[Congressional Record Volume 150, Number 16 (Tuesday, February 10, 2004)]
[Senate]
[Pages S793-S809]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
STATEMENTS ON INTRODUCED BILLS AND JOINT RESOLUTIONS
By Mrs. BOXER:
S. 2058. A bill to direct the Secretary of the Interior to cancel
certain Bureau of Land Management leases that authorize extraction of
sand and gravel from the Federal mineral estate in land in Soledad
Canyon, California, and for other purposes; to the Committee on Energy
and Natural Resources.
Mrs. BOXER. Mr. President, I am introducing a bill today that would
terminate two Bureau of Land Management mining leases in Soledad
Canyon, an area that is adjacent to the city of Santa Clarita in Los
Angeles County, CA.
The bill would also prohibit the issuance of any future mining
leases for sand and gravel in the Soledad Canyon area that exceed the
historical level of mining, which is estimated to be 285,000 tons of
sand and gravel per year. Before issuing any future leases in this
area, the Secretary of the Interior would be required to consult with
the city of Santa Clarita and take into consideration the environmental
and traffic impacts of mining. Congressman Buck McKeon introduced this
legislation in the House of Representatives in November 2003.
Here is the problem. These two leases in Soledad Canyon would allow
mining of approximately 56 million tons of sand and gravel over the
next 20 years. That will mean more dust and air pollution, as well as
more traffic congestion.
The residents of the city of Santa Clarita suffer from some of the
worst air quality in the Nation. The mining in Soledad Canyon would
occur in an area where State standards for particulate matter are
already exceeded. Development of these mining leases will worsen air
pollution by increasing dust and particulate matter emissions. This
will lead to more respiratory problems, increased doctor and emergency
room visits, more hospitalizations for cardiac and pulmonary disease,
and premature deaths for area residents.
Increased traffic congestion will also result from these mining
leases. Interstate 5 and State Route 14 are located in the vicinity of
the mining leases, and State Route 14 is already plagued with serious
traffic problems. Development of these leases would tremendously
increase truck traffic in the area, causing further congestion. It is
estimated that the proposed expansion of mining in Soledad Canyon would
result in 347 trucks making round trips to and from the site each day
in the first 10 years, increasing to 582 trucks in the second 10 years
of operation.
Due to these serious concerns over impacts on air quality and
traffic congestion, there is very strong opposition to the two leases
by the people of Santa Clarita and over 80 organizations in California.
We need this legislation.
I believe that local health and safety concerns should not be
overridden by the Federal Government. Development of these leases
should not occur to the detriment of the people of Santa Clarita. I
share Congressman Buck McKeon's interest in working with TMC/Cemex--the
company that currently holds the leases--the city of Santa Clarita, and
the Bureau of Land Management to find a resolution that is acceptable
to all parties and that protects the health and safety of the city and
its residents.
______
By Mr. FITZGERALD (for himself, Mr. Levin, and Ms. Collins):
S. 2059. A bill to improve the governance and regulation of mutual
funds under the securities laws, and for other purposes; to the
Committee on Banking, Housing, and Urban Affairs.
Mr. FITZGERALD. Mr. President, today I rise to introduce the Mutual
Fund Reform Act of 2004. This legislation would make fund governance
truly accountable, require genuinely transparent total fund costs,
enhance comprehension and comparison of fund fees, confront trading
abuses, create a culture of compliance, eliminate hidden transactions
that mislead investors and drive up costs, and save billions of dollars
for the 95 million Americans who invest in mutual funds. Above all, the
Mutual Fund Reform Act strives to preserve the attraction of mutual
funds as a flexible and investor-friendly vehicle for long-term,
diversified investment.
I am pleased to be joined today by my distinguished colleagues on the
Committee on Governmental Affairs, Senator Carl Levin and Senator Susan
Collins, the committee's chairman, who are original cosponsors of this
legislation. I am grateful for the extensive and important input both
Senators provided in the drafting of this bill, and appreciate the
invaluable perspective Senator Collins provided based on her first-hand
experience as Maine's Commissioner of Professional and Financial
Regulation.
I would like to take this opportunity to recognize the work of a
number of our colleagues in this area. Last year, I was pleased to
cosponsor S. 1822, introduced by Senator Daniel Akaka, the Ranking
Member of the Senate Governmental Affairs Subcommittee
[[Page S794]]
on Financial Management, the Budget, and International Security, which
I chair, to address mutual fund trading abuses. Senators Corzine, Dodd,
and Kerry also have sponsored mutual fund bills from which I drew, as
well as legislation introduced by Congressman Richard Baker last summer
and overwhelmingly passed by the House of Representatives at the end of
the last session.
I also would like to acknowledge the ongoing work of the Senate
Committee on Banking, Housing and Urban Affairs, the authorizing
committee which will ultimately decide questions of mutual fund
industry reform. The committee is conducting a series of legislative
hearings to examine the mutual fund scandal and the merits of various
reform proposals. I commend the leadership of Chairman Richard Shelby
and Ranking Member Paul Sarbanes, and look forward to continuing to
work with them and the other members of the Banking Committee on this
issue in the coming months.
The bill I am introducing today reflects extensive testimony that was
presented during oversight hearings of the Financial Management
Subcommittee that I chaired on November 3, 2003, and January 27, 2004.
The general consensus of the panelists at the November hearing was that
illegal late trading and illicit market timing were indeed very serious
threats to investors but that excessive fees and inadequate disclosure
of those fees were an even more serious threat to American investors.
Witnesses at our hearing last month testified regarding the propriety
and the adequacy of the disclosure of mutual fund fees, specifically
hidden fees such as revenue sharing, directed brokerage, soft money
arrangements, and hidden loads such as 12b-1 fees. The subcommittee
also heard from two whistleblowers who were responsible for the initial
revelations regarding Putnam Investments and Canary Capital Partners,
LLC.
The bill also reflects the constructive input from a number of key
organizations and leaders of mutual fund reform. I especially
appreciate the extensive contributions of Mr. John Bogle, the founder
and former CEO of the Vanguard Group, who has been a champion of
reforms in the mutual fund industry for many years.
I ask unanimous consent that letters from Mr. Bogle, Massachusetts
Secretary of State William Galvin, and organizations representing
investors and consumers endorsing this bill be printed in the Record.
In 1980 only a small percentage of Americans invested in mutual funds
and the assets of the industry were only $115 billion. Today, roughly
95 million Americans own shares in mutual funds and the assets of all
the funds combined are now more than $7 trillion. Mutual funds have
grown in popularity in part because Congress has sanctioned or expanded
a variety of tax-sheltered savings vehicles such as 401(k)s, Keoghs,
traditional IRAs, Roth IRAs, Rollover IRAs, and college savings plans.
Given that mutual funds are now the repository of such a large share of
so many Americans' savings, few issues we confront are as important as
protecting the money invested in mutual funds.
I want to commend the many recent regulatory initiatives from the
Securities and Exchange Commission (SEC). They are collectively a step
in the right direction and a demonstration of our seriousness in
Washington about putting the interests of America's mutual investors
first. But the SEC does not have the statutory authority to take all of
the needed steps to restore integrity and health to the mutual fund
industry. The current scandals demand that Congress take a
comprehensive look at an industry still governed by a 64-year old law.
