[Congressional Record Volume 149, Number 168 (Wednesday, November 19, 2003)]
[House]
[Pages H11533-H11547]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
MUTUAL FUNDS INTEGRITY AND FEE TRANSPARENCY ACT OF 2003
Mr. OXLEY. Mr. Speaker, I move to suspend the rules and pass the bill
(H.R. 2420) to improve transparency relating to the fees and costs that
mutual fund investors incur and to improve corporate governance of
mutual funds, as amended.
The Clerk read as follows:
H.R. 2420
Be it enacted by the Senate and House of Representatives of
the United States of America in Congress assembled,
SECTION 1. SHORT TITLE.
(a) Short Title.--This Act may be cited as the ``Mutual
Funds Integrity and Fee Transparency Act of 2003''.
(b) Table of Contents.--
Sec. 1. Short title.
TITLE I--INTEGRITY AND FEE TRANSPARENCY
Sec. 101. Improved transparency of mutual fund costs.
Sec. 102. Obligations regarding certain distribution and soft dollar
arrangements.
Sec. 103. Mutual fund governance.
Sec. 104. Audit committee requirements for investment companies.
Sec. 105. Trading restrictions.
Sec. 106. Definition of no-load mutual fund.
Sec. 107. Informing directors of significant deficiencies.
Sec. 108. Exemption from in person meeting requirements.
Sec. 109. Proxy voting disclosure.
Sec. 110. Incentive compensation and mutual fund sales.
Sec. 111. Commission study and report regulating soft dollar
arrangements.
Sec. 112. Study of arbitration claims.
TITLE II--PREVENTION OF ABUSIVE MUTUAL FUND PRACTICES
Sec. 201. Prevention of fraud; internal compliance and control
procedures.
Sec. 202. Ban on joint management of mutual funds and hedge funds.
Sec. 203. Short term trading by interested persons prohibited.
Sec. 204. Elimination of stale prices.
Sec. 205. Prevention of unfair after-hours trading.
Sec. 206. Report on adequacy of remedial actions.
TITLE I--INTEGRITY AND FEE TRANSPARENCY
SEC. 101. IMPROVED TRANSPARENCY OF MUTUAL FUND COSTS.
(a) Regulation Revision Required.--Within 270 days after
the date of enactment of this Act, the Securities and
Exchange Commission shall revise regulations 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 an open-end management investment company, in the
quarterly statement or other periodic report to shareholders
or other appropriate disclosure document, of the following:
(1) The estimated amount, in dollars for each $1,000 of
investment in the company, of the operating expenses of the
company that are borne by shareholders.
(2) 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.
(3) 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.
(4) Information concerning the company's policies and
practices with respect to the payment of commissions for
effecting securities transactions to a member of an exchange,
broker, or dealer who--
(A) 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;
(B) furnishes analyses and reports concerning issuers,
industries, securities, economic factors and trends,
portfolio strategy, and the performance of accounts; or
[[Page H11534]]
(C) facilitates the sale and distribution of the company's
shares.
(5) Information concerning payments by any person other
than the company that are intended to facilitate the sale and
distribution of the company's shares.
(6) Information concerning discounts on front-end sales
loads for which investors may be eligible, including the
minimum purchase amounts required for such discounts.
(b) Appropriate Disclosure Document.--
(1) In general.--For purposes of subsection (a), 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.
(2) Exceptions.--Notwithstanding paragraph (1), the
disclosures required by paragraph (2) and (4) of subsection
(a) 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.
(c) Concept Release Required.--
(1) 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 how such costs may be
disclosed to mutual fund investors in a manner that will
enable investors to compare such costs among funds.
(2) Report and recommendations required.--The Commission
shall submit a report on the findings from the concept
release required by paragraph (1), as well as legislative and
regulatory recommendations, if any, to the Committee on
Financial Services of the House of Representatives and the
Committee on Banking, Housing, and Urban Affairs of the
Senate, no later than 270 days after the date of enactment of
this Act.
(d) Additional Requirement for Fee Statement.--
(1) 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 an open-end management investment
company, in the quarterly statement or other periodic report,
or other appropriate disclosure document, a statement
informing shareholders that such shareholders have paid fees
on their investments, 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.
(2) Appropriate disclosure document.--The statement
required by paragraph (1) shall not be considered to be made
in an appropriate disclosure document unless such statement
is--
(A) 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
(B) prominently displayed, in a location in close proximity
to the statement of the shares account value.
(e) Reducing Burdens on Small Funds.--In prescribing rules
under this section, the Commission shall give consideration
to methods for reducing for small investment companies the
burdens of making the disclosures required by such rules,
consistent with the public interest and the protection of
investors.
SEC. 102. OBLIGATIONS REGARDING CERTAIN DISTRIBUTION AND SOFT
DOLLAR ARRANGEMENTS.
(a) Reporting Requirement.--Section 15 of the Investment
Company Act of 1940 (15 U.S.C. 80a-15) is amended by adding
at the end the following new subsection:
``(g) Obligations Regarding Certain Distribution and Soft
Dollar Arrangements.--
``(1) Reporting requirements.--Each investment adviser to a
registered investment company shall, no less frequently than
annually, submit to the board of directors of the company a
report on--
``(A) payments during the reporting period by the adviser
(or an affiliated person of the adviser) that were directly
or indirectly made for the purpose of promoting the sale of
shares of the investment company (referred to in paragraph
(2) as a `revenue sharing arrangement');
``(B) services to the company provided or paid for by a
broker or dealer or an affiliated person of the broker or
dealer (other than brokerage and research services) in
exchange for the direction of brokerage to the broker or
dealer (referred to in paragraph (2) as a `directed brokerage
arrangement'); and
``(C) research services obtained by the adviser (or an
affiliated person of the adviser) during the reporting period
from a broker or dealer the receipt of which may reasonably
be attributed to securities transactions effected on behalf
of the company or any other company that is a member of the
same group of investment companies (referred to in paragraph
(2) as a `soft dollar arrangement').
``(2) Fiduciary duty of board of directors.--The board of
directors of a registered investment company shall have a
fiduciary duty--
``(A) to review the investment adviser's direction of the
company's brokerage transactions, including directed
brokerage arrangements and soft dollar arrangements, and to
determine that the direction of such brokerage is in the best
interests of the shareholders of the company; and
``(B) to review any revenue sharing arrangements to ensure
compliance with this Act and the rules adopted thereunder,
and to determine that such revenue sharing arrangements are
in the best interests of the shareholders of the company.
``(3) Summaries of reports in annual reports to
shareholders.--In accordance with regulations prescribed by
the Commission under paragraph (4), annual reports to
shareholders of a registered investment company shall include
a summary of the most recent report submitted to the board of
directors under paragraph (1).
``(4) Regulations.--The Commission shall adopt rules and
regulations implementing this section, which rules and
regulations shall, among other things, prescribe the content
of the required reports.
``(5) Definition.--For purposes of this subsection--
``(A) the term `brokerage and research services' has the
same meaning as in section 28(e)(3) of the Securities
Exchange Act of 1934; and
``(B) the term `research services' means the services
described in subparagraphs (A) and (B) of such section.''.
(b) Contractual Records.--Within 270 days after the date of
enactment of this Act, the Securities and Exchange Commission
shall, by rule prescribed pursuant to section 28(e) of the
Securities Exchange Act of 1934 (15 U.S.C. 78bb(e)), require
that--
(1) if any research services (as such term is defined in
section 15(g)(5)(B) of the Investment Company Act of 1940, as
amended by subsection (a) of this section)--
(A) are provided by a member of an exchange, broker, or
dealer who effects securities transactions in an account, and
(B) are prepared or provided by a party that is
unaffiliated with such member, broker, or dealer,
any person exercising investment discretion with respect to
such account shall maintain a copy of the written contract
between the person preparing such research and the member of
an exchange, broker, or dealer; and
(2) such contract shall describe the nature and value of
the services provided.
SEC. 103. MUTUAL FUND GOVERNANCE.
(a) Director Independence.--Section 10(a) of the Investment
Company Act of 1940 (15 U.S.C. 80a-10) is amended by striking
``60 per centum'' and inserting ``one-third''.
(b) 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 clause (vi) and redesignating clause (vii)
as clause (vi); and
(B) by amending clause (v) to read as follows:
``(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
(2) in subparagraph (B)--
(A) by striking clause (vi) and redesignating clause (vii)
as clause (vi); and
(B) by amending clause (v) to read as follows:
``(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),''.
SEC. 104. AUDIT COMMITTEE REQUIREMENTS FOR INVESTMENT
COMPANIES.
(a) Amendments.--Section 32 of the Investment Company Act
of 1940 (15 U.S.C. 80a-31) is amended--
(1) in subsection (a)--
(A) by striking paragraphs (1) and (2) and inserting the
following:
``(1) such accountant shall have been selected at a meeting
held within 30 days before or after the beginning of the
fiscal year or before the annual meeting of stockholders in
that year by the vote, cast in person, of a majority of the
members of the audit committee of such registered company;
``(2) such selection shall have been submitted for
ratification or rejection at the next succeeding annual
meeting of stockholders if such meeting be held, except that
any vacancy occurring between annual meetings, due to the
death or resignation of the accountant, may be filled by the
vote of a majority of the members of the audit committee of
such registered company, cast in person at a meeting called
for the purpose of voting on such action;''; and
(B) by adding at the end the following new sentence: ``The
Commission, by rule, regulation, or order, may exempt a
registered management company or registered face-amount
certificate company subject to this subsection from the
requirement in paragraph (1) that the votes by the members of
the audit committee be cast at a meeting in person when such
a requirement is impracticable, subject to such conditions as
the Commission may require.''; and
(2) by adding at the end the following new subsection:
[[Page H11535]]
``(d) Audit Committee Requirements.--
``(1) Requirements as prerequisite to filing financial
statements.--Any registered management company or registered
face-amount certificate company that files with the
Commission any financial statement signed or certified by an
independent public accountant shall comply with the
requirements of paragraphs (2) through (6) of this subsection
and any rule or regulation of the Commission issued
thereunder.
``(2) Responsibility relating to independent public
accountants.--The audit committee of the registered company,
in its capacity as a committee of the board of directors,
shall be directly responsible for the appointment,
compensation, and oversight of the work of any independent
public accountant employed by such registered company
(including resolution of disagreements between management and
the auditor regarding financial reporting) for the purpose of
preparing or issuing the audit report or related work, and
each such independent public accountant shall report directly
to the audit committee.
``(3) Independence.--
``(A) In general.--Each member of the audit committee of
the registered company shall be a member of the board of
directors of the company, and shall otherwise be independent.
``(B) Criteria.--In order to be considered to be
independent for purposes of this paragraph, a member of an
audit committee of a registered company may not, other than
in his or her capacity as a member of the audit committee,
the board of directors, or any other board committee--
``(i) accept any consulting, advisory, or other
compensatory fee from the registered company or the
investment adviser or principal underwriter of the registered
company; or
``(ii) be an `interested person' of the registered company,
as such term is defined in section 2(a)(19).
``(4) Complaints.--The audit committee of the registered
company shall establish procedures for--
``(A) the receipt, retention, and treatment of complaints
received by the registered company regarding accounting,
internal accounting controls, or auditing matters; and
``(B) the confidential, anonymous submission by employees
of the registered company and its investment adviser or
principal underwriter of concerns regarding questionable
accounting or auditing matters.
``(5) Authority to engage advisers.--The audit committee of
the registered company shall have the authority to engage
independent counsel and other advisers, as it determines
necessary to carry out its duties.
``(6) Funding.--The registered company shall provide
appropriate funding, as determined by the audit committee, in
its capacity as a committee of the board of directors, for
payment of compensation--
``(A) to the independent public accountant employed by the
registered company for the purpose of rendering or issuing
the audit report; and
``(B) to any advisers employed by the audit committee under
paragraph (5).
``(7) Audit committee.--For purposes of this subsection,
the term `audit committee' means--
``(A) a committee (or equivalent body) established by and
amongst the board of directors of a registered investment
company for the purpose of overseeing the accounting and
financial reporting processes of the company and audits of
the financial statements of the company; and
``(B) if no such committee exists with respect to a
registered investment company, the entire board of directors
of the company.''.
(b) Conforming Amendment.--Section 10A(m) of the Securities
Exchange Act of 1934 is amended by adding at the end the
following new paragraph:
``(7) Exemption for investment companies.--Effective one
year after the date of enactment of the Mutual Funds
Integrity and Fee Transparency Act of 2003, for purposes of
this subsection, the term `issuer' shall not include any
investment company that is registered under section 8 of the
Investment Company Act of 1940.''.
