[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.

                          ____________________