Therefore, the Mutual Fund Reform Act of 2004 puts the interests of
investors first by: ensuring independent and empowered boards of
directors, clarifying and making specific fund directors' foremost
fiduciary duty to shareholders; strengthening the fund advisers'
fiduciary duty regarding negotiating fees and providing fund
information, and instituting Sarbanes-Oxley-style provisions for
independent accounting and auditing, codes of ethics, chief compliance
officers, compliance certifications, and whistleblower protections.
The Mutual Reform Act of 2004 empowers both investors and free
markets with clear, comprehensible fund transaction information by:
standardizing computation and disclosure of (i) fund expenses and (ii)
transaction costs, which yield a total investment cost ratio, and tell
investors actual dollar costs; providing disclosure and definitions of
all types of costs and requiring that the SEC approve imposition of any
new types of costs; disclosing portfolio managers' compensation and
stake in fund; disclosing broker compensation at the point of sale;
disclosing and explaining portfolio turnover ratios to investors, and
disclosing proxy voting policies and record.
The Mutual Fund Reform Act of 2004 vastly simplifies the disclosure
regime by: eliminating asset-based distribution fees (Rule 12b-1 fees),
the original purpose of which has been lost and the current use of
which is confusing and misleading--and amending the Investment Company
Act of 1940 to permit the use of the adviser's fee for distribution
expenses, which locates the incentive to keep distribution expenses
reasonable exactly where it belongs--with the fund adviser; prohibiting
shadow transactions--such as revenue sharing, directed brokerage, and
soft-dollar arrangements--that are riddled with conflicts of interest,
serve no reasonable business purpose, and drive up costs;
``Unbundling'' commissions, such that research and other services,
heretofore covered by hidden soft-dollar arrangements, will be the
subject of separate negotiation and a freer and fairer market;
requiring enforceable market timing policies and mandatory redemption
fees--as well as provision by omnibus account intermediaries of basic
customer information to funds to enable funds to enforce their market
timing, redemption fee, and breakpoint discount policies; and requiring
fair value pricing and strengthening late trading rules.
The Mutual Fund Reform Act also would perpetuate the dialogue and
preserve the wisdom gathered from hard experience. The Act directs the
SEC and the General Accounting Office to conduct several studies,
including a study of ways to minimize conflicts of interest and
incentivize internal management of mutual funds; a study on
coordination of enforcement efforts between SEC headquarters, SEC
regional offices, and state regulatory and law enforcement entities;
and a study to enhance the role of the internet in educating investors
and providing timely information about laws, regulations, enforcement
proceedings and individual funds, possibly by mandating disclosures on
websites.
Enactment of the Mutual Fund Reform Act would help restore the
integrity of the mutual fund industry and would dramatically enhance
the amount of retirement savings for many long term investors.
Shareholders would be the big winners under this legislation, and the
losers would be high cost mutual funds. I therefore urge my colleagues
to support passage of this legislation.
I ask unanimous consent that the text of the bill, as well as a one-
page summary and white paper describing the legislation, be printed in
the Record.
There being no objection, the materials were ordered to be printed in
the Record, as follows:
The Vanguard Group,
Valley Forge, PA, February 6, 2004.
I salute Senator Fitzgerald for the bill he has drafted to
improve the governance and regulation of mutual funds. I've
spent the greater part of my career speaking out on nearly
all of the important legislative issues that Senator
Fitzgerald's Mutual Fund Reform Act of 2004 addresses. While
nothing can solve the industry's problems overnight, I view
of the bill as the gold standard in putting mutual fund
shareholders back in the driver's seat, and endorse it in its
entirety.
John C. Bogle,
Founder.
____
Secretary of the Commonwealth
of Massachusetts,
Boston, MA, January 23, 2004.
Re Mutual Fund Reform act of 2004.
Hon. Peter Fitzgerald,
Chairman, Subcommittee of Financial Management, the Budget,
and International Security, Senate Committee of
Governmental Affairs, Hart Senate Building, Washington,
DC.
Dear Senator Fitzgerald: As the chief securities regulator
in Massachusetts, I write in support of the Mutual Fund
Reform Act of 2004. The recently-exposed abuses relating to
mutual funds show the need for this legislation. Small
investors are particularly
[[Page S795]]
vulnerable to these abusive practices, since nearly half of
U.S. households own mutual funds--often through their
retirement plans.
The bill increases the independence of fund directors and
obliges them to act as fiduciaries on behalf of shareholders;
it makes the costs of mutual funds more transparent; and it
curtails many abusive mutual fund sales practices.
We particularly support the provisions to prohibit directed
brokerage and soft dollar arrangements by mutual funds. These
practices, at best, mask the true costs of fund operations;
at worst, they are kick back-type payments in the securities
industry.
I also encourage you to add a provision that will give
investors the ability to choose the forum where they may
arbitrate disputes with their brokers. Under the current
system, investors are forced to arbitrate their claims in a
forum chosen by the brokerage.
Please contact me if I can assist you in working for the
adoption of this important legislation.
Sincerely,
William F. Galvin,
Secretary of the Commonwealth.
____
February 5, 2004.
Hon. Peter G. Fitzgerald,
Dirksen Building, U.S. Senate,
Washington, DC.
Dear Senator Fitzgerald: We are writing to express our
enthusiastic support for your draft ``Mutual Fund Reform
Act.'' More than any other legislation that has yet to be
introduced since the mutual fund scandals erupted last year,
this bill recognizes the need to fundamentally transform the
way in which mutual funds are governed, operated, and sold to
ensure that they live up to their statutory obligation to
operate in their shareholders' best interests.
This legislation offers a thoughtful and far-reaching
agenda for reform. It addresses significant gaps in the SEC's
proposals to improve fund governance, dramatically enhances
the quality of mutual fund cost disclosures, and prohibits
distribution practices that create unacceptable and poorly
understood conflicts of interest. It also takes the necessary
step of banning hidden ``soft dollar'' arrangements that
boost shareholder costs and create additional conflicts of
interest. We look forward to working with you to win passage
of these essential reforms.
Our support for this bill is based on the firm belief that
mutual funds have been and will continue to be the best way
for average, middle-income investors to participate in our
nation's securities markets. Individuals with only modest
amounts to invest have benefited greatly from the opportunity
mutual funds offer to achieve broad diversification. While
wealthy investors have other options that provide similar
benefits, average, middle-class investors do not. The
resulting influx of money into mutual funds has in turn
produced generous profits for fund companies.
This long record or mutual success had caused some in the
industry and among its regulators to become complacent,
taking for granted that all was well. By revealing the extent
to which some fund managers had abandoned their obligation to
operate in fund shareholders' best interests, the trading
scandals uncovered last fall provided sudden and compelling
evidence that such complacency was ill-founded. The closer
scrutiny of fund operations that resulted quickly uncovered
evidence of other similar failings: Management fees that had
failed to drop significantly, or in some cases at all,
despite a massive growth in assets; use of portfolio
transaction commissions, which are not incorporated in the
fund expense ratio, to pay for services whose costs would
otherwise have to be disclosed; use of portfolio transaction
commissions borne by shareholders to pay for services whose
benefits flowed in part or in whole to the fund manager; use
of poorly disclosed or misunderstood compensation methods,
including 12b-1 fees, directed brokerage, and payments for
shelf space to induce brokers to recommend particular funds;
and broker recommendation of mutual funds based on the
financial incentives received rather than on which funds
offer the best quality at the most reasonable price.
By driving up costs to investors and undermining
competition based on cost and quality, these practices
inflict far greater financial harm on their victims than the
trading scandals appear to have done.
