
the option, at the time the complaint is filed, to have any arbitration 
of that complaint held in an independent arbitration forum the 
complainant chooses.
                                 <all>