(c) Implementation.--Not later than 180 days after the date
of enactment of this Act, the Securities and Exchange
Commission shall issue final regulations to carry out section
32(d) of the Investment Company Act of 1940, as added by
subsection (a) of this section.
SEC. 105. TRADING RESTRICTIONS.
Subsection (e) of section 22 of the Investment Company Act
of 1940 (15 U.S.C. 80a-22(e)) is amended to read as follows:
``(e) Trading Restrictions.--
``(1) Prohibition and exceptions.--No registered investment
company shall suspend the right of redemption, or postpone
the date of payment or satisfaction upon redemption of any
redeemable security in accordance with its terms for more
than seven days after the tender of such security to the
company or its agents designated for that purpose for
redemption, except--
``(A) for any period (i) during which the principal market
for the securities in which the company invests is closed,
other than customary week-end and holiday closings; or (ii)
during which trading on such exchange is restricted;
``(B) for any period during which an emergency exists as a
result of which (i) disposal by the company of securities
owned by it is not reasonably practicable; or (ii) it is not
reasonably practicable for such company fairly to determine
the value of its net assets; or
``(C) for such other periods as the Commission may by order
permit for the protection of security holders of the company.
``(2) Commission rules.--The Commission shall by rules and
regulations--
``(A) determine the conditions under which trading shall be
deemed to be restricted;
``(B) determine the conditions under which an emergency
shall be deemed to exist; and
``(C) provide for the determination by each company,
subject to such limitations as the Commission shall determine
are necessary and appropriate for the protection of
investors, of the principal market for the securities in
which the company invests.''.
SEC. 106. DEFINITION OF NO-LOAD MUTUAL FUND.
Within 270 days after the date of enactment of this Act,
the Securities and Exchange Commission shall, by rule adopted
by the Commission or a self-regulatory organization (or
both)--
(1) clarify the definition of ``no-load'' as such term is
used by investment companies that impose any fee under a plan
adopted pursuant to rule 12b-1 of the Commission's rules (17
C.F.R. 270.12b-1); and
(2) require disclosure to prevent investors from being
misled by the use of such terminology by the company or its
adviser or principal underwriter.
SEC. 107. INFORMING DIRECTORS OF SIGNIFICANT DEFICIENCIES.
Section 42 of the Investment Company Act of 1940 (15 U.S.C.
80a-41) is amended by adding at the end the following new
subsection:
``(f) Informing Directors of Significant Deficiencies.--If
the report of an inspection by the Commission of a registered
investment company identifies significant deficiencies in the
operations of such company, or of its investment adviser or
principal underwriter, the company shall provide such report
to the directors of such company.''.
SEC. 108. EXEMPTION FROM IN PERSON MEETING REQUIREMENTS.
Section 15(c) of the of the Investment Company Act of 1940
(15 U.S.C. 80a-15(c)) is amended by adding at the end the
following new sentence: ``The Commission, by rule,
regulation, or order, may exempt a registered investment
company subject to this subsection from the requirement that
the votes of its directors be cast at a meeting in person
when such a requirement is impracticable, subject to such
conditions as the Commission may require.''.
SEC. 109. PROXY VOTING DISCLOSURE.
Section 30 of the Investment Company Act of 1940 (15 U.S.C.
80a-29) is amended by adding at the end the following new
subsection:
``(k) Proxy Voting Disclosure.--Every registered management
investment company, other than a small business investment
company, shall file with the Commission not later than August
31 of each year an annual report, on a form prescribed by the
Commission by rule, containing the registrant's proxy voting
record for the most recent twelve-month period ending on June
30. The financial statements of every such company shall
state that information regarding how the company voted
proxies relating to portfolio securities during the most
recent 12-month period ending on June 30 is available--
``(1) without charge, upon request, by calling a specified
toll-free (or collect) telephone number; or on or through the
company's website at a specified Internet address; or both;
and
``(2) on the Commission's website.''.
SEC. 110. INCENTIVE COMPENSATION AND MUTUAL FUND SALES.
(a) Commission Rule Required.--Within 270 days after the
date of enactment of this Act, the Commission shall by rule
prohibit, as a means reasonably designed to prevent
fraudulent, deceptive, or manipulative acts and practices,
the sale of the securities of an investment company or of
municipal fund securities by a broker or dealer or by a
municipal securities broker or dealer without the disclosure
of--
(1) the amount and source of sales fees, payments by
persons other than the investment company that are intended
to facilitate the sale and distribution of the securities,
and commissions for effecting portfolio securities
transactions, or other payments, paid to such broker or
dealer, or municipal securities broker or dealer, or
associated person thereof in connection with such sale;
(2) any commission or other fees or charges the investor
has paid or will or might be subject to, including as a
result of purchases or redemptions;
(3) any conflicts of interest that any associated person of
the investor's broker or dealer or municipal securities
broker or dealer may face due to the receipt of differential
compensation in connection with such sale; and
(4) information about the estimated amount of any asset-
based distribution expenses incurred, or to be incurred, by
the investment company in connection with the investor's
purchase of the securities.
(b) Benchmarks.--In connection with the rule required by
subsection (a), the Commission shall, to the extent
practical, establish standards for such disclosures.
(c) Definitions.--
(1) Differential compensation.--For purposes of this
section, an associated person of
[[Page H11536]]
a broker or dealer shall be considered to receive
differential compensation if such person receives any
increased or additional remuneration, in whatever form--
(A) for sales of the securities of an investment company or
municipal fund security that is affiliated with, or otherwise
specifically designated by, such broker or dealer or
municipal securities broker or dealer, as compared with the
remuneration for sales of securities of an investment company
or municipal fund security offered by such broker or dealer
or municipal securities broker or dealer that are not so
affiliated or designated; or
(B) for the sale of any class of securities of an
investment company or municipal fund security as compared
with the remuneration for the sale of a class of securities
of such investment company or municipal fund security
(offered by such broker or dealer or municipal securities
broker or dealer) that charges a sales load (as defined in
section 2(a)(35) of the Investment Company Act of 1940 (15
U.S.C. 80a-2(a)(35)) only at the time of such a sale.
(2) Municipal fund security.--For purposes of this section,
a municipal fund security is any municipal security issued by
an issuer that, but for the application of section 2(b) of
the Investment Company Act of 1940 (15 U.S.C. 80a-2(b)),
would constitute an investment company within the meaning of
section 3 of the Investment Company Act of 1940 (15 U.S.C.
80a-3).
SEC. 111. COMMISSION STUDY AND REPORT REGULATING SOFT DOLLAR
ARRANGEMENTS.
(a) Study Required.--
(1) In general.--The Commission shall conduct a study of
the use of soft dollar arrangements by investment advisers as
contemplated by section 28(e) of the Securities Exchange Act
of 1934 (15 U.S.C. 78bb(e)).
(2) Areas of consideration.--The study required by this
section shall examine--
(A) the trends in the average amounts of soft dollar
commissions paid by investment advisers and investment
companies in the past 3 years;
(B) the types of services provided through soft dollar
arrangements;
(C) the benefits and disadvantages of the use of soft
dollars for investors, including the extent to which use of
soft dollar arrangements affects the ability of mutual fund
investors to evaluate and compare the expenses of different
mutual funds;
(D) the potential or actual conflicts of interest (or both
potential and actual conflicts) created by soft dollar
arrangements, including whether certain potential conflicts
are being managed effectively by other laws and regulations
specifically addressing those situations, the role of the
board of directors in managing these potential or actual (or
both) conflicts, and the effectiveness of the board in this
capacity;
(E) the transparency of such soft dollar arrangements to
investment company shareholders and investment advisory
clients of investment advisers, the extent to which enhanced
disclosure is necessary or appropriate to enable investors to
better understand the impact of these arrangements, and an
assessment of whether the cost of any enhanced disclosure or
other regulatory change would result in benefits to the
investor; and
(F) whether such section 28(e) should be modified, and
whether other regulatory or legislative changes should be
considered and adopted to benefit investors.
(b) Report Required.--The Commission shall submit a report
on the study required by subsection (a) to the Committee on
Financial Services of the House of Representatives and the
Committee on Banking, Housing, and Urban Affairs of the
Senate, no later than one year after the date of enactment of
this Act.
SEC. 112. STUDY OF ARBITRATION CLAIMS.
(a) Study Required.--The Securities and Exchange Commission
shall conduct a study of the increased rate of arbitration
claims and decisions involving mutual funds since 1995 for
the purposes of identifying trends in arbitration claim rates
and, if applicable, the causes of such increased rates and
the means to avert such causes.
(b) Report.--The Securities and Exchange Commission shall
submit a report on the study required by subsection (a) to
the Committee on Financial Services of the House of
Representatives and the Committee on Banking, Housing, and
Urban Affairs of the Senate not later than one year after the
date of enactment of this Act.
TITLE II--PREVENTION OF ABUSIVE MUTUAL FUND PRACTICES
SEC. 201. PREVENTION OF FRAUD; INTERNAL COMPLIANCE AND
CONTROL PROCEDURES.
(a) Amendment.--Subsection (j) of section 17 of the
Investment Company Act of 1940 (15 U.S.C. 80a-17(j)) is
amended to read as follows:
``(j) Detection and Prevention of Fraud.--
``(1) Commission rules to prohibit fraud, deception, and
manipulation.--It shall be unlawful for any affiliated person
of or principal underwriter for a registered investment
company or any affiliated person of an investment adviser of
or principal underwriter for a registered investment company,
to engage in any act, practice, or course of business in
connection with the purchase or sale, directly or indirectly,
by such person of any security held or to be acquired by such
registered investment company, or any security issued by such
registered investment company or by an affiliated registered
investment company, in contravention of such rules and
regulations as the Commission may adopt to define, and
prescribe means reasonably necessary to prevent, such acts,
practices, or courses of business as are fraudulent,
deceptive or manipulative.
``(2) Codes of ethics.--Such rules and regulations shall
include requirements for the adoption of codes of ethics by
registered investment companies and investment advisers of,
and principal underwriters for, such investment companies
establishing such standards as are reasonably necessary to
prevent such acts, practices, or courses of business. Such
rules and regulations shall require each such registered
investment company to disclose such codes of ethics (and any
changes therein) in the periodic report to shareholders of
such company, and to disclose such code of ethics and any
waivers and material violations thereof on a readily
accessible electronic public information facility of such
company and in such additional form and manner as the
Commission shall require by rule or regulation.
``(3) Additional compliance procedures.--Such rules and
regulations shall--
``(A) require each investment company and investment
adviser registered with the Commission to adopt and implement
policies and procedures reasonably designed to prevent
violation of the Securities Act of 1933 (15 U.S.C. 78a et
seq.), the Securities Exchange Act of 1934 (15 U.S.C. 78a et
seq.), the Sarbanes-Oxley Act of 2002 (15 U.S.C. 7201 et
seq.), the Trust Indenture Act of 1939 (15 U.S.C. 77aaa et
seq.), the Investment Company Act of 1940 (15 U.S.C. 80a-1 et
seq.), the Investment Advisers Act of 1940 (15 U.S.C. 80b et
seq.), the Securities Investor Protection Act of 1970 (15
U.S.C. 78aaa et seq.), subchapter II of chapter 53 of title
31, United States Code, chapter 2 of title I of Public Law
91-508 (12 U.S.C. 1951 et seq.), or section 21 of the Federal
Deposit Insurance Act (12 U.S.C. 1829b);
``(B) require each such company and adviser to review such
policies and procedures annually for their adequacy and the
effectiveness of their implementation;
``(C) require each such company to appoint a chief
compliance officer to be responsible for overseeing such
policies and procedures--
``(i) whose compensation shall be approved by the members
of the board of directors of the company who are not
interested persons of such company;
``(ii) who shall report directly to the members of the
board of directors of the company who are not interested
persons of such company, privately as such members request,
but no less frequently than annually; and
``(iii) whose report to such members shall include any
violations or waivers of, and any other significant issues
arising under, such policies and procedures; and
``(D) require each such company to establish policies and
procedures reasonably designed to protect any officer,
director, employee, contractor, subcontractor, or agent of
such company from retaliation, including discharge, demotion,
suspension, harassment, or any other manner of discrimination
in the terms and conditions of employment, because of any
lawful act done by such officer, director, employee,
contractor, subcontractor, or agent to provide information,
cause information to be provided, or otherwise assist in an
investigation that relates to any conduct which such officer,
director, employee, contractor, subcontractor, or agent
reasonably believes constitutes a violation of the securities
laws or the code of ethics of such investment company.