Since it became clear that mutual fund sales and trading
abuses were widespread throughout the industry, the
Securities and Exchange Commission has responded with an
ambitious enforcement, investigation, and rule-making agenda.
In addition to developing reforms targeted specifically at
excessive and late trading, the Commission has issued
proposals to strengthen mutual fund governance, sought
suggestions on how to improve disclosure of portfolio
transaction costs, and proposed rules to improve disclosure
of distribution-related costs and conflicts of interest.
Despite this important progress, there are serious gaps in
the SEC's regulatory agenda. Some result from the agency's
lack of authority to effect change. Others result from the
SEC's lack of a vision of how mutual fund regulation must be
transformed. This legislation fills those gaps. If it is
adopted, it will dramatically improve fund governance,
eliminate practices that create unacceptable conflicts of
interest, and save mutual fund investors potentially tens of
billions of dollars a year by wringing out excess costs.
Our specific comments in support of some of the bill's most
important pro-investor provisions follow.
1. The legislation's fund governance reforms address
significant gaps in the SEC's rule proposal.
The Securities and Exchange Commission has made a promising
start on the issue of fund governance. In January, it issued
a rule proposal that would require that three-quarters of
mutual fund board members, including the chairman, be
independent. It would further require that independent
members meet at least quarterly without any interested
parties present. It authorizes the board to hire staff to
help it fulfill its responsibilities. And it requires boards
to retain copies of the written documents considered as part
of the board's annual review of the advisory contract.
Although the Commission certainly deserves credit for this
important first step, there is more that must be done to
achieve the goal of improved fund governance. First and
foremost, the Commission lacks the authority to strengthen
the definition of independent director. So, even if it adopts
its independent governance requirements without weakening
amendments over the already announced objections of two
commissioners, non-immediate family members, individuals
associated with significant service providers of the fund,
and recently retired fund company employees would all be
eligible to serve as ``independent'' directors. Furthermore,
the SEC proposal does not require that independent directors
have sole authority to nominate new directors and set
director compensation, potentially leaving significant issues
in the hands of fund managers.
This bill addresses all those concerns. It includes an
excellent definition of independence, which both specifically
addresses the issue of significant service providers and
authorizes the SEC to exclude from the definition of
independent director any set of individuals who for business,
family, or other reasons are unlikely to demonstrate the
appropriate degree of independence. It requires both that
independent directors determine director compensation and
that a committee of independent directors nominate new
directors. And it directs the SEC to study whether any limit
should be placed on the aggregate amount of director
compensation an individual could receive from a single fund
family and still be considered independent.
The bill further recognizes that lack if independence is
not the only concern about mutual fund governance. Also
problematic is the failure of many mutual fund boards to act
as fiduciaries, with a broad responsibility to protect
shareholder interests. The bill attacks this problem by
broadening the scope of directors' fiduciary duty. As defined
in the legislation, that duty would include, among other
things, a responsibility to: take quality of management as
well as actual costs and economies of scale into account when
negotiating management contracts; evaluate the quality,
comprehensiveness, and clarity of disclosures to fund
shareholders regarding costs; assess any distribution and
marketing plan with regard to its costs and benefits; and
monitor enforcement of policies and procedures to ensure
compliance with applicable securities laws. The SEC would be
responsible for detailing how the board's fiduciary duty
applies in each instance.
By shoring up the independence of fund boards and expanding
and clarifying their fiduciary duty to shareholders, this
bill would increase the likelihood that fund boards would
serve their intended function as the first line of defense
against a variety of abusive practices.
One element missing from the bill, however, is any
consideration of creating an independent board to oversee
mutual funds. In testimony late last year, SEC Chairman
William Donaldson suggested that the Commission was exploring
ways in which funds could ``assume greater responsibilities
for compliance with the federal securities laws, including
whether funds and advisers should periodically undergo an
independent third-party compliance audit.'' ``These
compliance audits could be a useful supplement to our own
examination program and could ensure more frequent
examination of funds and advisers,'' he said.
Recent accounting scandals should have taught us the risks
of relying on audits that are paid for by the entity being
audited. If the SEC needs a supplement to its own examination
program, a far better approach would be to create an
independent board, subject to SEC oversight, to conduct such
audits. The board could be modeled on the Public Company
Accounting Oversight Board, with similar authority to set
standards, conduct inspections, and bring enforcement actions
and similar (or, better yet, stronger) requirements for board
member independence. Your bill would require a GAO study of
the SEC's current organizational structure with respect to
mutual fund regulation. We urge you, at a minimum, to include
an assessment of the benefits of establishing an independent
oversight board as part of that study.
2. The legislation would dramatically enhance the quality
of mutual fund cost disclosures.
A major shortcoming in the SEC's regulation of mutual funds
have been its failure to take effective action to bring down
excessive costs. Not only has the agency not used its own
enforcement authority to bring cases against fund managers
who charge and fund boards who approve unreasonable fees, it
has criticized the New York Attorney General for negotiating
fee reduction agreements as
[[Page S796]]
part of his settlement with fund companies that engaged in
abusive trading. In criticizing those fee reduction
agreements, Commission officials have suggested that they
prefer to rely on independent fund boards and the market to
discipline costs.
While the Commission can show some progress on the issue of
fund governance, its proposals on cost disclosure are
extremely disappointing. They fall far short of the bare
minimum needed to introduce meaningful cost competition in
the mutual fund marketplace. This legislation attacks to
excessive costs both through strengthened governance
requirements that do beyond those in the SEC rule proposal
and through improved disclosures that will be more effective
in raising investor awareness of costs than those proposed so
far by the SEC.
One important area where the bill improves on SEC proposals
is in disclosure of portfolio transaction costs. These costs
vary greatly from fund to fund, may be the highest cost for
an actively managed stock fund, and in some cases exceed all
others costs combined. A recent study found that, on average,
funds spend $0.43 on portfolio transactions for every $1.00
of expenses that are disclosed in the current expense ratio,
and that in some cases fund transaction costs can exceed
three or four times the current expense ratio. (Jason
Karceski, Miles Livingston, Edward O'Neal, Mutual Fund
Brokerage Commissions, Jan. 2004, available at http://
www.zeroalphagroup.com/headlines/
ZAG_mutual_fund_true_cost_study.pdf.)
Yet, the SEC has long resisted incorporating these costs in
the expense ratio. In response to congressional pressure, the
agency has recently issued a concept release seeking
suggestions for improving transaction cost disclosure, but it
is not at all clear that the agency will come out in support
of an approach that goes much beyond its previously stated
preference for giving greater prominence to disclosure of the
portfolio turnover rate. Such an approach makes not
distinction between those funds that get good execution for
their trades and those that do not. Furthermore, it continues
to make it possible for funds to hide costs that would
otherwise have to be disclosed by paying for them through
soft dollar arrangements.
The bill would bring these costs out into the open where
they belong. It would do so by requiring a separate
computation of portfolio transaction costs that includes, at
a minimum, brokerage commissions and bid-ask spread costs.
And it would require this transaction cost ratio to be
disclosed both separately and as part of a total investment
cost ratio in the prospectus fee table and wherever else the
expense ratio is disclosed. Because the bill would retain the
current expense ratio, while also creating a new total
expense ratio that includes portfolio transaction costs, it
would allow the markets to decide which measure of fund costs
is most appropriate and useful. Once this information is
brought out into the open, these costs are more likely to be
subject to competitive pressures, helping to drive down
expenses for shareholders.
