[Congressional Bills 111th Congress]
[From the U.S. Government Publishing Office]
[S. 1964 Introduced in Senate (IS)]

111th CONGRESS
  1st Session
                                S. 1964

 To require disclosure of financial relationships between brokers and 
 dealers and mutual fund companies, and of certain commissions paid by 
                         mutual fund companies.


_______________________________________________________________________


                   IN THE SENATE OF THE UNITED STATES

                            October 28, 2009

   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 
 dealers and mutual fund companies, and of certain commissions paid by 
                         mutual fund companies.

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

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Mutual Fund Transparency Act of 
2009''.

SEC. 2. DISCLOSURE OF FINANCIAL RELATIONSHIPS BETWEEN BROKERS AND 
              DEALERS 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 and dealer shall 
                disclose in writing to customers that purchase the 
                shares of any open-end or closed-end company registered 
                under section 8 of the Investment Company Act of 1940 
                (15 U.S.C. 80a-8) or any interest in a unit investment 
                trust or municipal securities registered under this 
                title used for education savings plans--
                            ``(i) the amount of any compensation 
                        received or to be received by the broker or 
                        dealer 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) includes 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 
                entity described in subparagraph (A), and payments made 
                by an underwriter of the fund to a broker or dealer.
                    ``(C) Timing of disclosure.--The disclosure 
                required under subparagraph (A) shall be provided or 
                sent to a customer not later than 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 entity described in 
                        subparagraph (A); or
                            ``(ii) any other filing of an entity 
                        described in subparagraph (A) with the 
                        Commission.
                    ``(E) Commission authority.--
                            ``(i) In general.--The Commission shall 
                        issue such final rules or regulations 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 2009.
                            ``(ii) Form of disclosure.--Disclosures 
                        under this paragraph shall be in such form as 
                        the Commission shall require by rule.
                    ``(F) Definitions.--In this paragraph--
                            ``(i) the terms `open-end company' and 
                        `closed-end company' have the same meanings as 
                        in section 5 of the Investment Company Act of 
                        1940 (15 U.S.C. 80a-5);
                            ``(ii) the term `unit investment trust' has 
                        the same meaning as in section 4 of the 
                        Investment Company Act of 1940 (15 U.S.C. 80a-
                        4); and
                            ``(iii) the term `education savings plan' 
                        means a qualified tuition program described in 
                        section 529(b)(1)(A)(ii) of the Internal 
                        Revenue Code of 1986.''.
    (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 or closed-end 
company or a unit investment trust or issuer of municipal securities 
during the 5-year period preceding the date of the transaction 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 company; and
            ``(2) any other filing of that company with the Commission, 
        including the calculation of expense ratios.''.

SEC. 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) permit any person (other than an interested person, 
        as described in paragraph (1)) to serve as a member of its 
        board of directors, unless that person--
                    ``(A) is approved or elected by the shareholders of 
                such registered investment company at least once every 
                5 years; and
                    ``(B) 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 company, a significant 
                service provider to the company, or any entity 
                controlling, controlled by, or under common control 
                with such service provider, that could reasonably be 
                interpreted as a conflict of interest or cast doubt on 
                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(a)(19)) 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 or 
                                professional 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:''; and
            (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 or 
                                professional 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:
            ``(54) Significant service provider.--
                    ``(A) In general.--Not later than 270 days after 
                the date of enactment of the Mutual Fund Transparency 
                Act of 2009, the Commission shall issue final rules 
                defining the term `significant service provider'.
                    ``(B) Requirements.--The definition developed under 
                paragraph (1) shall include, at a minimum, the 
                investment adviser and principal underwriter of a 
                registered investment company for purposes of paragraph 
                (19).''.

SEC. 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.

SEC. 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.

SEC. 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 of this Act, is 
amended by adding at the end the following:
            ``(14) Broker and dealer disclosures in mutual fund 
        transactions.--
                    ``(A) In general.--Each broker and dealer shall 
                disclose in writing to each person that purchases the 
                shares of an open-end or closed-end company registered 
                under section 8 of the Investment Company Act of 1940 
                (15 U.S.C. 80a-8) or any interest in a unit investment 
                trust or municipal securities registered under this 
                title--
                            ``(i) the source and amount, in dollars and 
                        as a percentage of assets, of any compensation 
                        received or to be received by the broker or 
                        dealer 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 or dealer, if materially different from 
                        the amount under clause (i);
                            ``(iii) comparative information that shows 
                        the average amount received by brokers and 
                        dealers 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 
                2009.''.
    (b) Fiduciary Duties.--Section 15 of the Securities Exchange Act of 
1934 (15 U.S.C. 78o) is amended by adding at the end the following new 
subsection:
    ``(k) Standard of Care.--Notwithstanding any other provision of 
this title or the Investment Advisers Act of 1940, the Commission shall 
promulgate rules, not later than 1 year after the date of enactment of 
the Mutual Fund Transparency Act of 2009 to provide that the standard 
of care for all brokers and dealers in providing investment advice 
about securities to retail customers or clients (and such other 
customers or clients as the Commission may by rule provide) shall be 
the fiduciary duty established under the Investment Advisers Act of 
1940, including, without limitation, the duty to act solely in the best 
interest of the customer or client, without regard to the financial or 
other interest of the broker or dealer providing the advice.''.
                                 <all>