[Congressional Record Volume 149, Number 174 (Tuesday, November 25, 2003)]
[Senate]
[Pages S16014-S16022]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. ROCKEFELLER:

[[Page S16014]]

  S. 1970. A bill to amend title 11, United States Code, to increase 
the amount of unsecured claims for salaries and wages given priority in 
bankruptcy, to provide for cash payments to retirees to compensate for 
lost health insurance benefits resulting from the bankruptcy of their 
former employer, and for other purposes; to the Committee on the 
Judiciary.
  Mr. ROCKEFELLER. Mr. President, over the last several years as the 
economy came down from the high of the 1990s, we have seen how 
devastating it can be for workers when their companies declare 
bankruptcy. From the enormous Enron bankruptcy at the end of 2001 to 
the bankruptcies of Wheeling-Pitt and then Weirton Steel in my own home 
State, every bankruptcy has brought heartache for workers who had 
dedicated themselves to their employers. In many cases, employees and 
retirees have very limited ability to recover the wages, severance, or 
benefits they are due when their companies seek protection from 
creditors.
  Workers deserve better. So today I am introducing the Bankruptcy 
Fairness Act to strengthen workers' rights in bankruptcy and to provide 
greater authority to bankruptcy courts to ensure a fair distribution of 
assets. Specifically, my bill will do three things. It will ensure that 
retirees whose promised health insurance is taken away receive at least 
some compensation for their lost benefits. Second, my legislation would 
allow employees to recover more of the back-pay or other compensation 
that is owed to them at the time of the bankruptcy. And lastly, I would 
provide bankruptcy courts the authority to recover company assets in 
cases where company managers flagrantly paid excessive compensation to 
favored employees just before declaring bankruptcy.
  I am proposing this legislation as a way to start a dialogue about 
how we can better protect workers whose companies file for bankruptcy. 
I do not pretend to have all the answers. But I do know that we must do 
a better job of easing the burden that bankruptcy imposes on employees 
and retirees. And I believe that we can do so in creative ways that do 
not make it more difficult for companies to successfully reorganize and 
emerge from bankruptcy. I look forward to the ideas and suggestions of 
my colleagues.
  In the simplest economic terms, employees sell their labor to their 
companies. They toil away in offices, plants, factories, mills, and 
mines, because they are promised that at the end of the day they will 
receive certain compensation. One of the most important types of 
compensation that workers earn is the right to enjoy certain benefits 
when they retire. Pensions, life insurance, or health care coverage are 
earned by workers in addition to their weekly paychecks. Yet, sadly we 
have seen many companies in the last few years abandon these promises 
when they declare bankruptcy.
  More and more we see companies taking the easy road to profitability 
by abandoning commitments that they made to workers. For retirees who 
have planned for their golden years based on the benefits they have 
earned, losing health insurance can be a devastating blow. Retirees 
must have the right to reasonable compensation if the company seeks to 
break its promise to provide health insurance. Under current law, these 
retirees receive what is called a general unsecured claim for the value 
of the benefits they lost. As any creditor will tell you, a general 
unsecured claim is essentially worthless in most bankruptcies. It means 
you are at the end of the line, and there are not enough assets to go 
around. This law allows companies to essentially rescind compensation 
that retirees have earned with virtually no cost to the company. Of 
course that is a great deal for the company, but it is spectacularly 
unfair to the retirees.
  Recognizing that so-called legacy costs are often an impossible 
burden for a company that is trying to emerge from bankruptcy, my 
legislation would still allow companies in some circumstances to alter 
the health coverage offered to retirees. However, it would require that 
the company pay a minimum level of compensation to retirees. Under this 
bill, each retiree would be entitled to a payment equal to the cost of 
purchasing comparable health insurance for a period of 18 months. Of 
course, 18 months of health insurance coverage is a lot less than many 
of these retirees are losing, but it can ease the transition as 
retirees make alternative plans, and it will discourage companies from 
thinking that terminating retiree health coverage is an easy solution. 
The retirees would still be entitled to a general unsecured claim for 
the value of the benefits lost in excess of this one time payment. This 
change would ensure that retirees, while still not being made whole on 
lost benefits, will at least receive some compensation for the broken 
promises.
  Many active workers, too, have a difficult time recovering what is 
owed to them by their employer when the company files bankruptcy. Under 
current law, employees are entitled to a priority claim of up to 
$4,650. But that figure is usually not enough to cover the back-wages, 
vacation time, severance pay, or benefit payments that the employees 
are owed for work done prior to the bankruptcy. Congress needs to 
update the amount of the priority claim to ensure that more workers are 
able to receive what is rightfully theirs. The Bankruptcy Fairness Act 
would establish a priority claim for the first $15,000 of compensation 
owed to an employee.
  In most cases, employees have been working their hardest to help the 
company avoid the nightmare of bankruptcy, only to find that they will 
not be compensated for their services as promised. As we saw so clearly 
with the Enron case, employees are often left holding the bag when 
their company declares bankruptcy. In that case, employees were owed an 
average of $35,000 in back-wages, severance, and other promised 
compensation. They deserved to recover more than a mere $4,650 of what 
was owed them. Let me be clear, this bill does not establish any new 
obligation for a company to pay severance or other compensation to 
employees caught up in a company's bankruptcy. It merely ensures that 
employees can recover more of what is already owed to them through the 
bankruptcy process.
  I understand that many creditors or investors are not able to recover 
what is rightfully owed to them in bankruptcy, but employees deserve 
protection that recognizes the unique nature of their dependence on 
their employer. Any smart investor diversifies his or her portfolio so 
that a bankruptcy at one company does not bankrupt the investor. 
Likewise, suppliers and creditors that do business with a company 
typically have many other clients. This is not the case with workers. 
They cannot diversify away from the risk of working for a bankrupt 
company, and the financial hardship a bankruptcy brings is more 
devastating to the average worker than the average creditor or 
supplier.