``(4) Self-certification.--Such rules and regulations shall
require the members of the board of directors who are not
interested persons of each registered open-end investment
company to certify, in the periodic report to shareholders,
or other appropriate disclosure document, that--
``(A) procedures are in place for verifying that the
determination of current net asset value of any redeemable
security issued by the company used in computing periodically
the current price for the purpose of purchase, redemption,
and sale complies with the requirements of the Investment
Company Act of 1940 and the rules and regulations thereunder,
and the company is in compliance with such procedures;
``(B) procedures are in place for the oversight of the flow
of funds into and out of the securities of the company, and
the company is in compliance with such procedures;
``(C) procedures are in place to ensure that investors are
receiving any applicable discounts on front-end sales loads
that are disclosed in the company's prospectus;
``(D) procedures are in place to ensure that, if the
company's shares are offered as different classes of shares,
such classes are designed in the interests of investors, and
could reasonably be an appropriate investment option for an
investor;
``(E) procedures are in place to ensure that information
about the company's portfolio securities is not disclosed in
violation of the securities laws or the company's code of
ethics;
``(F) the members of the board of directors who are not
interested persons of the company have reviewed and approved
the compensation of the company's portfolio manager in
connection with their consideration of the investment
advisory contract under section 15(c);
``(G) the company has established and enforces a code of
ethics as required by paragraph (2) of this subsection; and
[[Page H11537]]
``(H) the company is in compliance with the additional
requirements of paragraph (3) of this subsection.''.
(b) Deadline for Rules.--The Securities and Exchange
Commission shall prescribe rules to implement the amendment
made by subsection (a) of this section within 90 days after
the date of enactment of this Act.
SEC. 202. BAN ON JOINT MANAGEMENT OF MUTUAL FUNDS AND HEDGE
FUNDS.
(a) Amendment.--Section 15 of the Investment Company Act of
1940 (15 U.S.C. 80a-15) is further amended by adding at the
end the following new subsection:
``(h) Ban on Joint Management of Mutual Funds and Hedge
Funds.--
``(1) Prohibition of joint management.--It shall be
unlawful for any individual to serve or act as the portfolio
manager or investment adviser of a registered open-end
investment company if such individual also serves or acts as
the portfolio manager or investment adviser of an investment
company that is not registered or of such other categories of
companies as the Commission shall prescribe by rule in order
to prohibit conflicts of interest, such as conflicts in the
selection of the portfolio securities.
``(2) Exceptions.--Notwithstanding paragraph (1), the
Commission may, by rule, regulation, or order, permit joint
management by a portfolio manager in exceptional
circumstances when necessary to protect the interest of
investors, provided that such rule, regulation, or order
requires--
``(A) enhanced disclosure by the registered open-end
investment company to investors of any conflicts of interest
raised by such joint management; and
``(B) fair and equitable policies and procedures for the
allocation of securities to the portfolios of the jointly
managed companies, and certification by the members of the
board of directors who are not interested persons of such
registered open-end investment company, in the periodic
report to shareholders, or other appropriate disclosure
document, that such policies and procedures of such company
are fair and equitable.
``(3) Definition.--For purposes of this subsection, the
term `portfolio manager' means the individual or individuals
who are designated as responsible for decision-making in
connection with the securities purchased and sold on behalf
of a registered open-end investment company, but shall not
include individuals who participate only in making research
recommendations or executing transactions on behalf of such
company.''.
(b) Deadline for Rules.--The Securities and Exchange
Commission shall prescribe rules to implement the amendment
made by subsection (a) of this section within 90 days after
the date of enactment of this Act.
SEC. 203. SHORT TERM TRADING BY INTERESTED PERSONS
PROHIBITED.
(a) Short Term Trading Prohibited.--Section 17 of the
Investment Company Act of 1940 (15 U.S.C. 80a-17) is further
amended by adding at the end the following new subsection:
``(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 an
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, 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.''.
(b) Increased Redemption Fees Permitted for Short Term
Trading.--Within 90 days after the date of enactment of this
Act, the Securities and Exchange Commission shall revise rule
11a-3 of its rules under the Investment Company Act of 1940
(17 CFR 270.11a-30), or other rules of the Commission, as
necessary to permit an investment company to charge
redemption fees in excess of 2 percent upon the redemption of
any securities of such company that are redeemed within such
period after their purchase as the Commission specifies in
such rule to prevent short term trading that is unfair to the
shareholders of such company.
(c) Deadline for Rules.--The Securities and Exchange
Commission shall prescribe rules to implement the amendment
made by subsection (a) of this section within 90 days after
the date of enactment of this Act.
SEC. 204. ELIMINATION OF STALE PRICES.
Within 90 days after the date of enactment of this Act, the
Securities and Exchange Commission shall prescribe, by rule
or regulation, standards concerning the obligation of
registered open-end investment companies under the Investment
Company Act of 1940 to apply and use fair value methods of
determination of net asset value when market quotations are
unavailable or do not accurately reflect the fair market
value of the companies' portfolio securities, in order to
prevent dilution of the interests of long-term investors or
as necessary in the other interests of investors. Such rule
or regulation shall identify, in addition to significant
events, the conditions or circumstances from which such
obligation will arise, such as the need to value securities
traded on foreign exchanges, and the methods by which fair
value methods shall be applied in such events, conditions,
and circumstances.
SEC. 205. PREVENTION OF UNFAIR AFTER-HOURS TRADING.
(a) Additional Rules Required.--Within 90 days after the
date of enactment of this Act, the Securities and Exchange
Commission shall issue rules to prevent transactions in the
securities of any registered open-end investment company in
violation of section 22 of the Investment Company Act of 1940
(15 U.S.C. 80a-22), including after-hours trades that are
executed at a price based on a net asset value that was
determined as of a time prior to the actual execution of the
transaction.
(b) Trades Collected by Intermediaries.--Such rules shall
permit execution of such after-hours trades that are provided
to the registered open-end investment company by a broker-
dealer, retirement plan administrator, or other intermediary,
after the time as of which such net asset value was
determined, if such trades are collected by such
intermediaries subject to procedures that are--
(1) designed to prevent the acceptance of trades by such
intermediaries after the time as of which net asset value was
determined; and
(2) subject to an independent annual audit to verify that
the procedures do not permit the acceptance of trades after
the time as of which such net asset value was determined.
(c) Independently Maintained Systems.--Such rules shall
permit firms that utilize computer systems and procedures
provided by unaffiliated entities to collect transactions to
satisfy the independent audit requirements under subsection
(b)(2) by means of an independent audit obtained by such
unaffiliated entity.
SEC. 206. REPORT ON ADEQUACY OF REMEDIAL ACTIONS.
(a) Report Required.--Within 180 days of enactment, the
Securities and Exchange Commission shall submit a report to
the Committee on Financial Services of the House of
Representatives and the Committee on Banking, Housing, and
Urban Affairs of the Senate on market timing and late trading
of mutual funds.
(b) Required Contents of Report.--The report required by
this section shall include the following:
(1) The economic harm of market timing and late trading of
mutual fund shares on long-term mutual fund shareholders.
(2) The findings by the Commission's Office of Compliance,
Inspections and Examinations, and the actions taken by the
Commission's Division of Enforcement, regarding--
(A) illegal late trading practices;
(B) illegal market timing practices; and
(C) market timing practices that are not in violation of
prospectus disclosures.
(3) When the Commission became aware that the use of market
timing practices was harming long-term shareholders, and the
circumstances surrounding the Commission's discovery of that
activity.
(4) The steps the Commission has taken since becoming aware
of market timing practices to protect long-term mutual fund
investors.
(5) Any additional legislative or regulatory action that is
necessary to protect long-term mutual fund shareholders
against the detrimental effects of late trading and market
timing practices.
The SPEAKER pro tempore (Mr. Simmons). Pursuant to the rule, the
gentleman from Ohio (Mr. Oxley) and the gentleman from Pennsylvania
(Mr. Kanjorski) each will control 20 minutes.
The Chair recognizes the gentleman from Ohio (Mr. Oxley).
General Leave
Mr. OXLEY. Mr. Speaker, I ask unanimous consent that all Members may
have 5 legislative days within which to revise and extend their remarks
on this legislation, and to insert extraneous material thereon.
The SPEAKER pro tempore. Is there objection to the request of the
gentleman from Ohio?
There was no objection.
Mr. OXLEY. Mr. Speaker, I yield myself 5 minutes.
Mr. Speaker, I stood on this floor last year and spoke of the need to
reform and improve the accounting profession, financial reporting,
corporate governance, and Wall Street research practices. Congress
responded admirably by passing the Sarbanes-Oxley Act which has proved
successful in improving the transparency of financial statements and
stemming the alarming rate of corporate fraud.
Now, we necessarily turn our focus to mutual funds. We are in the
midst of what one former SEC chairman calls the ``biggest financial
scandal of the past 50 years.'' An industry representative has lamented
the ``shocking betrayal of trust.'' Indeed, the scandals are deeply
troubling for a host of reasons.
First, we have become a Nation of investors, 95 million strong, and
the investment vehicles of choice are mutual funds. It is imperative
that Congress ensures that these investors, representing 54 million
households, are protected.
[[Page H11538]]
Second, the nature of the misconduct by trusted fiduciaries, fund
executives, directors, and portfolio managers is especially egregious.
Secret deals were reached to provide special trading privileges to
large, preferred customers. Fund managers and executives were caught
market-timing their own funds, and fund directors were found asleep at
the switch.
Third, the mutual fund fraud is widespread. We are not talking about
the actions of a few boiler room operations; we are talking about
pervasive financial fraud by all segments of the fund industry,
including the most trusted companies.
Finally, the regulators charged with investor protection failed to
detect or deter improper and illegal practices which have apparently
been occurring for a number of years. It is inexcusable that these
activities were not uncovered until this year.
Long before the current scandal came to light, the Committee on
Financial Services has called for reform. I am proud of the work of my
colleagues, particularly the gentleman from Louisiana (Mr. Baker),
chairman of the Subcommittee on Capital Markets, Insurance and
Government Sponsored Enterprises. The gentleman from Louisiana
(Chairman Baker) held oversight and legislative hearings long before it
was fashionable to scrutinize the fund industry. He and I shepherded
this legislation through the committee in July, but not without some
resistance.
The legislation before the House today, the Mutual Funds Integrity
and Fee Transparency Act, is a comprehensive reform package which
contains numerous provisions to aid investors.
I will not go into all of the details but, importantly, it will
provide for greater transparency of fund fees, costs, expenses, and
operations so that investors can make better informed decisions and
help market forces to drive fees down for fund investors. It will
strengthen fund management, particularly the board's independent
directors, and it will curb the trading abuses which have recently been
revealed.
We know there are some who believe this legislation goes too far;
there are some who think it does not go far enough. To those people, I
would say that we have achieved a good balance here. It is proinvestor,
it is tough, but it does not regulate for regulation's sake.
Again, I would like to commend the gentleman from Louisiana (Mr.
Baker) for his outstanding leadership on these issues and for crafting
a fine piece of legislation. He was ahead of the curve yet again.
Mr. Speaker, I reserve the balance of my time.
Mr. KANJORSKI. Mr. Speaker, I yield myself such time as I may
consume.
Mr. Speaker, with approximately 95 million investors and $7 trillion
in assets, mutual funds constitute a major component of our securities
industry. Mutual funds became a dominant force in our capital markets
because they have democratized investing for millions of average
Americans, greatly facilitating their ability to acquire a diversified
portfolio. Before September, many authorities and experts had also
generally extolled the reliability and integrity of the industry.
During the last 2 months, however, we have learned of alleged and
actual instances of wrongdoing at more than a dozen mutual fund
families with more than $2.5 trillion in assets under management. The
most serious transgressions brought to light so far have involved
market timing abuses, late trading, and preferential portfolio
disclosures to industry insiders.
The current evidence also suggests that additional announcements of
misconduct in the mutual fund industry will continue to proliferate in
the months ahead. A recent survey by the Securities and Exchange
Commission found that 30 percent of responding broker-dealers assisted
market timers in some way. It also revealed that more than 25 percent
of answering broker-dealers reported that customers had placed or
confirmed mutual fund orders after the market closed and received the
preferential closing price.
These misdeeds and findings have caused great and considerable
concern for average American investors who had placed their trust and
hard-earned savings in accounts at mutual fund companies. The widening
investigation by State and Federal authorities has also resulted in a
reevaluation of the mutual fund industry's business practices and
regulatory oversight.
These budding inquiries have caused me considerable unease as well.
It is completely and absolutely unacceptable for securities
professionals, who have an obligation to serve the best interests of
their customers, to place their own interests first and to provide
preferential treatment to selected insiders. In my view, we have an
obligation to American investors to monitor these developments and take
action to prevent further abuses.
