II 109th CONGRESS 1st Session S. 1037 IN THE SENATE OF THE UNITED STATES May 16, 2005 Mr. Akaka introduced the following bill; which was read twice and referred to the Committee on Banking, Housing, and Urban Affairs A BILL To require disclosure of financial relationships between brokers and mutual fund companies, and of certain brokerage commissions paid by mutual fund companies.
1.
Short title
This Act may be cited as the Mutual Fund Transparency Act of 2005.
2.
Disclosure of financial relationships between brokers and mutual fund companies
(a)
In general
Section 15(b) of the Securities Exchange Act of 1934 (15 U.S.C. 78o(b)) is amended by adding at the end the following: (13)
Confirmation of transactions for mutual funds
(A)
In general
Each broker shall disclose in writing to customers that purchase the shares of an open-end company registered under section 8 of the Investment Company Act of 1940 (15 U.S.C. 80a–8)— (i)the amount of any compensation received or to be received by the broker in connection with such transaction from any sources; and (ii)such other information as the Commission determines appropriate. (B)
Revenue sharing
The term compensation under subparagraph (A) shall include 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 an open-end company. (C)
Timing of disclosure
The disclosure required under subparagraph (A) shall be made to a customer not later than as of the date of the completion of the transaction. (D)
Limitation
The disclosures required under subparagraph (A) may not be made exclusively in— (i)a registration statement or prospectus of an open-end company; or (ii)any other filing of an open-end company with the Commission. (E)
Commission authority
(i)
In general
The Commission shall promulgate such final rules as are necessary to carry out this paragraph not later than 1 year after the date of enactment of the Mutual Fund Transparency Act of 2005. (ii)
Form of disclosure
Disclosures under this paragraph shall be in such form as the Commission, by rule, shall require. (F)
Definition
In this paragraph, the term open-end company has the same meaning as in section 5 of the Investment Company Act of 1940 (15 U.S.C. 80a–5). . (b)
Disclosure of brokerage commissions
Section 30 of the Investment Company Act of 1940 (15 U.S.C. 80a–29) is amended by adding at the end the following: (k)
Disclosure of brokerage commissions
The Commission, by rule, shall require that brokerage commissions as an aggregate dollar amount and percentage of assets paid by an open-end company be included in any disclosure of the amount of fees and expenses that may be payable by the holder of the securities of such company for purposes of— (1)the registration statement of that open-end company; and (2)any other filing of that open-end company with the Commission, including the calculation of expense ratios. .
3.
Mutual fund governance
(a)
Independent fund boards
Section 10(a) of the Investment Company Act of 1940 (15 U.S.C. 80a–10(a)) is amended— (1)by striking shall have and inserting the following: shall—(1)have ; (2)by striking 60 per centum and inserting 25 percent; (3)by striking the period at the end and inserting a semicolon; and (4)by adding at the end the following: (2)have as chairman of its board of directors an interested person of such registered company; or (3)have as a member of its board of directors any person that is an interested person of such registered investment company— (A)who has served without being approved or elected by the shareholders of such registered investment company at least once every 5 years; and (B)unless such director has been found, on an annual basis, by a majority of the directors who are not interested persons, after reasonable inquiry by such directors, not to have any material business or familial relationship with the registered investment company, a significant service provider to the company, or any entity controlling, controlled by, or under common control with such service provider, that is likely to impair the independence of the director. . (b)
Action by independent directors
Section 10 of the Investment Company Act of 1940 (15 U.S.C. 80a–10) is amended by adding at the end the following: (i)
Action by board of directors
No action taken by the board of directors of a registered investment company may require the vote of a director who is an interested person of such registered investment company. (j)
Independent committee
(1)
In general
The members of the board of directors of a registered investment company who are not interested persons of such registered investment company shall establish a committee comprised solely of such members, which committee shall be responsible for— (A)selecting persons to be nominated for election to the board of directors; and (B)adopting qualification standards for the nomination of directors. (2)
Disclosure
The standards developed under paragraph (1)(B) shall be disclosed in the registration statement of the registered investment company. . (c)
Definition of interested person
Section 2(a)(19) of the Investment Company Act of 1940 (15 U.S.C. 80a–2) is amended— (1)in subparagraph (A)— (A)in clause (iv), by striking two and inserting 5; and (B)by striking clause (vii) and inserting the following: (vii)any natural person who has served as an officer or director, or as an employee within the preceding 10 fiscal years, of an investment adviser or principal underwriter to such registered investment company, or of any entity controlling, controlled by, or under common control with such investment adviser or principal underwriter; (viii)any natural person who has served as an officer or director, or as an employee within the preceding 10 fiscal years, of any entity that has within the preceding 5 fiscal years acted as a significant service provider to such registered investment company, or of any entity controlling, controlled by, or under the common control with such service provider; (ix)any natural person who is a member of a class of persons that the Commission, by rule or regulation, determines is unlikely to exercise an appropriate degree of independence as a result of— (I)a material business relationship with the investment company or an affiliated person of such investment company; (II)a close familial relationship with any natural person who is an affiliated person of such investment company; or (III)any other reason determined by the Commission. ; (2)in subparagraph (B)— (A)in clause (iv), by striking two and inserting 5; and (B)by striking clause (vii) and inserting the following: (vii)any natural person who is a member of a class of persons that the Commission, by rule or regulation, determines is unlikely to exercise an appropriate degree of independence as a result of— (I)a material business relationship with such investment adviser or principal underwriter or affiliated person of such investment adviser or principal underwriter; (II)a close familial relationship with any natural person who is an affiliated person of such investment adviser or principal underwriter; or (III)any other reason as determined by the Commission: . (d)
Definition of significant service provider
Section 2(a) of the Investment Company Act of 1940 (15 U.S.C. 80a–2(a)) is amended by adding at the end the following: (53)
Significant service provider
(A)
In general
Not later than 270 days after the date of enactment of the Mutual Fund Transparency Act of 2005, the Securities and Exchange Commission shall issue final rules defining the term significant service provider. (B)
Requirements
The definition developed under paragraph (1) shall include, at a minimum, the investment adviser and principal underwriter of a registered investment company for purposes of paragraph (19). .