  Now, I know that some of my colleagues listening to this may be 
worrying that this legislation is insensitive to the needs of companies 
that are trying to reorganize in order to emerge from bankruptcy and go 
forward as successful businesses. I am fully aware that sometimes, too 
often in the real world, the bankruptcy process can help companies stay 
open and maintain jobs by restructuring obligations to creditors. Too 
many companies in West Virginia have had to go through the painful 
process of Chapter 11 reorganization. I completely understand the need 
to keep the factories open. And I have always worked side by side with 
companies to help them recover.
  I will continue that important work, and I have included a provision 
in this bill to help bankrupt companies that are struggling to survive 
to recover assets that have been pilfered from the corporate coffers. 
In too many cases, company executives reward themselves even as their 
companies careen toward bankruptcy. The most egregious recent example 
is at Enron in 2001. In the days and weeks leading up to the bankruptcy 
filing, executives granted large bonuses to themselves and their 
favored employees. Millions of dollars were paid to a select group of 
employees just before the company declared bankruptcy. It is 
unconscionable that executives would grant themselves undeserved 
bonuses and then weeks later claim that the company did not have the 
resources to pay its rank and file employees.
  My legislation provides bankruptcy courts greater authority to 
recover excessive compensation that was paid just prior to the 
bankruptcy filing. If

[[Page S16015]]

the court finds that compensation was out of the ordinary course of 
business or was unjust enrichment, the court can recover those assets 
for the bankrupt company, ensuring that more creditors, employees, and 
retirees can receive what is rightfully owed to them by the company.
  The reforms I have outlined are modest. They will not take the sting 
out of bankruptcy. By definition a bankruptcy is a failure, and it is 
painful for the company's employees, retirees, and business partners. 
But the Bankruptcy Fairness Act I am introducing today would make 
progress toward ensuring that bankruptcies are more fair to the workers 
who gave their time and energy and sweat to the company in exchange for 
certain promised compensation. And by helping a company recover assets 
that should not have been paid out as undeserved bonuses just before 
bankruptcy the bill ensures that more of a company's assets are paid to 
the employees, retirees, and creditors who are rightfully owed.
  It is my hope that this legislation will receive serious 
consideration from my colleagues, and that this can open an important 
debate about how workers and retirees can be better protected from the 
ugly side of prolonged economic downturns.
                                 ______
                                 
      By Mr. CORZINE (for himself, Mr. Dodd, and Mr. Lieberman):
  S. 1971. A bill to improve transparency relating to the fees and 
costs that mutual fund investors incur and to improve corporate 
governance of mutual funds; to the Committee on Banking, Housing, and 
Urban Affairs.
  Mr. DODD. Mr. President, I rise today, with my colleague from New 
Jersey, to introduce a measure that is critical to improving the 
investing public's faith in our capital markets. This legislation, the 
``Mutual Fund Investor Confidence Restoration Act'' will fundamentally 
strengthen protections for the millions of investors who rely on mutual 
funds for their financial security.
  America is the land of opportunity. Millions of Americans and 
countless others around the world seek the opportunity to participate 
in the economic life of our nation. Mutual funds are a principal 
pathway through which most investors achieve financial security. Mutual 
funds have in the past not only lived up to, but in many cases 
exceeded, the grand expectations of investors. They are a true success 
story of our securities markets and our system of securities 
regulation.
  However, in recent months, a series of revelations has shaken 
investor confidence in the promise of mutual funds. We must restore the 
faith of investors in mutual funds and those who manage them. This 
legislation is designed to address some of the abuses and shortcomings 
which have received so much recent attention.
  There are five broad areas which this legislation addresses: 
corporate governance, disclosures to investors, late trading and market 
timing, increased regulatory oversight, and financial literacy.
  This legislation significantly improves corporate governance 
standards at mutual funds. Investors have begun to lose faith that 
their hard earned savings are not being managed with their best 
interests in mind. Mutual fund boards must have greater independence 
from fund managers and be more accountable to shareholders of the fund. 
Directors and chairmen must exercise greater oversight to ensure that 
funds are run in the interest of their shareholders--and be accountable 
to shareholders for failing to do so. Additionally, this legislation 
directs the SEC to determine whether directors and chairmen need 
additional tools to carry out that job.
  This legislation mandates that corporate governance requirements 
created in the Sarbanes-Oxley Act, such as director independence 
requirements, financial expertise, and certification measures apply to 
mutual funds. Of particular note, this legislation mandates that funds 
employ a chief compliance officer to ensure that internal controls, 
policies and procedures are met by the fund in the interest of 
shareholders.
  We need to improve the disclosures to investors about the fees and 
costs associated with mutual funds. Current disclosures are inadequate 
in providing investors the information necessary to understand the true 
costs of investing through mutual funds. The current expense ratio by 
no means includes all of the fund's expenses.
  This legislation requires that currently unaccounted for expenses, 
such as brokerage commissions, advertising fees and research costs, 
among others, are fully disclosed.
  Additionally, the legislation requires the breakout of these 
respective costs to be displayed as a graph provided to shareholders 
that will enable them to compare the costs associated with owning 
shares of different mutual funds. The ability to compare the total 
costs of mutual funds with each other will drive competition and lower 
costs for investors.
  Investors deserve to know if their broker has a financial incentive 
to steer them into particular mutual funds. This legislation mandates 
greater disclosure of financial incentives provided to intermediaries 
and requires fund companies and investment advisers to fully disclose 
certain sales practices, including revenue-sharing and directed 
brokerage arrangements and disclose the value of research and other 
services paid for as part of brokerage commissions.
  The recent abuses that we have seen with respect to late trading and 
market timing must be stopped to restore investors faith in mutual 
funds. Insider dealings at mutual funds must never recur. Fund insiders 
must be prohibited from trading against their own shareholders' 
interest. Neither fund insiders nor preferred customers must enjoy 
privileges like market timing that are denied to the millions of 
average mutual fund investors.
  Late trading is already illegal, but we now know it isn't isolated. 
The system for prohibiting late trading in mutual funds must be 
strengthened, so all mutual fund investors are treated fairly. This 
legislation creates new requirements for intermediaries and funds to 
ensure that illegal late trading activities are stopped.
  As a result of the recent widespread scandals in this area, we must 
rededicate our regulatory oversight of the mutual fund industry. Due to 
the tremendous size of mutual funds and how critical of an investment 
tool they are to small investors, this legislation directs the General 
Accounting Office to consider the value of creating a new self 
regulatory body and/or independent regulator for mutual fund oversight.
  Lastly, this legislation calls for improved efforts to promote 
financial literacy among mutual fund shareholders. Ensuring that 
investors have the resources available to them to understand the 
benefits and costs of mutual funds is a fundamental importance.
  The Mutual Fund Investor Confidence Restoration Act is an important 
step in the right direction of restoring the integrity of the mutual 
fund industry and will greatly improve the basic protections given to 
investors who rely upon these investment vehicles for their economic 
security.
  Mr. CORZINE. Mr. President, I rise along with my colleague from 
Connecticut, Senator Dodd, to introduce the Mutual Fund Investor 
Confidence Restoration Act of 2003, a bill that would improve the 
oversight of the mutual fund industry, enhance fund governance, and 
protect the millions of Americans who invest in these funds.
  Mutual funds are the primary means for investors to participate in 
the market. Approximately 95 million Americans invest in mutual funds, 
and investments total near $7 trillion dollars. The industry, one of 
our oldest and most-revered, is entrusted by those shareholders with 
their dreams of a comfortable retirement, the ability to pay their 
children's college tuition, buy a first home or pursue other life-long 
dreams.
  It's not a stretch to say that in many ways the mutual fund industry 
has been the standard bearer for ethical behavior, strong oversight and 
governance committed to investor protection in our capital markets. 
Few, if anyone, would dare to have suggested that our mutual fund 
industry could become fertile ground for the types of `infectious 
greed' we witnessed during the governance and accounting scandals a few 
years ago.
  But that is just what has happened.
  Today, the mutual fund industry faces its own litany of scandals 
centered on allegations of investor fraud,