Before news of the mutual fund industry scandals broke in September,
the Committee on Financial Services approved a mutual fund reform bill
by a voice vote. In general, H.R. 2420 seeks to enhance the disclosures
of the mutual fund fees and costs to investors, improve corporate
governance for mutual funds, and heighten the awareness of boards about
mutual funds activities.
A manager's amendment attached today to H.R. 2420 makes several
additions to the reported bill. Several of these changes address the
recently discovered problems in the mutual fund industry. For example,
the bill will now allow for an increase in redemption fees to reduce
the ability of market timers to profit from their transactions. The
bill also now requires the Commission to act to strengthen audit trails
to guard against late trading.
Although each of these modifications generally improve H.R. 2420, I
remain concerned that we may have rushed to judgment in these matters.
The manager's amendment would have benefited from a more thorough
vetting by the Securities and Exchange Commission, State regulators,
and other experts. We should have made technical improvements to the
bill to ensure its workability.
We also have missed an opportunity to consider other worthy reform
ideas. We could have created a system to better protect mutual fund
investors against fraud by expanding fidelity bonding requirements. We
could have additionally required mutual fund managers to make the same
disclosures about their personal transactions that we already mandate
senior corporate executives to make.
The Investment Company Act further requires that mutual funds be
organized and operated in the best interests of shareholders. We,
therefore, could have considered adding legislative language to
establish a fiduciary responsibility of mutual fund boards to ensure
that funds are also organized and operated in such a way. Finally, we
might have worked to heighten the scrutiny of the joint management of
mutual funds and hedge funds within the same investment company to
prevent conflicts of interest.
Mr. Speaker, I am particularly disappointed that H.R. 2420 does not
include any of the regulatory enhancements that the Securities and
Exchange Commission specifically requested earlier this year and that
are contained in H.R. 2179, the Securities Fraud Deterrence and
Investor Restitution Act. These proposals would increase the level of
fines the Commission may impose against wrongdoers, improve its ability
to return money to swindled investors, and enhance the agency's
enforcement authorities.
Each of these administrative proposals would protect mutual fund
investors more immediately and more effectively than the bill we are
now considering. Fortunately, the Senate has an opportunity to review
these worthy ideas and adopt a more comprehensive, stronger, and
refined mutual fund bill when it considers these matters next year.
That said, we need to advance the legislative process today so that
we can eventually better protect average investors from further
transgressions by unscrupulous and unprincipled participants in the
mutual fund industry. Although imperfect, H.R. 2420 takes some steps to
restore accountability and reestablish investor trust. We should,
therefore, approve the bill.
In closing, Mr. Speaker, mutual funds have successfully worked to
help millions of middle-class Americans to successfully save for an
early retirement, purchase a vacation home, afford a dream vacation,
pay for a college education, or cover medical bills or other needs. We
need to ensure that
[[Page H11539]]
this success continues. I encourage my colleagues to adopt this bill.
Mr. Speaker, I reserve the balance of my time.
Mr. OXLEY. Mr. Speaker, I am pleased to yield 6 minutes to the
gentleman from Louisiana (Mr. Baker), the chairman of the Subcommittee
on Capital Markets, Insurance and Government Sponsored Enterprises.
Mr. BAKER. Mr. Speaker, I thank the gentleman for yielding me this
time. I certainly want to start by commending the chairman for his
leadership on this important issue. He has been committed to the
principle of getting it right, not getting it done fast, and I think
his long-suffering patience on this issue is to be highly commended,
for we have learned much, unfortunately, over the last weeks and
months.
When the committee first began its work almost 2 years ago with an
examination of mutual fund industry performance, it was with an eye
toward whether or not investors truly understood the costs associated
with investing in a particular fund, whether disclosures were adequate,
and whether the markets were functioning in a fair manner.
Well, only a few months later, the door to scandal not only opened a
bit, it blew wide open. There were not just minor aberrations of some
arcane accounting misrepresentation, but intentional acts clearly in
violation of the statutory provisions.
In one instance, there was a union where certain selected union
members were engaging in a practice known as late trading. This
resulted in their fellow union brotherhood being disenfranchised. It
became so prevalent that the house where these trades were executed
began to call that time of day the ``boilermaker hour.'' Our systems of
checks and balances had broken. It was a system of checks: you write me
one, I will write you one.
Clearly, the principle on which a fair, functioning capital market
must operate would require professionals never to set aside their
fiduciary duties for the sake of personal gain. Unfortunately, it was
happening.
So how do we ensure that that is the principle that guides market
performance? It is not easy, but I think H.R. 2420 is a very important
beginning. Full disclosure of all fees, full disclosure of what are
known as ``soft dollar'' transactions, full disclosure of where the
portfolio managers themselves invest their own funds and what they are
paid at the expense of shareholders.
The bill goes a long way, and I would join with some in saying
perhaps we have not gone far enough.
Let me digress with regard to the description of a mutual fund and a
mutual fund management company. Mutual funds are organizations into
which working families write their checks and send their money. They
have a board which then hires a mutual fund management company, an
operating company, a for-profit company, a company driven by the goal
to make as much money as they can through the mutual fund.
{time} 1215
Nothing wrong with that. But the board is constructed of members who
may well be the executives of the management company. So the people who
are making the judgments about whether to hire management company A or
management B are themselves employees of that company. Imagine how hard
it must be to fire one's self in that instance. That is why I think it
very important for us to engage in not only the bill's proposed two-
thirds required membership be independent, but that the chairman
himself be independent of that significant conflict.
And I would like to read from testimony of Chairman Donaldson,
chairman of the SEC, just yesterday in response to a question in the
Senate: ``I think the board chairman should be totally independent. And
I think the further you go toward a totally independent board, the
better. The matter seems to be closed.''
And as we proceed with consideration of this legislation through
conference, I certainly will renew my effort to see that that
particular provision is included. The bill does a great deal more, but
I think it is not the end of the process.
We in the Congress have an obligation with 95 million Americans and
over half of all households now directly invested in the marketplace to
ensure there is a fair and balanced functioning market. We must have
the investing facts clearly disclosed. We must have rules that are
clearly understood, trades engaged in by professionals who hold
themselves to the highest standards of fiduciary duty.
We must have, above all, the standard adopted where fiduciary
principles never are set aside for personal gain and all the rules will
be applied equitably to all investors. We do, in fact, have the
broadest, deepest, most successful capital markets of any time in world
history, but we cannot deviate from these principles.
The passage of H.R. 2420 will ensure we begin to return to that path,
never again to deviate from that responsibility.
Mr. Speaker, I would like to ask the chair of the Committee on
Financial Services, the gentleman from Ohio (Mr. Oxley), if the
gentleman would like to express his opinion with regard to the
appropriateness of further consideration of the independent chair and a
provision being adopted, if possible, in conference at a later time in
the consideration of this legislation.
Mr. OXLEY. Mr. Speaker, will the gentleman yield?
Mr. BAKER. I yield to the gentleman from Ohio.
Mr. OXLEY. Mr. Speaker, I thank the gentleman for his continued
leadership and tenacity on this issue. A few of us were kind of
isolated and lonely when this whole issue began. And I suspect that we
are now seeing the fruits of your efforts in taking on this difficult
issue.
And I would say that based on the testimony that Chairman Donaldson
gave to the other body just yesterday it is pretty clear that the SEC
not only supports our efforts but would indeed support an independent
chair. So from that standpoint, obviously, this is the beginning of the
process, not the end. And to that end, obviously we will consider other
measures going forward.
But I think, clearly, as the gentleman pointed out, this is an
excellent bill that deals with some of the real abuses that have been
out there in the public eye for the last several months. And this is
how our process works. As you know, very much like what ended up as
Sarbanes-Oxley, this is the House's ability to get our hands around
this issue and show that the Members of the House are quite concerned
about these burgeoning scandals and are not willing to sit back and
allow this to happen on our watch.
Mr. BAKER. Mr. Speaker, I thank the chairman for his leadership.
Mr. KANJORSKI. Mr. Speaker, I yield 3\1/2\ minutes to the gentleman
from Massachusetts (Mr. Frank), the ranking member of the Committee on
Financial Services, who has been instrumental in working with me on
this bill on our side of the aisle.
Mr. FRANK of Massachusetts. Mr. Speaker, the gentleman from
Pennsylvania (Mr. Kanjorski) has played a very important role in this.
I am glad to be here in support of his efforts. I agree that this is a
bill that is a good set of steps forward, it is more than a first step,
but it is not everything that we should be doing. It is useful to do it
now.
I have spoken with the Attorney General of New York, Mr. Spitzer, the
Secretary of the Commonwealth of Massachusetts, Mr. Galvin. They have
further ideas about how we can improve the protection of the investing
public. The gentleman from Pennsylvania (Mr. Kanjorski) himself has
some ideas. So I am glad we are moving. And I appreciate the fact we do
not end when we adjourn for the year this legislative process; we will
resume it next year and be in conference with the Senate bill, and
maybe even ourselves pass some other legislation in this regard.
But I want to address two other aspects of this issue. It is
important that we legislate. It is also important that we fully empower
those who are charged with investigation and enforcement. We are the
legislative branch. We set the policy. But we are not able to carry it
out. What is important is that those entities that are empowered to
carry it out be allowed to do that. Now, a number of people have noted
today on that.
We have learned recently some disturbing facts about the mutual fund
industry. It should be clear that we
[[Page H11540]]
learned them primarily from two State regulators, the Attorney General
of New York and the Secretary of the Commonwealth of Massachusetts. And
I am proud to say, Mr. Speaker, that on our side of the aisle we take
pride in that because there were efforts to impinge on their ability to
do this work.
And I am very pleased that our resistance to any effort to diminish
the role played by State regulators in the securities field has been
vindicated. If, in fact, the Attorney General of New York, the
Secretary of the Commonwealth of Massachusetts, and some other
regulators did not have the incentive, the tools, the ability fully to
investigate, we would not know today what we know.
In addition, we have had the problem that the SEC has said, well,
there were some limits in terms of funding. A year ago back to 2001, my
predecessor as ranking member, the very able gentleman from New York,
Mr. John LaFalce, when we were asked to raise SEC fees, he led our side
in saying, let us make sure a lot of that goes to the SEC to increase
their budget. And there was resistance. Even after the corporate reform
bill last year, the Sarbanes-Oxley bill, was passed, we as a Congress
did not initially give the SEC the money they needed to enforce that.
Now, my colleague, the gentleman from Pennsylvania (Mr. Kanjorski),
has correctly pointed out we regret the fact that we have not also
passed 2179, the SEC enforcement bill, giving the SEC more powers that
they have asked for, including some that would specifically enhance
their ability to levy fines against mutual fund companies. Parts of
that bill specifically deal with the power to penalize mutual fund
companies under those acts. But in addition to the additional powers,
we need to give them more people. And we did fight, beginning late last
year on into early this year; finally the Congress agreed to give the
SEC the amount of money that they needed for Sarbanes-Oxley, but there
is, of course, a time lag between getting the money and being able to
spend it.
Now, both sides agreed to give the SEC flexibility in hiring, and we
gave them that. But we ought to note that by the time we were to
persuade this Congress to give the SEC adequate funds, they tell us
they did not have time to spend it. So, ironically, the SEC had to give
back some money this year, over $100 million. But they have told us
that that does not mean that that level was too high, only that they
did not get it in time to spend it, over our objections.
We now, I think, should go forward and have a situation where State
regulators and the SEC are fully funded and fully empowered to do their
job.
Mr. OXLEY. Mr. Speaker, I yield 3\1/2\ minutes to the gentleman from
Delaware (Mr. Castle), distinguished member of the committee.
Mr. CASTLE. Mr. Speaker, I thank the chairman, not just for yielding
to me, but for the great work that he and the gentleman from Louisiana
(Mr. Baker) have done on this and also the gentleman from Pennsylvania
(Mr. Kanjorski) and the gentleman from Massachusetts (Mr. Frank). I
think it truly has been a team effort for both parties getting together
to try to address the problem. Maybe we are not as far as I would like
to be, as perhaps some others would like to be, but I think we started
to move in the right direction. For that I am very pleased.
Mr. Speaker, I will submit a statement here that supports H.R. 2420
and goes through the details of some of the reasons for that. But I
would like to take my time before us today just to discuss what I
consider to be the breadth and extent of this problem and what we have
to do.
It is very interesting because 2 decades ago only 6 percent of
American households had mutual funds, and the total was supposedly $134
billion. Today one-half of all American families are involved in mutual
funds in some way or another, probably do not even know they are. They
are in their 401(k) plans or another retirement plan or something of
that nature. It involves $7 trillion of money.