4.
Financial literacy among mutual fund investors study
(a)
In general
The Securities and Exchange Commission shall conduct a study to identify— (1)the existing level of financial literacy among investors that purchase shares of open-end companies, as that term is defined under section 5 of the Investment Company Act of 1940, that are registered under section 8 of that Act; (2)the most useful and understandable relevant information that investors need to make sound financial decisions prior to purchasing such shares; (3)methods to increase the transparency of expenses and potential conflicts of interest in transactions involving the shares of open-end companies; (4)the existing private and public efforts to educate investors; and (5)a strategy to increase the financial literacy of investors that results in a positive change in investor behavior. (b)
Report
Not later than 1 year after the date of enactment of this Act, the Securities and Exchange Commission shall submit a report on the study required under subsection (a) to— (1)the Committee on Banking, Housing, and Urban Affairs of the Senate; and (2)the Committee on Financial Services of the House of Representatives.
5.
Study regarding mutual fund advertising
(a)
In general
The Comptroller General of the United States shall conduct a study on mutual fund advertising to identify— (1)existing and proposed regulatory requirements for open-end investment company advertisements; (2)current marketing practices for the sale of open-end investment company shares, including the use of unsustainable past performance data, funds that have merged, and incubator funds; (3)the impact of such advertising on consumers; and (4)recommendations to improve investor protections in mutual fund advertising and additional information necessary to ensure that investors can make informed financial decisions when purchasing shares. (b)
Report
Not later than 1 year after the date of enactment of this Act, the Comptroller General of the United States shall submit a report on the results of the study conducted under subsection (a) to— (1)the Committee on Banking, Housing, and Urban Affairs of the United States Senate; and (2)the Committee on Financial Services of the House of Representatives.
6.
Point-of-sale disclosure
(a)
In general
Section 15(b) of the Securities Exchange Act of 1934 (15 U.S.C. 78o(b)), as amended by section 2, is amended by adding at the end the following: (14)
Broker disclosures in mutual fund transactions
(A)
In general
Each broker shall disclose in writing to each person that purchases the shares of an investment company registered under section 8 of the Investment Company Act of 1940 (15 U.S.C. 80a-8)— (i)the source and amount, in dollars and as a percentage of assets, of any compensation received or to be received by the broker in connection with such transaction from any sources; (ii)the amount, in dollars and as a percentage of assets, of compensation received in connection with transactions in shares of other investment company shares offered by the broker, if materially different from the amount under (i); (iii)comparative information that shows the average amount received by brokers in connection with comparable transactions, as determined by the Commission; and (iv)such other information as the Commission determines appropriate. (B)
Revenue sharing
The term compensation under subparagraph (A) shall include 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. (C)
Timing of disclosure
The disclosures required under subparagraph (A) shall be made to permit the person purchasing the shares to evaluate such disclosures before deciding to engage in the transaction. (D)
Limitation
The disclosures required under subparagraph (A) may not be made exclusively in— (i)a registration statement or prospectus of a registered investment company; or (ii)any other filing of a registered investment company with the Commission. (E)
Commission authority
The Commission shall promulgate such final rules as are necessary to carry out this paragraph not later than 1 year after the date of enactment of the Mutual Fund Transparency Act of 2005. . (b)
National securities association requirements
Section 15A of the Securities Exchange Act of 1934 (15 U.S.C. 78o-3) is amended by adding at the end the following: (n)
National securities association requirements
Each national securities association registered pursuant to this section shall issue such rules as necessary not later than 1 year after the date of enactment of the Mutual Fund Transparency Act of 2005 to require that a broker that provides individualized investment advice to a person shall— (1)have a fiduciary duty to that person; (2)act solely in the best interests of that person; and (3)fully disclose all potential conflicts of interest and other information that is material to the relationship to that person prior to the time that the investment advice is first provided to the person and at least annually thereafter. .