[[Page S16016]]

flawed corporate governance, financial conflicts of interest and 
outright investor abuse. Names like Putnam and Canary Capital have 
become synonymous with Enron, Tyco and WorldCom in terms of the 
financial harm inflicted upon investors, undermining their confidence 
and trust in America's financial markets.
  The vast majority of those who work in this industry are decent, 
hard-working individuals who make a significant contribution to the 
betterment of our nation.
  Unfortunately, there are also far too many associated with this 
profession--including some investment advisors, fund board members, and 
those in fund company management--who are all too willing to disregard 
their fiduciary obligation to shareholders in order to pursue their own 
personal self-enrichment.
  Investors should not perceive that the deck is stacked against them. 
They should not think that there are different rules--one that applies 
to them and a different and considerably less stringent set that 
applies to wealthy industry insiders.
  The legislation we are introducing today, The Mutual Fund Investor 
Confidence Restoration Act will make sure that the playing field stays 
level.
  This bill has five primary themes: improving mutual fund governance; 
enhancing cost, fee and other important disclosures to shareholders; 
preventing abusive mutual fund practices such as late trading and 
market timing; strengthening mutual fund industry oversight; and 
promoting fund shareholder literacy.
  Let me give a more detailed summation of what this legislation would 
do and why it is so important.
  Boards of directors for mutual funds have been criticized recently 
for the high number of directorships that members hold, the lack of 
board independence from fund management and the failure of several to 
fulfill their fiduciary responsibility to shareholders. This 
legislation would strengthen fund governance by establishing truly 
independent mutual fund boards, chairmen, nominating committees and 
independent audit committees that conform to Sarbanes-Oxley Act 
requirements for those at publicly traded companies.
  The bill would also improve fund governance by requiring Sarbanes-
Oxley-like ``certification'' from Board Chairmen and newly-designated 
Chief Compliance Officers that shareholders safeguards are in place 
within the fund.
  Also, it would ensure that accurate disclosures to shareholders, 
including cost and fee information, are contained in the prospectus.
  The legislation includes other `certifiable' requirements for board 
chairmen and chief compliance officers, including disclosures that 
internal controls, a code of ethics and personnel designated to 
ensuring adherence to stated polices and compliance with relevant 
securities laws, including measures preventing market-timing and late 
trading abuses, are in place at the fund and with the investment 
adviser. Additionally, the legislation calls for the disclosure of 
insider transactions by mutual fund managers and Board notification of 
Securities and Exchange Commission (SEC) deficiency letters.
  Another issue of concern with the mutual fund industry is the 
inadequate and confusing disclosure provided to shareholders regarding 
expenses. Fund shareholders are responsible for paying various fees and 
costs related to the operation and trading activity of the fund. While 
funds provide investors with certain fee-related disclosure, 
shareholders are largely in the dark about many other costs that impact 
the value of their fund's assets.
  The legislation includes numerous provisions aimed at improving the 
cost, fee and other disclosures shareholders receive from mutual funds. 
These would include requirements that funds disclose the actual cost 
borne by each shareholder for the operating expenses of the fund and 
the estimated expenses paid for costs associated with management of the 
fund that reduces the fund's overall value, including brokerage 
commissions, revenue sharing and directed brokerage arrangements, 
transactions costs another fees.
  The legislation would require a breakdown of these respective costs 
to be displayed graphically, in order to provide shareholders with the 
requisite information to compare the costs associated with owning 
shares of various mutual funds.
  In addition these requirements, the legislation would require fund 
companies and investment advisers to fully disclose certain sales 
practices, including revenue-sharing and directed brokerage 
arrangements, shareholder eligibility for breakpoint discounts and the 
value of research and other services paid for as part of brokerage 
commissions, directing the SEC to study so-called ``soft-dollar'' 
arrangements.
  As I mentioned earlier, Mr. President, this bill includes measures 
aimed at preventing abusive mutual fund practices, such as late trading 
and market timing, that diminish the shareholders' assets of a 
particular fund. First, the legislation seeks to ensure that fund 
companies and investment advisers have adequate shareholder safeguards 
in palace, and that they `certify' these internal control procedures. 
Those would include establishing a code of ethics, improving the 
accurate disclosure of fund company policies, and ensuring compliance 
efforts are overseen by the chief compliance officer.
  The bill also would also take steps aimed at directly preventing 
abusive practices and conflicts of interest. The recent scandals 
surrounding mutual funds primarily focus on brokers and fund officials 
that have engaged in the improper trading of mutual fund shares through 
late trading and market timing. Late trading refers to the practice of 
placing orders to buy or sell mutual fund shares after 4 p.m., and 
market timing is short-term trading in and out of stocks in the hope of 
exploiting an inefficiency in the fund's share price.
  To address the issue of market timing, the legislation requires the 
SEC to ensure that fund companies are in compliance with the Investment 
Company Act rules requiring them to use fair value calculation to 
determine the net asset value a fund company's securities when market 
quotations are otherwise unavailable or do not accurately reflect the 
companies fair market value. This provision would eliminate the stale 
pricing that allows market timers to profit, often illicitly, from the 
inaccurate pricing of a fund's shares.
  The legislation would also require the SEC to establish a rule 
requiring fund companies and investment advisers to develop and 
disclose formal policies related to market timing and short term 
trading. Certification by fund company management would further ensure 
that policies are being adhered to.
  To address late trading, the bill requires the SEC to issues rules 
and establishes guidelines for trades in fund securities that go 
through newly established ``permitted intermediaries'', such as broker-
dealers. The rules would allow these permitted intermediaries to 
execute trades of a fund after the funds net asset value has been 
derived, if the intermediary has; a policy in place that the company 
does not permit late trades, mechanisms in place to detect late-trades 
and if that intermediary make those procedures available for inspection 
by the SEC. Non-permitted intermediaries would be required to submit 
their transactions to the fund company prior to market close.
  To reduce other conflicts, the legislation would prohibit mutual fund 
managers from jointly managing a hedge fund, and would prohibit short-
term trading by fund and investment company management and requires 
disclosure of insider transactions.
  In seeking to bolster mutual fund industry oversight, this 
legislation would require the SEC to review the allocation of the 
resources it has dedicated to industry oversight and the General 
Accounting Office (GAO) to study the feasibility of establishing a new, 
independent regulator--the Mutual Fund Oversight Board. The bill also 
would direct the SEC to establish incentives and protections for 
whistleblowers and would require the GAO to independently review and 
report to Congress on the coordination of enforcement efforts between 
the SEC, its regional offices, and state regulators.
  Finally, this bill calls for a study into ways in which we can 
improve and promote financial literacy among mutual fund shareholders. 
And the legislation, through its enhanced disclosures to shareholders, 
already makes a significant contribution to improving