This, of all these issues we have talked about, probably involves
more Americans in a financial sense than anything else we ever had
before our committee or before the Congress of the United States of
America. It represents 10 percent of all the financial assets of the
United States of America. To suggest that this is not overwhelmingly
important, in my judgment, would be wrong.
It is amazing to me that just 6 months ago the mutual fund industry
was making statements as they were looking at the banking industry and
the corporate problems and everything else that they are the only ones
with an unblemished record. Nobody knew. Nobody at the State level,
nobody at the Federal level knew what was going on. And while we can
talk about the SEC now, I would like to know where the SEC was a year
ago, 3 years ago, 5 years ago, 10 years ago, or whatever it may be, why
was somebody not looking at some of these problems, which are
relatively self-evident when you really examine it closely if you
understand the details of how mutual funds work.
I would hope that those kinds of people have been working at the SEC
under Republicans and Democrats. And I am afraid to say that has not
been the case so far. And, frankly, I think we all need to be critical
of that.
Should we move quickly on this? And I understand what Mr. Greenspan
and Secretary Snow and others have said about, well, we need to take
our time. Well, I do not disagree completely because you want to do it
correctly; but on the other hand I think we need to move as quickly as
possible. There has been a recognized problem, and we need to do
something about it. And quite frankly, I am delighted that this bill is
on the floor today and our leaders have come forward and said we need
to move forward. Maybe they will do something somewhat differently in
the Senate, but hopefully they will do something and hopefully we will
have something which we can hold out to the American public as evidence
that we are moving in the right direction as far as mutual funds are
concerned.
On the old issue of who should regulate, where we should be, I give
credit to the States. I think they have done a wonderful job,
particularly in New York and Massachusetts, and perhaps other States in
coming forward and revealing some the problems. Frankly, I am not sure
where the SEC would be today, I am not sure where we would be today if
that had not happened. Yes, there are jurisdictional issues, but for
the most part I think they deserve a great deal of credit as far as all
of that is concerned.
The SEC, according to Stephen Cutler, has examined the records of 88
of these mutual funds, and they found problems with a great percentage
of them. And they have found in the case of 30 percent of them that
they have had market-timing problems. Virtually half of these funds
have had problems one way or another in the area in which we are trying
to deal. That just shows me how rapidly we have to move and what we
have to do.
So I give credit to everybody for the hearings, for the legislation,
and what we are doing today because, frankly, I think you are going to
start to see some changes. I think a lot of it is going to be because
of this legislation which we are considering today and all that has led
up to it.
Mr. Speaker, I rise today in support of H.R. 2420, the ``Mutual Funds
Integrity and Fee Transparency Act of 2003.'' I commend Chairman Oxley
and Subcommittee Chairman Baker for continuing your work in protecting
American investors and I am proud to play a role in addressing the
problems in the mutual fund industry. Hearings in the Financial
Services Committee have enabled us to address a number of ongoing
reforms that are necessary for the mutual fund industry to increase
transparency for investors. From these hearings we have also learned of
additional problems within the mutual fund industry that have only
recently come to light such as improper trading practices. We have
improved this legislation by incorporating all of the issues and I am
proud of the legislation we passed out of committee with strong
bipartisan support.
The average American family chooses to invest in mutual funds. I want
to make clear what is at stake. Two decades ago, only 6 percent of
American households had mutual fund shares valued at $134 billion.
Today, half of all American families have $7 trillion at stake. Mutual
funds represent about 10 percent of the total financial assets of the
U.S. population. The number of funds have grown from less than 500
mutual funds in 1980 to approximately 8,000 mutual funds today.
Just 6 months ago the mutual fund industry was boasting of its
unblemished record. It concerns me that the scandals we have learned of
in recent weeks may only be the tip of the
[[Page H11541]]
iceberg. This should be a wake-up call to both the Securities and
Exchange Commission (SEC) and the industry that change is needed.
Mutual funds are a $7 trillion industry, and with more than 50 percent
of the American public invested in mutual funds there is the potential
for investors to be hurt more so by these recent revelations than even
the WorldCom and Enron scandals. I am not downplaying the problems that
were in play there, but I feel this issue is further-reaching and could
impact a greater number of investors in the long run. Some in the
industry have stated market timing was an open practice; furthermore,
some funds have even stated they participated in market timing on a
limited level with clients to allow controversial trading as a way to
control the improper practice. This bothers me. Favoritism to big
investors and violating ethical and legal codes rob the average
investor who depends on their investments for costs such as education
and retirement. There is a lot at stake, and the reforms addressed in
this legislation will help prevent future investor betrayals. This bill
addresses the recent market scandals and makes additional necessary
reforms to the mutual fund industry, and I would like to highlight just
a few.
First, to address recent scandals in the mutual fund industry, the
manager's amendment will explicitly ban short-term trading by fund
insiders and permit funds to charge more than the current maximum 2
percent redemption fee to discourage all market timers. Second, to
prevent market timing trades, made possible by stale pricing, the
manager's amendment directs the SEC to clarify rules regarding mutual
funds' obligation to apply fair value pricing. Third, the manager'
amendment also addresses late trading. Late trading is not only an
improper advantage for large fund investors, it is illegal. Late
trading has allowed some big fund investors to take advantage of the
current day's price on orders to buy or sell shares placed after the
close of the New York markets, when proper procedure would be to carry
out the orders at the following day's price. Some have likened this
practice to ``betting today on yesterday's horse race.'' The manager's
amendment directs the SEC to issue rules to prevent late trading
without disadvantaging those investors who use financial intermediaries
such as broker-dealers and 401(k) and pension plan administrators to
purchase fund shares.
Fourth, this legislation rightly increases the requirement of
independent board members from one-half to two-thirds of total board
membership and strengthens independence qualifications. A greater
number of independent directors will increase protections of investors'
interests against those of directors whose interests are tied to the
success of their funds' advisers. Fifth, the bill requires disclosure
of brokers' conflicts of interest where they are paid incentives to
promote particular funds, so that investors can weigh sales incentives.
Finally, I am concerned about fees that mutual fund investors face. I
understand that mutual fund companies feel there is a need for certain
fees, but these fees must be transparent to investors. In many cases
investors choose ``no-load'' funds for their no-fee structure, but
hidden fees such as 12-(b)-1 fees are often charged. I am pleased this
legislation would prohibit a fund from advertising as a ``no-load''
fund if in fact the 12-(b)-1 fee is charged. Furthermore, in an effort
to enhance transparency of fees, the bill requires that mutual funds
disclose fees, in dollar amounts, on a hypothetical $1,000 investment,
and further requires that this information not be buried in a
prospectus.
Mr. Speaker, the House Financial Services Committee and Congress
acted in the wake of the Enron and WorldCom scandals to protect
investors. Today we are again being called on to protect the average
American investor, and I urge my colleagues on both sides of the aisle
to join me in supporting this important and very necessary legislation.
Mr. KANJORSKI. Mr. Speaker, I yield 2\1/2\ minutes to the gentleman
from North Carolina (Mr. Miller).
Mr. MILLER of North Carolina. Mr. Speaker, mutual funds are how
America's middle class saves. It is how young couples save for their
first home. It is how middle class families save for their children's
education, for their children's college, and for retirement. It is how
the middle class families save for a rainy day, to provide against
life's harsh uncertainties.
It is infuriating that some mutual fund managers have taken advantage
of those families. It is even more infuriating that they have such
disrespect for the middle class families who trusted them with their
life savings. They seem to see America's middle class as rubes or
hicks, not as the very people who make this Nation work.
This legislation is a beginning, and I am pleased that no one today
has described it as the end. But I certainly hope that when the Senate
considers the regulation of the mutual fund industry next year they
will pause to consider other reform proposals which others today have
spoken of. The gentleman from Pennsylvania (Mr. Kanjorski) has already
spoken of such proposals, and I know that the gentleman from Illinois
(Mr. Emanuel) will in just a moment.
I certainly hope that we will urge that the Senate consider measures
to assure that the welfare of the funds' investors, not the funds'
managers, is the guiding principle to how the funds are governed. The
funds need truly independent directors who know the industry, will ask
tough questions, and will exercise independent judgment, not just go
along with the funds' managers.
We should consider requiring that there be a single lead independent
director, focused responsibility with the authority to hire outside
experts, to call meetings of the board, and to place items on the
board's agenda.
Finally, we should require a clear fiduciary duty by the managers of
the fund to the investors in the fund.
Mr. Speaker, there may be reasons to address the same concerns in
different ways or, perhaps, even to leave well enough alone. But as
long as some funds are not governed for the benefit of the investors,
we will likely be dealing with one new fund management practice after
another, each designed to separate the middle class from more and more
of its life savings.
I will vote for this bill today; but I hope the Senate, with the
luxury of time next year, will look closely to make sure that we have
done enough to protect America's middle class. They work hard for the
money they have earned, and they deserve better.
{time} 1230
Mr. OXLEY. Mr. Speaker, I yield 3 minutes to the gentlewoman from New
York (Mrs. Kelly), the distinguished chairman of the Subcommittee on
Oversight and Investigations.
Mrs. KELLY. Mr. Speaker, I rise in support of this legislation.
Mr. Speaker, I would like to commend the gentleman from Ohio (Mr.
Oxley) and the gentleman from Louisiana (Mr. Baker), the gentleman from
Pennsylvania (Mr. Kanjorski) and the gentleman from Massachusetts (Mr.
Frank) for their leadership in improving and moving this legislation
through. It is going to send a clear message to all Americans that we
are trying to make sure that when they invest their money, there will
be fairness and there will be oversight in the marketplace.
The interest of the investors of this Nation need to come first. As
the gentleman from Delaware (Mr. Castle) said, this is a good step in
restoring confidence to those people with whom we trust our investment
money. And when we entrust that money to them, we want to know that it
will be regulated, that the transactions will be transparent so we can
see what they are doing.
This problem with the mutual funds should have been addressed many
years ago. Again, as my colleague, the gentleman from Delaware (Mr.
Castle) pointed out, this is something the SEC should have acted on a
long time ago, and especially during the 1990s when we had a strong
market and such a bright light of investigation could have gone in with
possibly less impact, because we certainly do not want to do anything
that is going to affect this Nation's growth that we are experiencing
with our economy now.
I think it is imperative that Congress take action to strengthen
investor confidence. It will allow our economy to continue to
experience a full growth. And we have to be sure that our investors
here in the United States, now over half of all American families are
invested in mutual funds, we have to make sure that we have, they have
the backing of Congress, that they have the oversight from Congress,
but more importantly, that that backing and oversight comes from the
SEC.
They need to invest their hard-earned money with full faith and hope
for prosperous futures. The Mutual Fund Integrity Fee and Transparency
Act is an important step in the process. The legislation improves
accountability and integrity by requiring a greater independence and
transparency, as I mentioned before, and eliminating conflict of
interests which we certainly are finding out were.
Nearly 100 million Americans invest their money in mutual funds.
These investments really represent a part of
[[Page H11542]]
their nest egg. This is what they are using for their tuition for their
kids. This is what they are going to use for their first home. It is
what they are thinking about when they are thinking about what they are
going to do for their retirement. These investments are the essential
part of the lives of American families. Our work today is not going to
be done. We are going to be all finished because this is a first step
in this. We are going to continue to investigate these issues, and I
look forward to continuing to work on these issues to strengthen
investor confidence to ensure the highest level of integrity,
transparency and accountability in this market.
I want people to have faith when they put their dollars into the U.S.
markets, that the market is acting in their behalf and not on the
behalf of someone who is going to make a private profit from what their
money is. I urge my colleagues to support this legislation.
Mr. KANJORSKI. Mr. Speaker, I yield 2 minutes to the gentlewoman from
New York (Mrs. Maloney).
(Mrs. MALONEY asked and was given permission to revise and extend her
remarks.)
Mrs. MALONEY. Mr. Speaker, as a cosponsor of this legislation I am
pleased to rise in support of it, but I regret that it did not include
the SEC recommendations that the Democrats supported.
Since the demise of Enron 2 years ago, the Committee on Financial
Services has undertaken a comprehensive reform agenda. We have
rewritten the rules applying to the accounting industry and completely
changed the relationship between boards of directors and corporate
managers.
The legislation we are considering today represents the beginning of
similar reforms for the mutual funds industry. This legislation attacks
conflicts of interest and increases the independence and accountability
of oversight boards. It increases the number of independent board
members from 40 percent to two-thirds. With increased independence,
also comes increased responsibility as the legislation places fiduciary
duties on boards of directors, requiring them to review revenue sharing
and soft dollar arrangements.
It will also require disclosure of fund managers' compensation
structure and bar the same individual from managing a mutual fund and
hedge fund. On the consumer side, the bill requires the disclosure of
total fees an investor will pay per $1,000 they invest.