The bill would supplement this disclosure by requiring
individualized disclosure in annual reports of the projected
actual dollar amount of each investor's total annual costs
based upon the investor's assets at the time of the
disclosure. We strongly support individualized dollar cost
disclosures, but believe that, to be workable, this
information must be provided in the quarterly or annual
account statements that show the shareholder's account
balance and transaction activity. Putting cost information in
dollar amounts side-by-side with information on the fund's
gains or losses for the year is key to helping investors to
put those costs into perspective. We urge you to adopt this
clarification.
In addition, the draft version of the legislation that we
have reviewed does not require pre-sale disclosure of mutual
fund costs, as opposed to distribution costs. If we are to
promote effective cost competition in the mutual fund
industry, investors must receive cost information in advance
of the sale. Post-sale disclosure, while useful in raising
investor awareness of costs, comes too late to influence the
purchase decision. We believe investors would be best served
by pre-sale cost disclosures that are comparative in nature,
showing how the fund's cost compare to category averages and
minimums, and how this is likely to affect performance over
the long-term. The provision in the bill that allows for
point-of-sale disclosure provides an easy mechanism for
offering this information. We urge you to add a provision to
this effect to your bill.
With these changes, the cost disclosure provisions in this
bill will go a long way toward bringing meaningful cost
competition to an industry that has too long escaped its
disciplining effects.
3. The bill would prohibit a variety of distribution
practices that create unacceptable conflicts of interest.
Growing investor reluctance to pay the front loads that
were common in the 1980s has driven mutual fund distribution
costs underground. Funds substituted a variety of
distribution practices--e.g., 12b-1 fees, directed brokerage,
and payments for shelf space--that were less visible to
shareholders. These practices encouraged the impression that
the funds were load-free when in fact they imposed
significant distribution costs. The practices adopted also
posed significant new conflicts of interest.
Although 12b-1 fees are disclosed as a separate line item
on prospectus fee tables, evidence suggests that investors
are less aware of the cost implications of annual expenses
than they are of front loads and do not necessarily
understand that 12b-1 fees are used to compensate brokers.
Because they are included in the expense ratio, 12b-1 fees
appear to be a cost the shareholder pays for the fund, not a
cost they pay for the services the broker provides. Problems
with 12b-1 fees abound, including the fact that investors in
funds that charge substantial 12b-1 fees may be stuck paying
distribution costs whose benefits flow partially, or even
primarily, to the fund company. Shareholders are forced to
pay the fees even when they do not use the services the fees
are designed to provide. With fund manager compensation based
on a percentage of assets under management, fund managers
reap significant benefits from the asset growth the fees
promote, without having to risk their own money in the
process.
Because it also uses shareholder assets to promote
distribution, directed brokerage creates many of the same
conflicts as 12b-1 fees and more. Not only are shareholders
forced to pay higher costs for benefits that flow in part or
in full to the fund manager, in some cases costs paid by one
set of shareholders may be used in part to promote sale of
other funds in the same fund family. Furthermore, these
arrangements may encourage fund managers to decide where to
conduct their portfolio transactions based not on where they
can get the best execution, but on where they get the best
distribution. They may even encourage fund managers to trade
more than necessary simply to fulfill their directed
brokerage agreements. This, in turn, drives up costs to
shareholders. While 12b-1 fees are disclosed to investors,
distribution costs paid through directed brokerage are not.
Instead, they are hidden in undisclosed portfolio transaction
costs.
Payments for shelf space are similar to directed brokerage
agreements. Instead of being paid indirectly through
portfolio transaction costs, however, these financial
incentives are made in the form of cash payments by the fund
manager to the broker. At best, by eating into the manager's
bottom line, the payments may reduce the likelihood that the
management fee will be reduced in response to economies of
scale. At worst, fund managers will pass along those costs to
shareholders in a form that is even less transparent than
directed brokerage payments.
All these practices are designed to encourage brokers to
recommend funds based not on which offer the best quality at
the most reasonable price, but instead on which offer the
most generous compensation to the broker. As such, they stand
in sharp contrast to the image brokers promote of themselves
as objective advisers. To its great credit, the legislation
recognizes that simply disclosing these conflicts will not
solve the problem. The best disclosure in the world is
unlikely to counteract multi-million dollar advertising
campaigns intent on convincing investors to place their trust
in the objectivity and professionalism of their ``financial
consultant.''
Instead, the legislation deals with these conflicts in the
cleanest, most sensible way possible. It eliminates them. In
doing so, it takes an enormous and much needed step toward
forcing brokers to act like the objective advisers they claim
to be. Furthermore, reforming the distribution system in this
way is one of the most important things Congress can do to
promote competition in the mutual fund industry based on cost
and quality. That is because these practices allow mediocre,
high-cost funds to survive and even thrive simply by offering
generous compensation to the brokers that sell them. And, by
making it harder for brokers to hide the compensation they
receive for selling particular funds, this legislation should
make it easier for shareholders to assess whether the
services they receive from their broker justify the costs.
4. The bill would prohibit soft dollar arrangements that
boost shareholder costs and create unacceptable conflicts of
interest.
Soft dollar arrangements allow fund managers to pay for
services through portfolio transaction costs that they would
otherwise have to bill for directly--primarily research, but
a variety of other services as well. And, because these costs
are hidden, they create a strong incentive for fund managers
to pay for services in this fashion. The conflicts they
create are substantial. As with directed brokerage
agreements, they encourage fund managers to direct their
portfolio transactions based on the services they receive and
not on who offers the best execution for those trades. Soft
dollar arrangements also may encourage excessive trading with
no purpose except to fulfill soft dollar agreements. This, in
turn, requires shareholders to pay those unnecessary trading
costs. Soft dollar arrangements may also encourage fund
managers to choose service providers based not on who offers
the best service at the best price, but on what services can
be paid for through soft dollars, where the costs will be
hidden.
As with the distribution practices discussed above, the
legislation would deal with these conflicts by eliminating
them. We strongly support this approach, which would reduce
shareholder costs by requiring funds to seek best execution
on all their trades. Some in the independent research
community have raised concerns about this approach,
suggesting that it will harm independent research. Nothing
could be further
[[Page S797]]
from the truth. As long as funds can pay for research through
soft dollars, they will have an incentive to choose the
research whose cost can be hidden in this fashion. If soft
dollar arrangements are banned, however, funds will have no
reason to choose research based on any consideration but
which is of the highest quality. If independent research can
compete on quality, its competitive position should be
improved under a soft dollar ban.
conclusion
Mutual funds have been largely responsible for making it
possible for average, middle-income investors to participate
in our Nation's securities markets. As such, they have done
much to promote both the financial well-being of those
investors and the financial health of our capital markets.
Regulatory oversight, however, has not kept pace with mutual
funds' growing and changing role in our financial markets.
The recent trading and sales abuse scandals have offered a
painful reminder of just how far some fund companies have
strayed from their obligation to operate in shareholders'
best interests.
Fundamental reform is needed to get the fund industry back
on track. The SEC has gotten us part of the way there with
its recent enforcement actions and rule proposals. But
partway there is simply not good enough. Important gaps exist
in the SEC's agenda that will keep it from delivering the
comprehensive reform that the current situation demands. This
legislation fills those gaps. It offers a far-reaching and
thoughtful approach that, if enacted, will go a long way
toward getting the mutual fund industry back to operating in
shareholders' best interests once again. Please let us know
what we can do to help win passage of these essential, pro-
investor reforms.