[[Page S16017]]

shareholder understanding of the policies of the fund and the costs 
associated with its management and operation.
  There being no objection, the bill was ordered to be printed in the 
Record, as follows:

                                S. 1971

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

     SECTION 1. SHORT TITLE; TABLE OF CONTENTS.

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

Sec. 1. Short title; table of contents.

  TITLE I--ENHANCING COST, FEE, AND OTHER DISCLOSURES TO SHAREHOLDERS

Sec. 101. Improved transparency of mutual fund costs.
Sec. 102. Obligations regarding certain distribution and soft dollar 
              arrangements.
Sec. 103. Definition of no-load mutual fund.
Sec. 104. Disclosure of incentive compensation and mutual fund sales.

                    TITLE II--MUTUAL FUND GOVERNANCE

Sec. 201. Independent mutual fund boards.
Sec. 202. Audit committee requirements for investment companies.
Sec. 203. Informing directors of significant deficiencies.
Sec. 204. Certification by chairman and chief compliance officer.

          TITLE III--PREVENTING ABUSIVE MUTUAL FUND PRACTICES

Sec. 301. Prevention of fraud; internal compliance and control 
              procedures.
Sec. 302. Ban on joint management of mutual funds and hedge funds.
Sec. 303. Restrictions on short term trading and mandatory redemption 
              fees.
Sec. 304. Elimination of stale prices.
Sec. 305. Formal policies and procedures related to market timing.
Sec. 306. Prevention of late trades.
Sec. 307. Disclosure of insider transactions.

         TITLE IV--STRENGTHENING MUTUAL FUND INDUSTRY OVERSIGHT

Sec. 401. Study of Mutual Fund Oversight Board.
Sec. 402. Study of coordination of enforcement efforts.
Sec. 403. Review of Commission resources.
Sec. 404. Commission study and report regulating soft dollar 
              arrangements.
Sec. 405. Report on adequacy of regulatory response to late trading and 
              market timing.
Sec. 406. Study of arbitration claims.

                TITLE V--PROMOTING SHAREHOLDER LITERACY

Sec. 501. Financial literacy among mutual fund investors study.

  TITLE I--ENHANCING COST, FEE, AND OTHER DISCLOSURES TO SHAREHOLDERS

     SEC. 101. IMPROVED TRANSPARENCY OF MUTUAL FUND COSTS.