Finally, I am pleased that this legislation provides the SEC more
authority to police the funds industry. I can only hope that they use
it. I would also like to commend the leadership of State regulators and
State attorneys general, specifically Mr. Elliot Spitzer from New York
State. The following is an article he recently authored and published
on this subject:
[From the New York Times, Nov. 17, 2003]
Regulation Begins at Home
(By Eliot Spitzer)
Albany--With two decisions in the last two weeks, the Bush
administration has sent its clearest message yet that it
values corporate interests over the interests of the average
Americans. In the Securities and Exchange Commission's
settlement with Putnam Investments, the public comes away
short-changed. In the Environmental Protection Agency's
decision to forgo enforcement of the Clean Air Act, the
public comes away completely empty-handed.
The 95 million Americans who invest in mutual funds paid
more than $70 billion in fees in 2002. These fees went to an
industry that did not take seriously its responsibility to
safeguard investors' money. Investors are now rightly
concerned about whether those mutual funds that breached
their fiduciary duties will be required to refund the
exorbitant fees they took, and what mechanism will be put in
place to ensure that the fees charged in the future are fair.
Unfortunately, the S.E.C.'s deal with Putnam does not
provide a satisfactory answer to these questions. Instead, it
raises new questions.
The commission's first failure is one of oversight. The
mutual fund investigation began when an informant approached
our office with evidence of illegal trading practices.
Tipsters also approached the commission, which is supposed to
be the nation's primary securities markets regulator, but the
commission simply did not act on the information.
The commission's second failure was acting in haste to
settle with Putnam even though the investigation is barely 10
weeks old and is yielding new and important information each
day. Whether the commission recognizes it or not, the first
settlement in a complex investigation always sets the tone
for what follows. In this case, the bar is set too low.
The Putnam agreement does contain a useful provision
mandating that the funds' board of directors be more
independent of the management companies that run its day-to-
day operations. It also talks of fines and restitution, but
leaves for another day the determination of the amount Putnam
should pay.
Most important, the agreement does not address the manner
in which the fees charged to investors are calculated. Nor
does it require the fund to inform investors exactly how much
they are being charged--or even provide a structure that will
create market pressure to reduce those fees. Finally, there
is no discussion of civil or criminal sanctions for the
managers who acted improperly by engaging in or permitting
market timing and late trading.
S.E.C. officials are now saying that they may be interested
in additional reforms. But by settling so quickly, they have
lost leverage in obtaining further measures to protect
investors. After reviewing this agreement, I can say with
certainty that any resolution with my office will require
concessions from the industry that go far beyond what the
commission obtained from Putnam.
It is not surprising that the commission would sanction a
deal that ignores consumers and is unsatisfactory to state
regulators. Just look at the Bush administration's decision
to abandon pending enforcement actions and investigations of
Clear Air Act violations.
Even supporters of the Bush administration's environmental
policy were stunned when the E.P.A. announced that it was
closing pending investigations into more than 100 power
plants and factories for violating the Clean Air Act--and
dropping 13 cases in which it had already made a
determination that the law had been violated.
Regulators may disagree about what our environmental laws
should look like. But we should all be able to agree that
companies that violated then-existing pollution laws should
be punished.
Those environmental laws were enacted to protect a public
that was concerned about its health and safety. By letting
companies that violated the Clean Air Act off the hook, the
Environmental Protection Agency has effectively issued an
industry-wide pardon. This will only embolden polluters to
continue practices that harm the environment.
My office had worked with the agency to investigate
polluters, and will continue to do so when possible. But
today a bipartisan coalition of 14 state attorneys general
will sue the agency to halt the implementation of weaker
standards. In addition, we will continue to press the
lawsuits that have been filed. We have also requested the
E.P.A. records for the cases that have been dropped, and will
file lawsuits if they are warranted by the facts.
Similarly, my office--while committed to working with the
Security and Exchange Commission in our investigation of the
mutual fund industry--will not be party to settlements that
fail to protect the interests of investors and let the
industry off with little more than a slap on the wrist.
The public expects and deserves the protection that
effective government oversight provides. Until the Bush
administration shows it is willing to do the job, however, it
appears the public will have to rely on state regulators and
lawmakers to protect its interests.
Mr. OXLEY. Mr. Speaker, I yield 2 minutes to the gentlewoman from
Florida (Ms. Harris), a valuable member of the committee.
(Ms. HARRIS asked and was given permission to revise and extend her
remarks.)
Ms. HARRIS. Mr. Speaker, I rise to express my vigorous support for
H.R. 2420, the Mutual Fund Integrity and Fee Transparency Act. Mutual
funds have become a vital tool that millions of Americans rely on. In
fact, approximately some 95 million investors representing nearly half
of all U.S. households own a stake in some type of mutual fund.
Reflecting the dramatic shift in recent decades toward this investment
alternative, the mutual funds industry hold an estimated $7 trillion
dollars in assets.
Just as the stock market boom of the 1990s bolstered the average
American's belief in the strength of our Nation's capital markets, the
corporate malfeasance of recent years rocked that market.
Through the market's ups and down during this period, many investors
maintained their mutual fund holdings because they felt these
investments represented a safe harbor for their assets. In essence,
this perception constitutes precisely why the latest problems to shake
the industry have created such damage. Mutual funds reputation as the
harbinger of safe and easy investing has vanished. As our Nation
confronts an array of daunting challenges, restoring and safeguarding
the economic security of every American must remain one of our top
priorities.
[[Page H11543]]
The legislation that we consider today responds to the illegal and
unethical practices that have affected the mutual fund industry.
Moreover, it comprises an integral part of the gentleman from Ohio's
(Mr. Oxley) strategy to enhance investor protection which continues to
serve as the hallmark of his leadership in the Committee on Financial
Services.
I applaud the vision and foresight of the gentleman from Ohio (Mr.
Oxley) and the gentleman from Louisiana (Mr. Baker) that they have
demonstrated in forcefully addressing the concerns regarding the mutual
fund disclosure and investor protection well in advance of State and
Federal investigators.
Throughout the hearing and markup process, we have heard ample
evidence regarding how the vague disclosures permitted under current
law have allowed greed to tarnish the mutual fund industry.
The Mutual Fund Integrity and Fee Transparency Act provide Americans
with a clear understanding of the management, the fees and the ethics
of the organizations with whom they entrust that are hard earned
dollars, restoring a significant amount of confidence in the
reliability and security of our capital markets.
Mr. KANJORSKI. Mr. Speaker, I yield 3 minutes to the gentleman from
Texas (Mr. Hinojosa).
Mr. HINOJOSA. Mr. Speaker, I thank the gentleman from Pennsylvania
(Mr. Kanjorski) for yielding me time.
Mr. Speaker, I commend the gentleman from Ohio (Mr. Oxley) and the
ranking member, the gentleman from Massachusetts (Mr. Frank) for their
leadership in moving this issue forward. I also acknowledge and credit
the good work of the gentleman from Louisiana (Mr. Baker) and the
gentleman from Pennsylvania (Mr. Kanjorski).
I rise in support of H.R. 2420, the Mutual Fund Integrity and Fee
Transparency Act of 2003. I agreed to cosponsor this legislation which
emphasizes integrity and values in the securities industry. I will vote
for this bill today. However, I want the House and Senate to continue
to modify its content because the mutual fund issues at hand continue
to evolve.
Congress needs to ensure that the final bill sent to President Bush
for his signature reflects appropriate solutions to real problems so
that mutual funds shareholders will benefit from it. At present we are
caught in the middle of regulatory one-upsmanship which is creating an
interesting situation for Congress. Although some people in the mutual
funds industry certainly make themselves easy targets, press accounts
of the problem have helped inflame the situation, as have the very
public battles between two regulators responsible for oversight of the
mutual funds industry.
Mutual funds such as Putnam have violated certain laws and
regulations. However, in just 6 weeks that same fund is in the process
of cleaning house, has settled with the Securities and Exchange
Commission, put strict compliance measures in place as part of that
settlement, and is now run by a man some consider to be one of the most
ethical men in the financial services industry.
At the end of the day, the overall mutual funds industry restitution
may be $50 to $100 per affected share holder. We need to remember that
the majority of mutual funds shareholders are not affected by the
recent developments in this market and the guilty parties are
rightfully being fined and punished under existing laws, not laws that
have yet to be passed. Market forces are at work.
Mr. Speaker, the public perception of good funds versus bad funds
will shape success for the mutual funds companies. Although I have
cosponsored this legislation, and will vote for it today, I want to
stress how important it is that we proceed very carefully with this
legislation and any legislation that changes the regulation of the
mutual funds industry.
Mr. OXLEY. Mr. Speaker, does the gentleman from Pennsylvania (Mr.
Kanjorski) have any further speakers?
Mr. KANJORSKI. Mr. Speaker, I have one more speaker.
Mr. OXLEY. Mr. Speaker, I reserve the balance of my time.
Mr. KANJORSKI. Mr. Speaker, I yield 3 minutes to the gentleman from
Illinois (Mr. Emanuel).
Mr. EMANUEL. Mr. Speaker, I would like to enter into a colloquy with
the chairman of the committee.
Section 202 of the manager's amendment requires the commission to
issue rules that will protect mutual fund investors against conflicts
of the interest created by the situation where the same individual
serves as a portfolio manager of both a mutual fund and a hedge fund.
This provision generally bans joint management of the two types of
funds by the same individual. I note that the joint management of such
funds by the same individual could create conflict whereby mutual fund
investors effectively subsidize the hedge fund managed by the same
individual.
Is it your understanding that the rules that the commission will be
promulgating pursuant to the section will address those conflicts of
interest?
Mr. OXLEY. Mr. Speaker, will the gentleman yield?
Mr. EMANUEL. I yield to the gentleman from Ohio.
Mr. OXLEY. Mr. Speaker, the answer is yes. The rules will ban joint
management by the same individual but not the same firm, both the
registered investment company and other unregistered investment
vehicles. Those rules will address the conflicts of interest that are
presented by such an arrangement, including the conflicts raised by the
gentleman.
Mr. EMANUEL. Reclaiming my time, I support H.R. 2420 for the simple
reason that I think it is essential to replace and retain, but also
reconstruct the Good Housekeeping seal that the mutual fund industry
has had for so long. They have lost it in the last 6 months.
This legislation would restore that seal, that sense that people's
money, the middle-class investors' money is safe with the mutual fund.
How it would do that is it would reverse the culture and the practice
that has been developed in the mutual fund industry where the manager's
strategy, the manager's mentality is, heads I win; tails the investors
lose.
That is what has been going on. This legislation is not only a good
step in the right direction, it is a strong step in the right
direction.
As we just were talking a second ago about the relationship between
mutual funds and hedge funds, I know as the Senate takes this up, we
have more work to do in this area. In my view for too long we have a
culture that has been developed in the industry where it is self-
serving to the management. It is essential now as the relationship
between mutual funds and hedge funds exist in the same family, to go
beyond the individual area, but to ensure that the mutual fund investor
does not subsidize the well-to-do investors in the hedge fund.
We have made sure that if we are going to allow that to exist, that
real walls exist between the mutual fund industry and the hedge funds
inside those families; and that those walls that boast sharing of
research, staffing, IPO's, that, in fact, there is a wall that exists
so we get back that culture, get back that mentality, look for other
conflicts of interest and deal with them in this legislation.
I am proud like we did in the Fair Credit Reporting Act which we will
soon vote on, that again here in this step we have bipartisanship,
taking the right type of steps to ensure that the democratic capitalism
and culture of the most fluid markets that exist in the world and the
most open markets continue to be encouraged; that mom-and-pop investors
that save for college and save for retirement, that their funds are
safe.
The SPEAKER pro tempore (Mr. Simmons). The gentleman from
Pennsylvania (Mr. Kanjorski) has 30 seconds.
Mr. KANJORSKI. Mr. Speaker, I yield myself such time as I may
consume.
I have no further requests for time. Mr. Speaker, in closing, I would
like to congratulate the chairman, the gentleman from Ohio (Mr. Oxley)
for a job well done and the chairman of my subcommittee, the gentleman
from Louisiana (Mr. Baker) for a job well done.
We have the unusual experience in the House of Representatives in the
Financial Services industry of having a collegial relationship on both
sides of the aisle, and this piece of legislation reflects that. We
certainly look for a continuing of that type of collegial relationship,
and, again, my compliments
[[Page H11544]]
to the chairman and to the chairman of the subcommittee.
Mr. Speaker, I yield back the balance of my time.
{time} 1245
Mr. OXLEY. Mr. Speaker, I yield myself such time as I may consume.