Respectfully submitted,
Barbara Roper,
Director of Investor Protection, Consumer Federation of
America.
Travis Plunkett,
Legislative Director, Consumer Federation of America.
Mercer Bullard,
Founder and President, Fund Democracy, Inc.
Ed Mierzwinski,
Consumer Program Director, U.S. Public Interest Research
Group.
Sally Greenberg,
Senior Counsel, Consumers Union.
Kenneth McEldowney,
Executive Director, Consumer Action.
____
Coalition of Mutual
Fund Investors,
Washington, DC, January 26, 2004.
Hon. Peter Fitzgerald,
Chairman, Subcommittee on Financial Management, The Budget
and International Security, Committee on Governmental
Affairs, U.S. Senate, Hart Senate Office Building,
Washington, DC.
Dear Senator Fitzgerald: The Coalition of Mutual Fund
Investors (``CMFI'' or ``Coalition'') has reviewed your
legislative proposals to reform the mutual fund industry.
Without a doubt, your legislative initiative is the most
comprehensive mutual fund bill yet to be introduced in either
the House or the Senate.
The Coalition strongly supports your efforts to improve the
mutual fund regulatory framework in a manner which benefits
all individual investors. As the mutual fund reform debate
begins this year in the Senate, your bill is likely to serve
as the gold standard by which other legislative proposals are
evaluated for their effectiveness in protecting the interests
of individual investors.
CMFI supports the provisions contained in the mutual fund
reform bill which recently passed the House of
Representatives (H.R. 2420), however, the Coalition has been
advocating additional regulatory measures to protect the
interests of individual investors. These additional measures
include: (1) better shareholder disclosure of mutual fund
operating and transaction costs, (2) improved oversight of
``omnibus'' accounts operated by financial intermediaries,
and (3) enhanced disclosure of the Statement of Additional
Information.
You have included many of these reform proposals in your
bill and so the Coalition is very pleased to offer its
support to your legislation. The Coalition is particularly
pleased that your legislation includes a CMFI proposal to
require financial intermediaries operating ``omnibus''
accounts to disclose basic shareholder identity and
transaction information to mutual funds so that the funds can
ensure uniform application of their policies, procedures,
fees, and charges across all shareholder classes. The
interests of long-term shareholders are being harmed by a
lack of oversight regarding the trading activities occurring
in these ``omnibus accounts'' and your legislation addresses
this structural problem with an effective solution.
The Coalition looks forward to working with you and your
staff to enact the many thoughtful provisions contained in
your bill.
Sincerely,
Niels Holch,
Executive Director.
____
S. 2059
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 Reform Act of 2004''.
(b) Table of Contents.--The table of contents for this Act
is as follows:
Sec. 1. Short title; table of contents.
Sec. 2. Definitions.
Sec. 3. Rulemaking.
TITLE I--FUND GOVERNANCE
Sec. 110. Independent directors.
Sec. 111. Study of director compensation and independence.
Sec. 112. Fiduciary duties of directors.
Sec. 113. Fiduciary duty of investment adviser.
Sec. 114. Termination of fund advisers.
Sec. 115. Independent accounting and auditing.
Sec. 116. Prevention of fraud; internal compliance and control
procedures.
TITLE II--FUND TRANSPARENCY
Sec. 210. Cost consolidation and clarity.
Sec. 211. Advisor compensation and ownership of fund shares.
Sec. 212. Point of sale and additional disclosure of broker
compensation.
Sec. 213. Breakpoint discounts.
Sec. 214. Portfolio turnover ratio.
Sec. 215. Proxy voting policies and record.
Sec. 216. Customer information from account intermediaries.
Sec. 217. Advertising.
TITLE III--FUND REGULATION AND OVERSIGHT
Sec. 310. Prohibition of asset-based distribution expenses.
Sec. 311. Prohibition on revenue sharing, directed brokerage, and soft
dollar arrangements.
Sec. 312. Market timing.
Sec. 313. Elimination of stale prices.
Sec. 314. Prohibition of short term trading; mandatory redemption fees.
Sec. 315. Prevention of after-hours trading.
Sec. 316. Ban on joint management of mutual funds and hedge funds.
Sec. 317. Selective disclosures.
TITLE IV--STUDIES
Sec. 410. Study of adviser conflict of interest.
Sec. 411. Study of coordination of enforcement efforts.
Sec. 412. Study of Commission organizational structure.
Sec. 413. Trends in arbitration clauses.
Sec. 414. Hedge fund regulation.
Sec. 415. Investor education and the Internet.
SEC. 2. DEFINITIONS.
In this Act, the following definitions shall apply:
(1) Commission.--The term ``Commission'' means the
Securities and Exchange Commission.
(2) Investment adviser.--The term ``investment adviser''
has the same meaning as in section 2(a)(20) of the Investment
Company Act of 1940 (15 U.S.C. 80a-2(a)(20)).
(3) Investment company--The term ``investment company'' has
the same meaning as in section 3 of the Investment Company
Act of 1940 (15 U.S.C. 80-3).
(4) Registered investment company.--The term ``registered
investment company'' means an investment company that is
registered under section 8 of the Investment Company Act of
1940 (15 U.S.C. 80a-8).
SEC. 3. RULEMAKING.
(a) Timing.--Unless otherwise specified in this Act or the
amendments made by this Act, the Commission shall issue, in
final form, all rules and regulations required by this Act
and the amendments made by this Act not later than 180 days
after the date of enactment of this Act.
(b) Authority To Define Terms.--The Commission may, in
issuing rules and regulations under this Act or the
amendments made by this Act, define any term used in this Act
or such amendments that is not otherwise defined for purposes
of this Act or such amendment, as the Commission determines
necessary and appropriate.
(c) Exemption Authority.--The Commission may, in issuing
rules and regulations under this Act or the amendments made
by this Act, exempt any investment company or other person
from the application of such rules, as the Commission
determines is necessary and appropriate, in the public
interest or for the protection of investors.
TITLE I--FUND GOVERNANCE
SEC. 110. INDEPENDENT DIRECTORS.
(a) Independent Fund Boards.--Section 10(a) of the
Investment Company Act of 1940 (15 U.S.C. 80a-10(a)) is
amended--
(1) by striking ``shall have'' and inserting the following:
``shall--
``(1) have'';
(2) by striking ``60 per centum'' and inserting ``25
percent'';
(3) by striking the period at the end and inserting a
semicolon; and
(4) by adding at the end the following:
``(2) have as chairman of its board of directors an
interested person of such registered company; or
``(3) have as a member of its board of directors any person
that is not an interested person of such registered
investment company--
``(A) who has served without being approved or elected by
the shareholders of such registered investment company at
least once every 5 years; and
``(B) unless such director has been found, on an annual
basis, by a majority of the directors who are not interested
persons, after
[[Page S798]]
reasonable inquiry by such directors, not to have any
material business or familial relationship with the
registered investment company, a significant service provider
to the company, or any entity controlling, controlled by, or
under common control with such service provider, that is
likely to impair the independence of the director.''.
(b) Action by Independent Directors.--Section 10 of the
Investment Company Act of 1940 (15 U.S.C. 80a-10) is amended
by adding at the end the following:
``(i) 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;
``(B) adopting qualification standards for the nomination
of directors; and
``(C) determining the compensation to be paid to directors.
``(2) Disclosure.--The standards developed under paragraph
(1)(B) shall be disclosed in the registration statement of
the registered investment company.''.