       (a) Regulation Revision Required.--
       (1) In general.--Not later than 180 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--
       (A) the actual dollar amount, borne by each shareholder, of 
     the expenses of the company;
       (B) the structure of, method used to determine, and the 
     total amount of 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, including when 
     such individuals have no ownership interest in the company;
       (C) whether the chairman of the board of directors of the 
     open-end management investment company or any directors of 
     the investment adviser of such company employed to manage the 
     portfolio of the company do not own any securities of the 
     company;
       (D) the estimated total annual dollar amount of fees, 
     costs, expenses, taxes, and any other payments made by the 
     company for any purpose, excluding only pro rata 
     distributions to shareholders, and set forth in a manner that 
     facilitates comparison among different companies;
       (E) 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--
       (i) furnishes advice, either directly or through 
     publications or writings, as to the value of securities, the 
     advisability of investing in, purchasing, or selling 
     securities, and the availability of securities or purchasers 
     or sellers of securities;
       (ii) furnishes analyses and reports concerning issuers, 
     industries, securities, economic factors and trends, 
     portfolio strategy, and the performance of accounts; or
       (iii) facilitates the sale and distribution of the 
     company's shares;
       (F) information concerning payments by any person other 
     than the company that are intended to facilitate the sale and 
     distribution of the company's shares; and
       (G) information concerning discounts on front-end sales 
     loads for which investors may be eligible, including the 
     minimum purchase amounts required for such discounts.
       (2) Rules and regulations.--
       (A) Other management and service-related cost.--Not later 
     than 180 days after the date of enactment of this Act, the 
     Securities and Exchange Commission shall issue rules or 
     regulations defining ``fees, costs, expenses, taxes, and any 
     other payments made by the company'' for purposes of 
     paragraph (1)(D). Such definition shall include any 
     management fees, transfer agency expenses, custodial fees, 
     shareholder servicing fees, portfolio transaction costs 
     (including commissions, market impact, spread, and 
     opportunity costs, fees charged under a plan adopted pursuant 
     to rule 12b-1 of the rules of the Securities and Exchange 
     Commission (17 C.F.R. 270.12b-1), and other distribution 
     expenses, directors' fees, and registration fees.
       (B) Manner that facilitates comparison among investment 
     companies.--
       (i) In general.--Not later than 180 days after the date of 
     enactment of this Act, the Securities and Exchange Commission 
     shall issue rules or regulations defining ``manner that 
     facilitates comparison amount investment companies'' for 
     purposes of paragraph (1)(D). Such definition shall include 
     definitions of functional categories of fees, costs, 
     expenses, taxes, and other payments disclosed under paragraph 
     (1)(D) that shall not be based on the contract under which or 
     with whom the services are provided, and shall instead be 
     based on the nature of the services provided.
       (ii) Display.--Each category of costs under clause (i) 
     shall be presented in a graphical display (such as a bar or 
     pie chart) that shows each category as a percentage of the 
     total dollar amount under paragraph (1)(D).
       (C) Certification.--Not later than 90 days after the date 
     of enactment of this Act, the Securities and Exchange 
     Commission shall issue rules or regulations requiring the 
     independent audit of the estimate required under paragraph 
     (1)(D) and certification by the investment adviser and the 
     chairman of the board of directors of the open-end investment 
     company.
       (b) Appropriate Disclosure Document.--
       (1) In general.--For purposes of subsection (a)(1), a 
     disclosure shall not be considered to be made in an 
     appropriate disclosure document if the disclosure is made 
     exclusively in a prospectus or statement of additional 
     information, or both such documents.
       (2) Exceptions.--Notwithstanding paragraph (1), the 
     disclosures required by paragraph (1)(B), (C), and (E) 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.

     SEC. 102. OBLIGATIONS REGARDING CERTAIN DISTRIBUTION AND SOFT 
                   DOLLAR ARRANGEMENTS.

       Section 15 of the Investment Company Act of 1940 (15 U.S.C. 
     80a-15) is amended by adding at the end the following:
       ``(g) Obligations Regarding Certain Distribution and Soft 
     Dollar Arrangements.--
       ``(1) Reporting requirements.--Each investment adviser to a 
     registered investment company shall, not 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 that 
     the direction of such brokerage adheres to the Fund's stated 
     policies and 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 that such revenue sharing arrangements adheres to the 
     Fund's stated policies and are in the best interests of the 
     shareholders of the company.
       ``(3) Summaries of reports in annual reports to 
     shareholders.--In accordance

[[Page S16018]]

     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.''.

     SEC. 103. DEFINITION OF NO-LOAD MUTUAL FUND.

       Not later than 180 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 rules of the Securities 
     and Exchange Commission (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. 104. DISCLOSURE OF INCENTIVE COMPENSATION AND MUTUAL 
                   FUND SALES.

       (a) In General.--Section 15(b) of the Securities Exchange 
     Act of 1934 (15 U.S.C. 78o(b)) is amended by adding at the 
     end the following:
       ``(11) Confirmation of transactions for mutual funds.--
       ``(A) In general.--Each broker shall disclose in writing to 
     customers that purchase the shares of an open-end company 
     registered under section 8 of the Investment Company Act of 
     1940 (15 U.S.C. 80a-8)--
       ``(i) the amount of any compensation received or to be 
     received by the broker in connection with such transaction 
     from any sources, including--

       ``(I) 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;
       ``(II) 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;
       ``(III) any conflicts of interest that any associated 
     person of the broker, dealer, or municipal securities broker 
     or dealer of the investor may face due to the receipt of 
     differential compensation in connection with such sale; and
       ``(IV) information about the estimated amount of any asset-
     based distribution expenses incurred, or to be incurred, by 
     the investment company in connection with the purchase of 
     securities by the investor; and

       ``(ii) such other information as the Commission determines 
     appropriate.
       ``(B) Timing of disclosure.--The disclosure required under 
     subparagraph (A) shall be made to a customer not later than 
     as of the date of the completion of the transaction.
       ``(C) Limitation.--The disclosures required under 
     subparagraph (A) may not be made exclusively in--
       ``(i) a registration statement or prospectus of an open-end 
     company; or
       ``(ii) any other filing of an open-end company with the 
     Commission.
       ``(D) Commission authority.--Not later than 1 year after 
     the date of enactment of the Mutual Fund Investor Confidence 
     Restoration Act of 2003, the Commission shall, by rule, 
     establish, to the extent practicable, standards for the 
     disclosures required under subparagraph (A).
       ``(E) Definition of open-end company.--In this paragraph, 
     the term `open-end company' has the same meaning as in 
     section 5 of the Investment Company Act of 1940 (15 U.S.C. 
     80a-5).
       ``(F) Definitions of differential compensation and 
     municipal fund security.--
       ``(i) Differential compensation.--In this paragraph, an 
     associated person of a broker or dealer shall be considered 
     to receive differential compensation if such person receives 
     any increased or additional remuneration, in whatever form--

       ``(I) 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
       ``(II) 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.