In closing, let me also commend my friend from Pennsylvania, as well
as the gentleman from Massachusetts (Mr. Frank), the ranking member,
for their leadership and their assistance on this issue.
As the gentleman knows, the gentleman from Louisiana (Mr. Baker) has
been very active on this issue for a number of months; and as I
indicated to him, his efforts going forward were most appreciated, and
we come to this day where we are going to pass this bill by a large
margin, and that is due to the work of all three gentlemen that I
mentioned. It is good to be in a situation where the committee works so
well together on a number of issues. As the gentleman from Illinois
indicated, when we bring up the conference report on the bill that all
of us worked so hard on, we are going to be a very effective responder
to some of those problems that developed in the area of consumer
demand, as well as identity theft which will come forward, we hope, in
the next few hours.
Mrs. KELLY. Mr. Speaker, during debate on the bill today, the
gentleman from Pennsylvania placed in the Record an editorial authored
by the Attorney General of New York. I want to also include for the
Record a response published on November 18, 2003, in the Wall Street
Journal by the chairman of the Securities Exchange Commission.
[From the Wall Street Journal, Nov. 18, 2003]
Investors First
(By William H. Donaldson)
Washington.--Among its many roles, the Securities and
Exchange Commission has two critical missions. The first is
to protect investors, and the second is to punish those who
violate our securities laws. Last week's partial settlement
of the SEC's fraud case against the Putnam mutual-fund
complex does both. It offers immediate and significant
protections for Putnam's current mutual-fund investors,
serving as an important first step. Moreover, by its terms,
it enhances our ability to obtain meaningful financial
sanctions against alleged wrongdoing at Putnam, and leaves
the door open for further inquiry and regulatory action.
Despite its merits, the settlement has provoked
considerable discussion, and some criticism. Unfortunately,
the criticism is misguided and misinformed, and it obscures
the settlement's fundamental significance.
By acting quickly, the SEC required Putnam to agree to
terms that produce immediate and lasting benefits for
investors currently holding Putnam funds. First, we put in
place a process for Putnam to make full restitution for
investor losses associated with Putnam's misconduct. Second,
we required Putnam to admit its violations for purposes of
seeking a penalty and other monetary relief. Third, we forced
immediate, tangible reforms at Putnam to protect investors
from this day forward. These reforms are already being put
into place, and they are working to protect Putnam investors
from the sort of misconduct we found in this case.
Among the important reforms Putnam will implement is a
requirement that Putnam employees who invest in Putnam funds
hold those investments for at least 90 days, and in some
cases for as long as one year--putting an end to the type of
short-term trading we found at Putnam. On the corporate
governance front, Putnam fund boards of trustees will have
independent chairmen, at least 75% of the board members will
be independent, and all board actions will be approved by a
majority of the independent directors.
In addition, the fund boards of trustees will have their
own independent staff member who will report to and assist
the fund boards in monitoring Putnam's compliance with the
federal securities laws, its fiduciary duties to
shareholders, and its Code of Ethics. Putnam has also
committed to submit to an independent review of its policies
and procedures designed to prevent and detect problems in
these critical areas--now, and every other year.
This settlement is not the end of the Commission's
investigation of Putnam. We are also continuing to examine
the firm's actions and to pursue additional remedies that may
be appropriate, including penalties and other monetary
relief. If we turn up more evidence of illegal trading, or
any other prohibited activity, we will not hesitate to bring
additional enforcement actions against Putnam or any of its
employees. Indeed, our action in federal court charging two
Putnam portfolio managers with securities fraud is pending.
There are two specific criticisms of the settlement that
merit a response.
First, some have charged that it was a mistake not to force
the new management at Putnam to agree that the old management
had committed illegal acts. In fact, we took the unusual step
of requiring Putnam to admit to liability for the purpose of
determining the amount of any penalty to be imposed. We made
a decision, however, that it would be better to move quickly
to obtain real and practical protections for Putnam's
investors, right now, rather than to pursue a blanket legal
admission from Putnam. The SEC is hardly out of the
mainstream in making such a decision. All other federal
agencies, and many state agencies (including that of the New
York attorney general), willingly and regularly forgo blanket
admissions in order to achieve meaningful and timely
resolutions of civil proceedings.
Second, some have criticized the Putnam settlement because
it does not address how fees are charged and disclosed in the
mutual fund industry. While this issue is serious, the claim
is spurious. The Putnam case is about excessive short-term
trading by at least six Putnam management professionals and
the failure of Putnam to detect and deter that trading. The
amount and disclosure of fees is not, and never has been, a
part of the Putnam case, and thus it would be wholly improper
to try to piggyback the fee-disclosure issue on an unrelated
matter.
If our continuing investigation of Putnam uncovers evidence
of wrongdoing in the fee-disclosure area, we will not
hesitate to act, and the Commission is already moving forward
with rulemaking that will address this issue, and others, on
an industry-wide basis. Those lacking rulemaking authority
seem to want to shoehorn the consideration of the fee-
disclosure issues into the settlement of lawsuits about other
subjects. But we should not use the threat of civil or
criminal prosecution to extract concessions that have nothing
to do with the alleged violations of the law.
Criticism of the Commission for moving to quickly misses
the significance of the Commission's action. While continuing
our broader investigation of Putnam, we have reached a fair
and far-reaching settlement that establishes substantial
governance reforms and compliance controls that are already
benefiting Putnam's investors. It is a settlement where the
Commission put the interests of investors first.
As the Commission continues to initiate critical and
immediate reforms of the mutual-fund industry, and while we
investigate a multitude of other cases involving mutual fund
abuses, we will continue to seek reforms that provide
immediate relief to harmed investors.
Mr. MOORE. Mr. Speaker, as a member of the Financial Services
Committee, I rise in support of H.R. 2420, the Mutual Fund Integrity
and Fee Transparency Act of 2003, which I joined in cosponsoring after
our committee approved it earlier this year.
H.R. 2420 includes numerous provisions to help stop trading abuses
involving mutual funds such as those that have been recently uncovered
by State and Federal regulators. For example, it requires better
disclosures of mutual fund fees and expenses to help investors compare
the relative costs of funds and make more informed investment
decisions, and it improves the corporate governance of mutual fund
companies.
Among other things, the bill requires the Securities and Exchange
Commission (SEC) to issue rules that would prevent late trades;
prohibits mutual fund employees from engaging in any short-term trading
of their personal shares, and allows funds to charge higher redemption
fees to discourage short-term trades by others; prohibits any
individual from managing both a mutual fund and a hedge fund at the
same time; requires mutual funds to provide operating cost comparisons
using a standard $1,000 investment as an example; requires funds to
disclose the extent to which their portfolio ``turns over'' each year;
requires disclosures of financial incentives provided to brokers to
recommend certain funds, of how fund managers are compensated, and of
the extent to which fund managers hold fund shares in their personal
portfolio; requires that at least two-thirds of the directors of a
mutual fund be independent; and enhances the fiduciary duty of a fund's
board of directors to act on behalf of investors.
I do, however, have concerns with some of the provisions that were
included in the bill through adoption of today's manager's amendment. I
believe that this legislation has suffered as a result of the addition
of this amendment without any bipartisan consideration of its
provisions. My concerns involve the following issues:
The manager's amendment would require fund companies and their
principals to establish a code of ethics and to disclose such code of
ethics in periodic reports to shareholders. In addition to developing
and making public a fund's code of ethics, the fund company is required
by this section to ``disclose such code of ethics and any waivers and
material violations thereof on a readily accessible electronic public
information facility of such company.''
Establishing and following a code of ethics to ensure that fund
companies operate in the best interests of investors is a critical step
towards meaningful reform of the mutual fund industry; however,
publicly disclosing waivers and material violations of codes of ethics
places fund companies at unprecedented levels of liability risk,
particularly if done on a
[[Page H11545]]
``readily accessible electronic public information facility''--e.g., a
Web site.
The manager's amendment requires the independent directors of a
fund's board to certify, at the risk of personal liability, that a host
of procedures exist for the day-to-day operations of the fund company,
including: Verification that the current net asset value of any
security issued by the fund company complies with the applicable
securities laws; oversight of the flow of funds into and out of the
securities company; ensuring investors receive applicable discounts on
advertised front-end sales loads; share classes are offered in the
interests of investors and ``could reasonably be an appropriate
investment option for an investor''; and review and approval of the
portfolio manager's compensation.
This section raises serious questions about the appropriate role of
the board of directors by changing the face of mutual fund company
boards to act as managers of the day-to-day operations of the fund,
over which they normally now have little control, with regard to actual
compliance. No other board structure, for any other sort of public
company, has these sorts of requirements. Given the litany of new
requirements imposed on independent directors, grave concerns are
already being raised about a fund's ability to find individuals willing
to serve on a fund board. If fund companies are able to find
individuals willing to subject themselves to new liability, the company
would likely have to compensate that individual for taking on this
risk--a cost that will ultimately be borne by shareholders.
For example, section 201(a)(4)(A) requires the independent directors
of the mutual fund (a separate company) to certify that the mutual
fund's investment manager (another company) has procedures in place to
verify the fund's net asset value and that there is compliance with
these procedures. Net asset values are determined daily. Given the
independent fund director's relationship to those who do daily pricing,
independent directors would be hard pressed to comfortably provide the
certifications required. I have additional concern about how
independent directors of the mutual fund could certify that investors
receive front-end load sales discounts when neither the fund nor their
investment manager knows the identity of the investors or how to
communicate with them. This is often the case when funds are sold by
third party intermediaries. I am also concerned about language that
requires the independent directors to certify that mutual fund share
classes are designed in the interests of investors and are reasonably
appropriate investment options. Directors of the fund should not be
asked to assume the role of financial adviser to an investor.
Another significant concern relates to independent fund director
approval and certification of portfolio manager compensation. This
chips away at the fundamental structure underlying the relationship
between the mutual fund and its investment management company. As
indicated, they are separate companies. The independent fund directors
negotiate and approve the investment management contract on behalf of
mutual fund investors. In this way, they control expenses for
investors. They hire out expert investment management and can fire them
if they don't perform. It is inappropriate for them to approve and
certify approval of compensation at another company. When someone hires
a company to do something, you don't usually get to approve their
employees' compensation--only what you pay the company.
Finally, the manager's amendment requires the mutual fund to appoint
a chief compliance officer and the independent directors of the fund to
approve his or her compensation. The amendment also requires the
compliance officer to provide reports directly and privately to the
independent fund directors. I have no problem with the fund appointing
a compliance officer who ``functionally reports'' to it, but
``administratively reports'' to the investment manager. This can be
worked out. But, for the same reasons cited above, I think it is
improper for the independent directors of the fund to approve the
compensation of someone who works for its contractor. In addition, the
language of this provision could be read to require each fund to
appoint its own compliance officer, when a mutual fund often manages
several dozen funds. The result could be a costly, unworkable
situation.
Overall, H.R. 2420 is a bill is a timely and needed piece of
legislation; as Consumers Union stated in a letter to Congress earlier
today, it ``is an important first step in the effort toward reforming
this industry and protecting the interests of millions of investors.''
I support its passage in this body today, but hope that the Senate and
ultimately, a conference committee, can address the remaining issues I
have outlined here.
Mr. UDALL of Colorado. Mr. Speaker, I support this bill as a
necessary first step toward greater protection for the millions of
Americans who have invested in mutual funds.
Anyone who reads the daily newspapers is aware of the need for
greater vigilance by the Securities and Exchange Commission to prevent
continued practices by fund managers and others that enrich favored
individuals and groups at the expense of the majority of mutual-fund
shareholders.
I do understand that there are concerns about some parts of the bill,
including a provision that would authorize an increase in the fees
charged for redemption of fund shares, presumably as a way to reduce
the likelihood of some transactions that would have adverse effects on
other shareholders.
I have heard from people in Colorado who think that the costs to
shareholders of such fee increases would outweigh its benefits, and I
think they make some good points in support of that view.
However, my understanding is that while the bill would authorize such
fee increases, it does not mandate them. And, on balance, I think the
potentially adverse effects of this provision are outweighed by the
desirable changes to current law that would be made by other parts of
the bill.
So, I will vote for the bill as a necessary first step to respond to
a real and urgent problem. My hope is that it will be further refined
as the legislative process proceeds in the other body and possibly in
conference.
Mr. CASTLE. Mr. Speaker, I rise today in support of H.R. 2420, the
``Mutual Funds Integrity and Fee Transparency Act of 2003.'' I commend
Chairman Oxley and Subcommittee Chairman Baker for continuing your work
in protecting American investors and I am proud to play a role in
addressing the problems in the mutual fund industry. Hearings in the
Financial Services Committee have enabled us to address a number of
ongoing reforms that are necessary for the mutual fund industry to
increase transparency for investors. From these hearings we have also
learned of additional problems within the mutual fund industry that
have only recently come to light such as improper trading practices. We
have improved this legislation by incorporating all of the issues and I
am proud of the legislation we passed out of committee with strong
bipartisan support.