(c) Definition of Interested Person.--Section 2(a)(19) of
the Investment Company Act of 1940 (15 U.S.C. 80a-2) is
amended--
(1) in subparagraph (A)--
(A) in clause (iv), by striking ``two'' and inserting
``5''; and
(B) by striking clause (vii) and inserting the following:
``(vii) any natural person who has served as an officer or
director, or as an employee within the preceding 10 fiscal
years, of an investment adviser or principal underwriter to
such registered investment company, or of any entity
controlling, controlled by, or under common control with such
investment adviser or principal underwriter;
``(viii) any natural person who has served as an officer or
director, or as an employee within the preceding 10 fiscal
years, of any entity that has within the preceding 5 fiscal
years acted as a significant service provider to such
registered investment company, or of any entity controlling,
controlled by, or under the common control with such service
provider;
``(ix) any natural person who is a member of a class of
persons that the Commission, by rule or regulation,
determines is unlikely to exercise an appropriate degree of
independence as a result of--
``(I) a material business relationship with the investment
company or an affiliated person of such investment company;
``(II) a close familial relationship with any natural
person who is an affiliated person of such investment
company; or
``(III) any other reason determined by the Commission.'';
(2) in subparagraph (B)--
(A) in clause (iv), by striking ``two'' and inserting
``5''; and
(B) by striking clause (vii) and inserting the following:
``(vii) any natural person who is a member of a class of
persons that the Commission, by rule or regulation,
determines is unlikely to exercise an appropriate degree of
independence as a result of--
``(I) a material business relationship with such investment
adviser or principal underwriter or affiliated person of such
investment adviser or principal underwriter;
``(II) a close familial relationship with any natural
person who is an affiliated person of such investment adviser
or principal underwriter; or
``(III) any other reason as determined by the
Commission.''.
(d) Definition of Significant Service Provider.--Section
2(a) of the Investment Company Act of 1940 is amended by
adding at the end the following:
``(53) Significant service provider.--
``(A) In general.--Not later than 270 days after the date
of enactment of the Mutual Fund Reform Act of 2004, the
Commission shall issue final rules defining the term
`significant service provider'.
``(B) Requirements.--The definition developed under
paragraph (1) shall include, at a minimum, the investment
adviser and principal underwriter of a registered investment
company for purposes of paragraph (19).''.
SEC. 111. STUDY OF DIRECTOR COMPENSATION AND INDEPENDENCE.
(a) In General.--The Commission shall conduct a study of--
(1) whether any limits should be placed upon the amount of
compensation paid by a registered investment company or any
affiliate of such company to a director thereof; and
(2) whether a director of a registered investment company
who is otherwise not an interested person of a registered
investment company, as defined in section 2(a)(19) of the
Investment Company Act of 1940, as amended by this Act, but
serves as a director of multiple registered investment
companies, or receives substantial compensation from the
investment adviser of any such company, should be considered
an ``interested person'' for purposes of section 2 of the
Investment Company Act of 1940.
(b) Report.--Not later than 1 year after the date of
enactment of this Act, the Commission shall submit a report
regarding the study conducted 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. 112. FIDUCIARY DUTIES OF DIRECTORS.
Section 10 of the Investment Company Act of 1940 (15 U.S.C.
80a-10), as amended by this Act, is amended by adding at the
end the following:
``(j) Fiduciary Duty of Directors.--
``(1) In general.--The members of the board of directors of
a registered investment company shall have a fiduciary duty
to act with loyalty and care, in the best interests of the
shareholders.
``(2) Rulemaking.--The Commission shall promulgate rules to
clarify the scope of the fiduciary duty under paragraph (1),
which rules shall, at a minimum, require the directors of a
registered investment company to--
``(A) determine the extent to which independent and
reliable sources of information are sufficient to discharge
director responsibilities;
``(B) negotiate management and advisory fees with due
regard for the actual cost of such services, including
economies of scale;
``(C) evaluate the totality of fees with reference to the
interests of shareholders;
``(D) evaluate the quality of the management of the company
and potentially superior alternatives;
``(E) evaluate the quality, comprehensiveness, and clarity
of disclosures to shareholders regarding costs;
``(F) evaluate any distribution or marketing plan of the
company, including its costs and benefits;
``(G) evaluate the size of the portfolio of the company and
its suitability to the interests of shareholders;
``(H) implement and monitor policies to ensure compliance
with applicable securities laws; and
``(I) implement and monitor policies with respect to
predatory trading practices.''.
SEC. 113. FIDUCIARY DUTY OF INVESTMENT ADVISER.
Section 36 of the Investment Company Act of 1940 (15 U.S.C.
80a-35(b)) is amended--
(1) by redesignating subsection (c) as subsection (d); and
(2) by inserting after subsection (b) the following:
``(c) Duties With Respect To Compensation and Provision of
Information.--For purposes of subsections (a) and (b), the
fiduciary duty of an investment adviser--
``(1) with respect to any compensation received, may
require reasonable reference to the actual costs of the
adviser and economies of scale; and
``(2) shall include a duty to supply such material
information as is necessary for the independent directors of
a registered investment company with whom the adviser is
employed to review and govern such company.''.
SEC. 114. TERMINATION OF FUND ADVISER.
The Commission shall promulgate such rules as it determines
necessary in the public interest or for the protection of
investors to facilitate the process through which the
independent directors of a registered investment company may
terminate the services of the investment adviser of such
company in the good faith exercise of their fiduciary duties,
without undue exposure to financial or litigation risk.
SEC. 115. INDEPENDENT ACCOUNTING AND AUDITING.
(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 investment
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: ``The Commission,
by rule, regulation, or order, may exempt a registered
management company or registered face-amount certificate
company otherwise 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
investment company, in its capacity as a committee of the
board of directors, shall be directly responsible for the
appointment, compensation, and
[[Page S799]]
oversight of the work of any independent public accountant
employed by the registered investment 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 investment 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 investment 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 investment company or
the investment adviser or principal underwriter of the
registered investment company; or
``(ii) be an interested person of the registered investment
company.
``(4) Complaints.--The audit committee of the registered
investment company shall establish procedures for--
``(A) the receipt, retention, and treatment of complaints
received by the registered investment company regarding
accounting, internal accounting controls, or auditing
matters; and
``(B) the confidential, anonymous submission by employees
of the registered investment 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 investment 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 investment 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 investment 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 (15 U.S.C. 78j-1(m)) is amended by
adding at the end the following:
``(7) Exemption for investment companies.--Effective one
year after the date of enactment of the Mutual Fund Reform
Act of 2004, 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.--The 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. 116. PREVENTION OF FRAUD; INTERNAL COMPLIANCE AND
CONTROL PROCEDURES.
(a) Detection and Prevention of Fraud.--Section 17(j) 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 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 adopted under paragraph
(1) shall include requirements for the adoption of codes of
ethics by a registered investment company 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 adopted
under paragraph (1) shall--
``(A) require each registered investment company and
investment adviser to adopt and implement general policies
and procedures reasonably designed to prevent violations of
this title, 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.) and amendments made by that Act, the Trust Indenture
Act of 1939 (15 U.S.C. 77aaa 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 registered investment company and
registered investment adviser to review such policies and
procedures annually for their adequacy and the effectiveness
of their implementation; and
``(C) require each registered investment 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 the 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 not 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.