       ``(ii) Municipal fund security.--In this paragraph, 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).''.

                    TITLE II--MUTUAL FUND GOVERNANCE

     SEC. 201. INDEPENDENT MUTUAL FUND BOARDS.

       (a) Director Independence.--
       (1) In general.--Section 10(a) of the Investment Company 
     Act of 1940 (15 U.S.C. 80a-10(a)) is amended--
       (A) by striking ``more than 60 per centum'' and inserting 
     ``more than 25 percent''; and
       (B) by striking the period at the end and inserting ``, and 
     such company shall not have as a member of its board of 
     directors any person--
       ``(1) who has served without being approved or elected by 
     the shareholders of such registered investment company at 
     least once every 5 years; and
       ``(2) unless such director is an interested person or has 
     been found, on an annual basis, by a majority of the 
     directors who are not interested persons, after reasonable 
     inquiry by such directors, not to have any material business 
     or familial relationship with the registered investment 
     company, a significant service provider to the company, or 
     any entity controlling, controlled by, or under common 
     control with such service provider, that is likely to impair 
     the independence of the director.''.
       (2) Chairman; financial expert; independent committee.--
     Section 10 of the Investment Company Act of 1940 (15 U.S.C. 
     80a-10) is amended by adding at the end the following:
       ``(i) Chairman.--No registered investment company shall 
     have as chairman of its board of directors an interested 
     person of such registered company.
       ``(j) Independent Committee.--
       ``(1) In general.--The members of the board of directors of 
     a registered investment company who are not interested 
     persons of such registered investment company shall establish 
     a committee comprised solely of such members, which committee 
     shall be responsible for--
       ``(A) selecting persons to be nominated for election to the 
     board of directors; and
       ``(B) adopting qualification standards for the nomination 
     of directors.
       ``(2) Disclosure.--The standards developed under paragraph 
     (1)(B) shall be disclosed in the registration statement of 
     the registered investment company.
       ``(k) Financial Expert.--
       ``(1) In general.--Each registered investment company shall 
     have as a member of its board of directors not less than 1 
     member who is a financial expert, as such term is defined by 
     the Commission.
       ``(2) Rules defining financial expert.--In defining the 
     term `financial expert' for purposes of paragraph (1), the 
     Commission shall consider whether a person has, through 
     education and experience as a public accountant or auditor or 
     principal financial officer, comptroller, or principal 
     accounting officer of a registered investment company, or 
     from a position involving the performance of similar 
     functions--
       ``(A) an understanding of generally accepted accounting 
     principles and financial statements; and
       ``(B) experience in the preparation or auditing of 
     financial statements of general comparable registered 
     investment companies.
       ``(3) Deadline for rulemaking.--Not later than 180 days 
     after the date of enactment of the Mutual Fund Investor 
     Confidence Restoration Act of 2003, the Commission shall 
     issue rules under paragraph (2).''.
       (c) Definition of Interested Person.--Section 2(a)(19) of 
     the Investment Company Act of 1940 (15 U.S.C. 80a-2(a)(19)) 
     is amended--
       (1) in subparagraph (A)--
       (A) in clause (iv), by striking ``two'' and inserting 
     ``5''; and
       (B) by striking clause (vii) and inserting the following:
       ``(vii) any natural person who has served as an officer or 
     director, or as an employee within the preceding 10 fiscal 
     years, of an investment adviser or principal underwriter to 
     such registered investment company, or of any entity 
     controlling, controlled by, or under common control with such 
     investment adviser or principal underwriter;
       ``(viii) any natural person who has served as an officer or 
     director, or as an employee within the preceding 10 fiscal 
     years, of any entity that has within the preceding 5 fiscal 
     years acted as a significant service provider to such 
     registered investment company, or of any entity controlling, 
     controlled by, or under the common control with such service 
     provider; or
       ``(ix) any natural person who is a member of a class of 
     persons that the Commission, by rule or regulation, 
     determines is unlikely to exercise an appropriate degree of 
     independence as a result of--

       ``(I) a material business relationship with the investment 
     company or an affiliated person of such investment company;

[[Page S16019]]

       ``(II) a close familial relationship with any natural 
     person who is an affiliated person of such investment 
     company; or
       ``(III) any other reason determined by the Commission.''; 
     and

       (2) in subparagraph (B)--
       (A) in clause (iv), by striking ``two'' and inserting 
     ``5''; and
       (B) by striking clause (vii) and inserting the following:
       ``(vii) any natural person who is a member of a class of 
     persons that the Commission, by rule or regulation, 
     determines is unlikely to exercise an appropriate degree of 
     independence as a result of--

       ``(I) a material business relationship with such investment 
     adviser or principal underwriter or affiliated person of such 
     investment adviser or principal underwriter;
       ``(II) a close familial relationship with any natural 
     person who is an affiliated person of such investment adviser 
     or principal underwriter; or
       ``(III) any other reason as determined by the 
     Commission.''.

       (d) Definition of Significant Service Provider.--Section 
     2(a) of the Investment Company Act of 1940 (15 U.S.C. 80a-
     2(a)) is amended by adding at the end the following:
       ``(53) Significant service provider.--
       ``(A) In general.--Not later than 180 days after the date 
     of enactment of the Mutual Fund Investor Confidence 
     Restoration Act of 2003, the Securities and Exchange 
     Commission shall issue final rules defining the term 
     `significant service provider'.
       ``(B) Requirements.--The definition developed under 
     paragraph (1) shall include, at a minimum, the investment 
     adviser and principal underwriter of a registered investment 
     company for purposes of paragraph (19).''.