The average American family chooses to invest in mutual funds. I want
to make clear what is at stake. Two decades ago, only 6 percent of
American households had mutual fund shares valued at $134 billion.
Today, half of all American families have $7 trillion at stake. Mutual
funds represent about 10 percent of the total financial assets of the
U.S. population. The number of funds have grown from less than 500
mutual funds in 1980 to approximately 8,000 mutual funds today.
It concerns me that the scandals we have learned of in recent weeks
may only be the tip of the iceberg. This should be a wake up call to
both the Securities and Exchange Commission (SEC) and the industry that
change is needed. Mutual funds are a $7 trillion industry and with more
than 50 percent of the American public invested in mutual funds there
is the potential for investors to be hurt more so by these recent
revelations than even the World Com and Enron scandals. I am not
downplaying the problems that were in play there but I feel this issue
is further reaching and could impact a greater number of investors in
the long run. Some in the industry have stated market timing was an
open practice, furthermore, some funds have even stated they
participated in market timing on a limited level with clients to allow
controversial trading as a way to control the improper practice. This
bothers me. Favoritism to big investors and violating ethical and legal
codes rob the average investor who depends on their investments for
costs such as education and retirement. There is a lot at stake and the
reforms addressed in this legislation will help prevent future investor
betrayals. This bill addresses the recent market scandals and makes
additional necessary reforms to the mutual fund industry, and I would
like to highlight just a few.
First, to address recent scandals in the mutual fund industry, the
manager's amendment will explicitly ban sort term trading by fund
insiders and permit funds to charge more than the current maximum 2
percent redemption fee to discourage all market timers. Second, to
prevent market timing trades, made possible by stale pricing, the
manager's amendment directs the SEC to clarify rules regarding mutual
funds' obligation to apply fair value pricing. Third, the manager's
amendment also addresses late trading. Late trading is not only an
improper advantage for large fund investors, it is illegal. Late
trading has allowed some big fund investors to take advantage of the
current day's price on orders to buy or sell shares placed after the
close of the New York markets, when proper procedure would be to carry
out the orders at the following day's price. Some have likened this
practice to ``betting today on yesterday's horse race.'' The manager's
amendment directs the SEC to issue rules to prevent late trading
without disadvantaging those investors who use financial intermediaries
such as broker-dealers and 401(k) and pension plan administrators to
purchase fund shares.
[[Page H11546]]
Fourth, this legislation rightly increases the requirement of
independent board members from one-half to two-thirds of total board
membership and strengthens independence qualifications. A greater
number of independent directors will increase protections of investors'
interest against those of directors whose interests are tied to the
success of their funds' advisers. Fifth, the bill requires disclosure
of brokers' conflicts of interest where they are paid incentives to
promote particular funds so that investors can weigh sales incentives.
Finally, I am concerned about fees that mutual fund investors face. I
understand that mutual fund companies feel there is a need for certain
fees, but these fees must be transparent to investors. In many cases
investors choose ``no-load'' funds for their no fee structure, but
hidden fees such as 12-(b)-1 fees are often charged. I am pleased this
legislation would prohibit a fund from advertising as a ``no-load''
fund if in fact the 12-(b)-1 fee is charged. Furthermore, in an effort
to enhance transparency of fees, the bill requires that mutual funds
disclose fees, in dollar amounts, on a hypothetical $1,000 investment,
and further requires that this information not be buried in a
prospectus.
Mr. Speaker, the House Financial Services Committee and Congress
acted in the wake of the Enron and World Com scandals to protect
investors. Today we are again being called on to protect the average
American investor and I urge my colleagues on both sides of the aisle
to join me in supporting this important and very necessary legislation.
Mr. PORTMAN. Mr. Speaker, I rise today in strong support of H.R.
2420, the Mutual Funds Integrity and Fee Transparency Act, and
congratulate Chairman Oxley and Chairman Baker for bringing this needed
legislation to the House Floor so expeditiously. These critical reforms
will help to ensure that America's 95 million mutual fund investors,
representing a combined $7 trillion in assets, are reassured and
protected. I have a special interest in this issue because I have
worked over the past eight years to strengthen 401(k) plans, many of
which are significantly invested in mutual funds.
I am deeply concerned about the allegations of illegal mutual fund
trading practices, including improper market timing and late trading.
There have also been reports that certain investors, including large
institutional investors, have been given preferential treatment, to the
detriment and disadvantage of individual investors. Each day has
brought news of additional allegations, indicating that the abuse is
widespread in the mutual fund industry.
Every investor is entitled to fair treatment. Every investor should
expect, and is indeed entitled, to expect that the mutual fund industry
will place the interest of investors first. In fact, the Investment
Company Act requires that mutual funds be organized, operated and
managed in the interest of the funds' shareholders, not those of the
fund directors, executives or certain investors.
H.R. 2420 provides key reforms. The bill will strengthen funds'
compliance with rules, by requiring each fund a code of ethics and a
chief compliance officer; ban short-term trading by insiders; allow
higher fees to discourage short-term trading; and eliminate conflicts
of interest in portfolio management. Investors will be provided with
more information about fees, with additional disclosure required about
estimated fund operating expenses, portfolio turnover rates and whether
brokers receive extra financial incentives to sell particular fund
shares. And mutual fund corporate governance will be strengthened by
requiring two thirds of all board directors be independent.
Mr. Speaker, I strongly support these important reforms. I urge my
colleagues to vote for this legislation to help improve mutual fund
disclosure; eliminate conflicts of interest, and strengthen corporate
governance.
Ms. McCARTHY of Missouri. Mr. Speaker, I rise today to urge my
colleagues to support H.R. 2420 and remove any question that U.S.
mutual funds are a sound investment. ``The Mutual Funds Integrity and
Fee Transparency Act of 2003'' is the product of hard work and
bipartisan cooperation to address concerns by investors in the wake of
revelations this year of improprieties by irresponsible individuals in
the mutual fund industry.
Today almost 100 million Americans invest in stock and bond mutual
funds through direct holdings, 401(k) accounts, and through other
mechanisms. I am one of these investors. Mutual funds are a stellar
success story, combining diversification of risk with the simplicity of
a single vehicle. Estimates are that mutual fund holdings today exceed
$7 trillion dollars.
We must provide investors with the assurances they need to continue
to fuel the mutual fund engine. H.R. 2420 will protect investors by
reforming the mutual fund industry in several significant ways. Among
the important provisions of this measure are rules to require greater
transparency to investors as to the fees they are charged, and a new
directive to the Securities and Exchange Commission to conduct a study
of transaction costs.
This measure also correctly addresses the issue of the objectivity of
the mutual fund's board of directors by requiring that two-thirds of
the directors be independent, a significant increase from the current
40 percent requirement.
I support H.R. 2420 and urge my colleagues to do the same. As the
bill advances through the legislative process it will undergo further
changes, and I would recommend minor corrections that will improve the
functionality and efficacy of this measure.
I encourage my colleagues to make certain that we enact legislation
that produces the transparency that investors require yet does not
become overly bureaucratic or burdensome to the mutual fund industry.
For example, the requirement in H.R. 2420 for the appointment of a
Chief Compliance Officer should take into account that investment
management companies generally oversee several funds, and that each
individual fund should not require a separate Chief Compliance Officer.
Such a step would only add to the management costs of the funds which
in turn will result in higher costs to the investor.
We must also balance the much needed protection given to
whistleblowers in H.R. 2420 with the legitimate needs of businesses to
weed out poor performers. With hundreds of funds to choose among, there
is no lack of competition in the mutual fund industry, and when the
success of a given fund is measured in fractions the emphasis must be
on getting results for the investor. Let us be certain to protect
whistleblowers while not creating a safe harbor for underachievers.
Mr. Speaker, H.R. 2420 is worthy of our support, and again I urge my
colleagues to vote in the affirmative today, and to work to further
improve the measure as it moves toward enactment.
Mr. SHAYS. Mr. Speaker, I rise in support of the Mutual Funds
Integrity and Fee Transparency Act.
Mutual funds are based on trust. Every day, America's workers hand
over their hard-earned money and trust mutual fund companies to invest
their savings for them.
That trust has been severely damaged in recent months, and I can only
hope this harm is not irreparable because mutual funds have played an
important role in democratizing our stock markets.
This isn't Enron. It isn't WorldCom. But it's just as bad because
there are 95 million mutual fund investors in America and they're being
harmed. Mutual funds are one of the best ways for workers to plan for
their retirements. It allows them to diversity their investments and
access the capital markets without having to become experts in
individual stocks. It allows them to build wealth in a way that was
once reserved for the Rockefellers and Kennedys.
These investors are being defrauded by insiders who trade, in the
short term, their own fund shares and trade even after the markets
close. For each dollar gained through these illegal activities, every
other investor in these funds loses, a result that goes against the
very nature of mutual funds.
The Financial Services Committee acted quickly and reported out a
good bill. The legislation before us today takes important steps in
highlighting the growing cost of mutual fund fees and improving the
accountability and integrity of mutual fund companies.
In an equally important step, the bill increase the requirement of
independent board members from one-half to two-thirds and strengthens
independence qualifications. I hope this provision leads to more
independent directors who will be better able to protect investors'
interest against those of directors whose interests are tied to the
success of their funds' advisers.
I urge swift passage of this bill so that the Securities and Exchange
Commission will have the tools it needs to right the mutual fund
industry. In the meantime, I hope mutual fund companies heed this wake-
up call and begin to rebuild the trust they have squandered.
Mr. OSE. Mr. Speaker, I rise today in strong support of H.R. 2420,
the Mutual Funds Integrity and Fee Transparency Act of 2003. As a
Member of the Financial Services Committee I am proud to be an original
cosponsor of legislation that makes significant and much needed reforms
to the mutual funds industry by implementing measures to improve
transparency on fund fees and practices, bolster oversight abilities,
address conflicts of interest and enhance information provided to
investors. H.R. 2420 will strengthen the market by improving investor
confidence and by giving investors the necessary information to make
more informed investment decisions.
In today's climate, it seems one cannot pick up a paper without
reading about financial scandals involving improper conduct involving
mutual funds. The actions of this body in passing this H.R. 2420 will
mitigate the adverse impact these recent scandals may have on the
market by reassuring American investors that Congress and relevant
regulatory bodies are acting expeditiously to address shortfalls in
industry practice and regulation.
[[Page H11547]]
I commend Chairman Baker on his leadership on this bill, with
foresight he recognized loopholes in mutual fund regulation and even
before the current scandals surfaced worked hard to implement
significant reforms to clarify and codify rules on disclosure, improve
transparency, and increase oversight capabilities. In the Subcommittee
on Capital Markets, Insurance and Government Sponsored Enterprises,
where I serve as Vice-Chairman, Chairman Baker has held a number of
hearings to examine this issue in a deliberate and methodical manner,
and I thank him for his dedication to this issue.
I would also like to recognize the leadership Chairman Oxley has
demonstrated in bringing this bill to the floor today. His manager's
amendment strengthen the existing bill and in the spirit of the H.R.
2420's original intent, ensure that mutual funds are contentious in
their fiduciary duty to investors.
Mutual funds have become more accessible to increasing numbers of
Americans over the years, and this has served the industry well. Today
95 million individuals, comprising nearly half of all U.S. households,
own mutual funds. More Americans have a vested interest in the success
of these funds for the health of their savings and pensions, and their
increased involvement also is symbolic of the trust they have in the
integrity of the system. It is imperative that we do not let the
American mutual investors down by failing to resolve these issues.
Mr. Speaker, this bill is an important and necessary step in
restoring American investor trust into the mutual fund industry. I
applaud the leadership Chairman Baker and Chairman Oxley have shown on
this bill, and thank them for their service on behalf of American
investors. I yield back the remainder of my time.
Mr. OXLEY. Mr. Speaker, I yield back the balance of our time.
The SPEAKER pro tempore (Mr. Simmons). The question is on the motion
offered by the gentleman from Ohio (Mr. Oxley) that the House suspend
the rules and pass the bill, H.R. 2420, as amended.
The question was taken.
The SPEAKER pro tempore. In the opinion of the Chair, two-thirds of
those present have voted in the affirmative.
Mr. OXLEY. Mr. Speaker, on that I demand the yeas and nays.
The yeas and nays were ordered.
The SPEAKER pro tempore. Pursuant to clause 8 of rule XX and the
Chair's prior announcement, further proceedings on this motion will be
postponed.
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