``(4) Certifications.--The rules adopted under paragraph
(1) shall require each senior executive officer, or such
officers designated by the Commission, of an investment
adviser of a registered investment company to certify in each
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 this title and the
rules and regulations issued under this title, and the
company is in compliance with such procedures;
``(B) procedures are in place to ensure that, if the shares
of the company are offered as different classes of shares,
such classes are designed in the interests of shareholders,
and could reasonably be an appropriate investment option for
a shareholder;
``(C) procedures are in place to ensure that information
about the portfolio securities of the company is not
disclosed in violation of the securities laws or the code of
ethics of the company;
``(D) the members of the board of directors who are not
interested persons of the company have reviewed and approved
the compensation of the portfolio manager of the company in
connection with their consideration of the investment
advisory contract under section 15(c); and
``(E) the company has established and enforces a code of
ethics, as required by paragraph (2).''.
(b) Whistleblower Protection.--Section 1514A(a) of title
18, United States Code, is amended by striking the matter
preceding paragraph (1) and inserting the following:
``(a) Whistleblower Protection for Employees of Publicly
Traded Companies and Registered Investment Companies.--No
company with a class of securities registered under section
12 of the Securities Exchange Act of 1934 (15 U.S.C. 78l), or
that is required to file reports under section 15(d) of the
Securities and Exchange Act of 1934 (15 U.S.C. 78o(d)), or
that is an investment adviser, principal underwriter, or
significant service provider (as such terms are defined under
section 2(a) of the Investment Company Act of 1940 (15 U.S.C.
80a-2(a)) of an investment company which is registered under
section 8 of the Investment Company Act of 1940, or any
officer, employee, contractor, subcontractor, or agent of
such company, may discharge, demote, suspend, threaten,
harass, or in any other manner discriminate against an
employee in the terms and conditions of employment because of
any lawful act done by the employee--''.
TITLE II--FUND TRANSPARENCY
SEC. 210. COST CONSOLIDATION AND CLARITY.
(a) Expense Ratio Computation.--
(1) In general.--The Commission shall, by rule, develop a
standardized method of calculating the expense ratio of a
registered investment company that accounts for as many
operating costs to shareholders of such companies as is
practicable.
(2) Separate disclosures.--In developing the method of
calculation required under paragraph (1), if the Commission
determines that the inclusion of certain costs in such
calculation will lead to a significant risk of confusing or
misleading shareholders, the Commission shall develop
separate standardized methods for the calculation and
disclosure of such costs.
[[Page S800]]
(b) Transaction Cost Ratio.--The Commission shall, by rule,
develop a standardized method of computing the transaction
cost ratio of a registered investment company that
practicably and fairly accounts for actual transaction costs
to shareholders, including, at a minimum, brokerage
commissions and bid-ask spread costs. Such computation, if
necessary for ease of administration, may be based upon a
fair method of estimation or a standardized derivation from
easily ascertainable information.
(c) Disclosure of Expense Ratio and Transaction Cost
Ratio.--The Commission shall, by rule, require the prominent
disclosure of the expense ratio and the transaction cost
ratio of a registered company, both separately and as a total
investment cost ratio, in--
(1) each annual report of the registered investment
company;
(2) any prospectus of the registered investment company, as
part of a fee table; and
(3) such other filings with the Commission as the
Commission determines appropriate.
(d) Actual Cost Disclosure.--The Commission shall, by rule,
require, on at least an annual basis, the prominent
disclosure in the shareholder account statement of a
registered investment company of the actual dollar amount of
the projected annual costs of each shareholder of the
company, based upon the asset value of the shareholder at the
time of the disclosure.
(e) Definition of Fees and Expenses.--
(1) In general.--The Commission shall, by rule, define all
specific allowable types or categories of fees and expenses
that may be borne by the shareholders of a registered
investment company.
(2) New fees and expenses.--No new fee or expense, other
than any defined under paragraph (1), shall be borne by the
shareholders of a registered investment company, unless the
Commission finds that such new fee or expense fairly reflects
the services provided to, or is in the best interests of the
shareholders of--
(A) a particular registered investment company;
(B) specific types or categories of registered investment
companies; or
(C) registered investment companies in general.
(f) Cost Structures.--The Commission shall promulgate such
rules or regulations as are necessary--
(1) to promote the standardization and simplification of
the disclosure of the cost structures of registered
investment companies; and
(2) to ensure that the shareholders of such registered
investment companies receive all material information
regarding such costs--
(A) in a nonmisleading manner; and
(B) in such form and prominence as to facilitate, to the
extent practicable, ease of comprehension and comparison of
such costs.
(g) Descriptions of Fees, Expenses, and Costs.--The
Commission shall, by rule, require--
(1) the disclosure, in any annual or periodic report filed
with the Commission or any prospectus delivered to the
shareholders of a registered investment company, of all types
of fees, expenses, or costs borne by shareholders;
(2) a clear definition of each such fee, expense, or cost;
and
(3) information as to where shareholders may find out more
information concerning such fees, expenses, or costs.
SEC. 211. ADVISOR COMPENSATION AND OWNERSHIP OF FUND SHARES.
(a) Compensation of Investment Adviser.--The Commission
shall, by rule, require--
(1) the disclosure to the shareholders of a registered
investment company of--
(A) the amount and structure of, or the method used to
determine, the compensation paid by the registered investment
company to the portfolio manager or portfolio management team
of the investment adviser; and
(B) the ownership interest in such company of the portfolio
manager or portfolio management team; and
(2) the disclosure to the board of directors of the
registered investment company of all transactions in the
securities of the company by the portfolio manager or
management team of the investment adviser of such company.
(b) Form of Disclosure.--The disclosures required under
subparagraphs (A) and (B) of subsection (a)(1) shall be made
by a registered investment company in--
(1) the registration statement of the company; and
(2) any other filings with the Commission that the
Commission determines appropriate.
SEC. 212. POINT OF SALE AND ADDITIONAL DISCLOSURE OF BROKER
COMPENSATION.
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) Broker disclosures in mutual fund transactions.--
``(A) In general.--Each broker shall disclose in writing to
each person that purchases the shares of an investment
company registered under section 8 of the Investment Company
Act of 1940 (15 U.S.C. 80a-8)--
``(i) the source and amount of any compensation received or
to be received by the broker in connection with such
transaction; and
``(ii) such other information as the Commission determines
appropriate.
``(B) Timing of disclosure.--The disclosures required under
subparagraph (A) shall be made at or before the time of the
purchase transaction.
``(C) Limitation.--The disclosures required under
subparagraph (A) may not be made exclusively in--
``(i) a registration statement or prospectus of the
registered investment company; or
``(ii) any other filing of a registered investment company
with the Commission.''.
SEC. 213. BREAKPOINT DISCOUNTS.
The Commission, by rule, shall require the disclosure by
any registered investment company, in any quarterly or other
periodic report filed with the Commission, information
concerning discounts on front-end sales loads for which
shareholders may be eligible, including the minimum purchase
amounts required for such discounts.
SEC. 214. PORTFOLIO TURNOVER RATIO.
The Commission, by rule, shall require the disclosure, by
any registered investment company, in any quarterly or
periodic report filed with the Commission, and in any
prospectus delivered to the shareholders of such company, of
the portfolio turnover ratio of the company, and an
explanation of its meaning and implications for cost and
performance. Such rules shall require the disclosures to be
prominently displayed within the appropriate document.
SEC. 215. PROXY VOTING POLICIES AND RECORD.