     SEC. 202. 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:
       ``(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 
     among 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) (15 U.S.C. 78j-
     1(m)) of the Securities Exchange Act of 1934 is amended by 
     adding at the end the following:
       ``(7) Exemption for investment companies.--Effective 1 year 
     after the date of enactment of the Mutual Fund Investor 
     Confidence Restoration 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.--
       (1) In general.--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.
       (2) Incentives.--Not later than 180 days after the date of 
     enactment of this Act, the Securities and Exchange Commission 
     shall, by rule, establish--
       (A) a program of incentives to encourage the filing of 
     meritorious complaints under section 32(d)(4)(A) of the 
     Investment Company Act of 1940; and
       (B) appropriate penalties for the willful filing of 
     materially false complaints under such section.

     SEC. 203. 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:
       ``(f) Informing Directors of Significant Deficiencies.--
       ``(1) In general.--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.
       ``(2) Disclosure of deficiencies.--The Commission shall, on 
     an annual basis, review all inspection reports of registered 
     investment companies and publicly disclose the 10 most common 
     deficiencies cited in those reports.''.

     SEC. 204. CERTIFICATION BY CHAIRMAN AND CHIEF COMPLIANCE 
                   OFFICER.

       (a) In General.--Subsection (j) of section 17 of the 
     Investment Company Act of 1940 (15 U.S.C. 80a-17(j)), as 
     amended by section 301 of this Act, is amended by adding at 
     the end the following:
       ``(4) Certification by chairman.--The rules and regulations 
     established under paragraph (1) shall require the chairman of 
     the board of directors 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;

[[Page S16020]]

       ``(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;
       ``(H) the company is in compliance with the additional 
     requirements of paragraph (3) of this subsection;
       ``(I) the report submitted to the board of directors under 
     section 15(g)(1) is complete and accurate; and
       ``(J) the board of directors has fulfilled its obligations 
     under section 15(g)(2).''
       ``(5) Certification by chief compliance officer.--The rules 
     and regulations established under paragraph (1) shall require 
     the chief compliance officer of each registered open-end 
     investment company to certify, on an annual basis, that--
       ``(A) appropriate internal controls are in place for the 
     review required under subparagraphs (A) through (H) of 
     paragraph (4); and
       ``(B) such internal controls have been reviewed, and 
     determined to reasonably achieve their stated purpose, by the 
     chief compliance officer.
       ``(6) Review of advisory contracts.--The rules and 
     regulations established under paragraph (1) shall require 
     that the chairman of the board of directors and the chief 
     compliance officer of a registered open-end investment 
     company certify, on an annual basis, that any advisory 
     contract entered into by the company and associated 
     management fees have been negotiated and are in the best 
     interests of the company.''.
       (b) Deadline for Rules.--Not later than 90 days after the 
     date of enactment of this Act, the Securities and Exchange 
     Commission shall prescribe--
       (1) rules to implement subsection (a); and
       (2) minimum standards for compliance with the certification 
     requirements of paragraphs (4) and (5) of section 17(j) of 
     the Investment Company Act of 1940 (15 U.S.C. 80a-17(j)).

          TITLE III--PREVENTING ABUSIVE MUTUAL FUND PRACTICES

     SEC. 301. 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.--The rules and regulations 
     established under paragraph (1) 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.--The rules and 
     regulations established under paragraph (1) 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, ensuring that the practices of the 
     company adhere to those policies and procedures, and promote 
     the interest of shareholders--
       ``(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.''.
       (b) Deadline for Rules.--Not later than 90 days after the 
     date of enactment of this Act, the Securities and Exchange 
     Commission shall prescribe rules to implement subsection (a).

     SEC. 302. 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:
       ``(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. 303. RESTRICTIONS ON SHORT TERM TRADING AND MANDATORY 
                   REDEMPTION FEES.

       (a) Short Term Trading Prohibited.--Section 17 of the 
     Investment Company Act of 1940 (15 U.S.C. 80a-17) is amended 
     by adding at the end the following:
       ``(k) Short Term Trading Prohibited.--It shall be unlawful 
     for any officer, director, partner, or employee of a 
     registered investment company, any affiliated person, 
     investment adviser, or principal underwriter of such company, 
     or any officer, director, partner, or employee of such 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) Mandatory Redemption Fees.--Not later than 180 days 
     after the date of enactment of this Act, the Securities and 
     Exchange Commission shall, by rule, require that any 
     investment company that does not allow for market timing 
     practices to charge a redemption fee upon the short-term 
     redemption of any securities of such company.
       (c) Deadline for Rules.--Not later than 180 days after the 
     date of enactment of this

[[Page S16021]]

     Act, the Securities and Exchange Commission shall prescribe 
     rules to implement the amendment made by subsection (a) of 
     this section.

     SEC. 304. ELIMINATION OF STALE PRICES.

       (a) In General.--Not later than 180 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.
       (b) Formal Policies and Procedures.--
       (1) In general.--Not later than 180 days after the date of 
     enactment of this Act, the Securities and Exchange Commission 
     shall, by rule or regulation--
       (A) require that each registered open-end investment 
     company and registered investment advisor establish formal 
     policies with respect to compliance with the regulations 
     established under subsection (a);
       (B) require such policies to be publicly disclosed to 
     shareholders;
       (C) require the adoption of internal procedures to ensure 
     compliance with such policies;
       (D) require that such policies be subject to ongoing review 
     by the company or investment adviser; and
       (E) require, on an annual basis, a certification by the 
     chief executive officer of the company or investment adviser 
     that such policies are being adhered to.
       (2) Changes to policies.--Any policies adopted by a 
     registered open-end company or registered investment adviser 
     under paragraph (1) shall not be altered without the prior 
     approval of a majority of the shareholders of such company or 
     adviser.

     SEC. 305. FORMAL POLICIES AND PROCEDURES RELATED TO MARKET 
                   TIMING.

       (a) In General.--Not later than 180 days after the date of 
     enactment of this Act, the Securities and Exchange Commission 
     shall, by rule--
       (1) require that each registered open-end investment 
     company and registered investment advisor establish formal 
     policies with respect to whether it permits market timing and 
     short term trading, and under what circumstances such 
     practices will be permitted;
       (2) require such policies to be publicly disclosed in any 
     prospectus delivered by the company or investment advisor;
       (3) require the adoption of internal procedures reasonably 
     designed to ensure compliance with such policies;
       (4) require that such policies be subject to ongoing review 
     by the company or investment advisor; and
       (5) require, on an annual basis, a certification by the 
     chief executive officer of the investment adviser, and 
     chairman of the board of directors and chief compliance 
     officer of the company that such policies are being adhered 
     too by the investment adviser or the company.

     SEC. 306. PREVENTION OF LATE TRADES.

       (a) Additional Rules Required.--Not later than 180 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.--
       (1) In general.--The rules established under subsection (a) 
     shall permit execution of after-hours trades that are 
     provided to the registered open-end investment company by a 
     broker-dealer, retirement plan administrator, insurance 
     company, or other intermediary, after the time as of which 
     such net asset value was determined, if the late trading and 
     detection procedures and policies of such intermediary are 
     subject to inspection by the Commission (in this subsection, 
     a ``permitted intermediary'').
       (2) Rules.--The Commission, by rule, shall--
       (A) require each permitted intermediary to certify that it 
     has policies and procedures in place to prevent and detect 
     late-trades, and that such policies have been adhered too by 
     the permitted intermediary;
       (B) require each permitted intermediary to submit an 
     independent annual audit verifying that its policies and 
     procedures do not permit the acceptance of late order 
     trading; and
       (C) provide that any intermediary that is not a permitted 
     intermediary shall be required to submit all transactions to 
     the open-end investment company before the determination of 
     the related net asset value.

     SEC. 307. DISCLOSURE OF INSIDER TRANSACTIONS.

       Not later than 180 days after the date of enactment of this 
     Act, the Securities and Exchange Commission shall, by rule, 
     require--
       (1) that any senior executive officer of an open-end 
     management investment company publicly disclose, prior to the 
     actual time of purchase, any intended sale or purchase of 
     securities of an open-end management investment company that 
     employs the same investment adviser as the company with whom 
     such senior executive officer is employed; and
       (2) that any such securities purchased be held by the 
     senior executive officer for not less than 6 months.

         TITLE IV--STRENGTHENING MUTUAL FUND INDUSTRY OVERSIGHT

     SEC. 401. STUDY OF MUTUAL FUND OVERSIGHT BOARD.

       (a) In General.--The General Accounting Office shall 
     conduct a study to determine the feasibility of, and assess 
     what, if any, benefits to shareholders, mutual fund 
     governance and mutual fund supervision would result from 
     establishing a Mutual Fund Oversight Board that would--
       (1) have inspection, examination, and enforcement authority 
     over mutual fund boards of directors;
       (2) be funded by assessments against mutual fund assets or 
     management fees;
       (3) have members selected by Commission; and
       (4) have rulemaking authority.
       (b) Report.--Not later than 1 year after the date of 
     enactment of this Act, the General Accounting Office shall 
     submit a report on the study required under paragraph (1) 
     to--
       (1) the Committee on Banking, Housing, and Urban Affairs of 
     the Senate; and
       (2) the Committee on Financial Services of the House of 
     Representatives.

     SEC. 402. STUDY OF COORDINATION OF ENFORCEMENT EFFORTS.

       (a) In General.--The General Accounting Office shall 
     conduct a study of the coordination of enforcement efforts 
     related to allegations of misconduct by open-end management 
     companies between the headquarters of the Securities and 
     Exchange Commission, the regional offices of the Commission, 
     and appropriate State regulatory and law enforcement 
     entities, such as State attorney generals and the North 
     American Securities Administrators Association.
       (b) Report.--Not later than 1 year after the date of 
     enactment of this Act, the General Accounting Office shall 
     submit a report on the study required under subsection (a) to 
     Congress.

     SEC. 403. REVIEW OF COMMISSION RESOURCES.

       (a) In General.--The Securities and Exchange Commission 
     shall conduct a study on the allocation and adequacy of the 
     supervision and enforcement resources of the Commission 
     dedicated to the oversight of open-end management companies.
       (b) Report.--Not later than 1 year after the date of 
     enactment of this Act, the Securities and Exchange Commission 
     shall submit a report on the study required under subsection 
     (a) to--
       (1) the Committee on Banking, Housing, and Urban Affairs of 
     the Senate; and
       (2) the Committee on Financial Services of the House of 
     Representatives.

     SEC. 404. 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.--Not later than 1 year after the date 
     of enactment of this Act, 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.

[[Page S16022]]

     SEC. 405. REPORT ON ADEQUACY OF REGULATORY RESPONSE TO LATE 
                   TRADING AND MARKET TIMING.

       (a) Report Required.--Not later than 180 days after the 
     date enactment of this Act, 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.

     SEC. 406. 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.--Not later than 1 year after the date of 
     enactment of this Act, the Securities and Exchange Commission 
     shall submit a report on the study required 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.

                TITLE V--PROMOTING SHAREHOLDER LITERACY

     SEC. 501. FINANCIAL LITERACY AMONG MUTUAL FUND INVESTORS 
                   STUDY.

       (a) In General.--The Securities and Exchange Commission 
     shall conduct a study to identify--
       (1) the existing level of financial literacy among 
     investors that purchase shares of open-end companies, as such 
     term is defined under section 5 of the Investment Company Act 
     of 1940, that are registered under section 8 of such Act;
       (2) the most useful and understandable relevant information 
     that investors need to make sound financial decisions prior 
     to purchasing such shares;
       (3) methods to increase the transparency of expenses and 
     potential conflicts of interest in transactions involving the 
     shares of open-end companies;
       (4) the existing private and public efforts to educate 
     investors; and
       (5) a strategy to increase the financial literacy of 
     investors that results in a positive change in investor 
     behavior.
       (b) Report.--Not later than 1 year after the date of 
     enactment of this Act, the Securities and Exchange Commission 
     shall submit a report on the study required under subsection 
     (a) to--
       (1) the Committee on Banking, Housing, and Urban Affairs of 
     the Senate; and
       (2) the Committee on Financial Services of the House of 
     Representatives.

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