Section 30 of the Investment Company Act of 1940 (15 U.S.C.
80a-29) is amended by adding at the end the following:
``(k) Proxy Voting Disclosure.--
``(1) In general.--Each registered 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 proxy voting record of the registrant
and policies of the company with respect to the voting of
such proxies for the most recent 12-month period ending on
June 30.
``(2) Notice in financial statements.--The financial
statements of each registered investment company shall state
that information regarding how the company voted proxies and
proxy voting policies relating to portfolio securities during
the most recent 12-month period ending on June 30 is
available--
``(A) 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
``(B) on the website of the Commission.''.
SEC. 216. CUSTOMER INFORMATION FROM ACCOUNT INTERMEDIARIES.
(a) In General.--The Commission shall, by rule, require
that each account intermediary of a registered investment
company provide to such company, with respect to each account
serviced by the intermediary, such information as is
necessary for the company to enforce its investment, trading,
and fee policies.
(b) Requirements.--The information provided by a registered
investment company under subsection (a) shall include, at a
minimum--
(1) the name under which the account is opened with the
intermediary;
(2) the taxpayer identification number of such person;
(3) the mailing address of such person; and
(4) individual transaction data for all purchases,
redemptions, transfers, and exchanges by or on behalf of such
person.
(c) Privacy of Information.--The information provided under
subsection (a), and the use thereof, shall be subject to all
Federal and State laws with regard to privacy and proprietary
information.
SEC. 217. ADVERTISING.
(a) Performance Advertising.--The Commission shall
promulgate such rules as the Commission determines necessary
with respect to the advertising of a registered investment
company regarding--
(1) unrepresentative short-term performance;
(2) performance based upon an undisclosed or improbable
event; and
(3) performance based upon incomplete or misleading data.
(b) Dollar and Time-Weighted Returns.--
(1) In general.--Subject to paragraph (2), the Commission
shall, by rule, require each registered investment company to
disclose, in its annual report and any prospectus delivered
to shareholders, dollar-weighted returns and time-weighted
returns for each of--
(A) the preceding fiscal year;
(B) the preceding 5 fiscal years;
(C) the preceding 10 fiscal years; and
(D) the life of the company.
(2) Exception.--The Commission may omit or require
additional disclosures required under paragraph (1) for such
time periods as the Commission determines necessary.
(3) Commission use of benchmarks.--The Commission may
require, in the interest of facilitating non-misleading
disclosures, that any performance-related advertising by a
registered investment company be accompanied by such
benchmarks as the Commission may deem appropriate.
(c) Subsidized Yields.--The Commission shall, by rule,
require that any registered investment company that discloses
in any publication a subsidized yield to disclose in the same
publication the amount and duration of such subsidy.
[[Page S801]]
TITLE III--FUND REGULATION AND OVERSIGHT
SEC. 310. PROHIBITION OF ASSET-BASED DISTRIBUTION EXPENSES.
(a) Repeal of Rule 12b-1.--
(1) In general.--Beginning 180 days after the date of
enactment of this Act (or such earlier time as the Commission
may elect), as in effect on the date of enactment of this
Act, section 270.12b-1 of chapter II of title 17 of the Code
of Federal Regulations, promulgated under section 12 of the
Investment Company Act of 1940 (15 U.S.C. 80a-12), is
repealed, and shall have no force or effect.
(2) Preservation of actions.--Paragraph (1) shall have no
effect on any case pending or penalty imposed under section
270.12b-1 of the Code of Federal Regulations prior to the
date of repeal under paragraph (1).
(b) Payment of Distribution Expenses from Management Fee.--
Section 12 of the Investment Company Act of 1940 (15 U.S.C.
80a-12) is amended by adding at the end the following:
``(h) Payment of Distribution Expenses.--Notwithstanding
any provision of subsection (b), or any rule or regulation
promulgated thereunder, distribution expenses incurred by an
investment adviser may be paid out of the management fee
received by the investment adviser.''.
(c) Sums Expended Promoting Sale of Securities.--The
Commission shall, by rule--
(1) require that any sums expended by the investment
adviser of a registered investment company to promote or
facilitate the sale of the securities of such company be
disclosed to the board of directors of the company;
(2) require that such sums be accounted for and identified
in the expense ratio of any such company; and
(3) authorize the board of directors of any such company to
prohibit its investment adviser from using any compensation
received from the company for distribution expenses that the
board determines not to be in the best interest of the
shareholders of the company.
(d) Prohibition of Asset-Based Fees.--Section 12 of the
Investment Company Act of 1940 (15 U.S.C. 80a-12), as amended
by subsection (a), is amended by adding at the end the
following:
``(i) Asset-Based Fees.--
``(1) In general.--It shall be unlawful for any registered
investment company to pay asset-based fees to any broker or
dealer in connection with the offer or sale of the securities
of such investment company.
``(2) Definition of asset-based fees.--The Commission
shall, by rule, define the term `asset-based fees' for
purposes of this subsection.''.
SEC. 311. PROHIBITION ON REVENUE SHARING, DIRECTED BROKERAGE,
AND SOFT DOLLAR ARRANGEMENTS.
(a) In General.--The Investment Company Act of 1940 (15
U.S.C. 80a-1 et seq.) is amended by inserting after section
12 the following:
``SEC. 12A. PROHIBITION ON REVENUE SHARING, DIRECTED
BROKERAGE, AND SOFT DOLLAR ARRANGEMENTS.
``(a) Revenue Sharing Arrangements.--It shall be unlawful
for any investment adviser to enter into a revenue sharing
arrangement with any broker or dealer with respect to the
securities of a registered investment company.
``(b) Directed Brokerage Arrangements.--It shall be
unlawful for any registered investment company, or any
affiliate of such company, to enter into a directed brokerage
arrangement with a broker or dealer.
``(c) Soft-Dollar Arrangements.--It shall be unlawful for
any registered investment company or registered investment
adviser to enter into a soft-dollar arrangement with any
broker or dealer.
``(d) Regulations Respecting Section 28(e) of the
Securities Exchange Act of 1934.--The Commission shall, by
rule, narrow the soft-dollar safe harbor under section 28(e)
of the Securities Exchange Act of 1934 (15 U.S.C. 78bb(e)(1))
to promote such parity as the Commission determines
appropriate, and in the best interests of shareholders of a
registered investment company, between registered investment
companies governed by section 12A, and companies not covered
by section 12A.
``(e) Definitions.--
``(1) In general.--In this section--
``(A) the term `directed brokerage arrangement' means the
direction of discretionary brokerage by an investment company
or an affiliate of that company, to a broker or dealer in
exchange for services other than trade executions;
``(B) the term `revenue sharing arrangement' means any
direct or indirect payment made by an investment adviser (or
any affiliate of an investment adviser) to a broker or dealer
for the purpose of promoting the sales of securities of a
registered investment company, other than any payment made
directly by a shareholder as a commission for the purchase of
such securities;
``(C) the term `soft-dollar arrangement' means payments to
a broker or dealer for best trade executions in exchange for,
or which generate credits for, services or products other
than trade executions; and
``(D) the term `trade executions' has the meaning given
that term by the Commission, by rule;
``(2) Regulations.--The Commission may, by rule, refine the
definitions under paragraph (1), define such other terms as
the Commission determines necessary, and otherwise tailor the
proscriptions set forth under this section to achieve the
purposes of--
``(A) protecting the best interests of shareholders of a
registered investment company;
``(B) minimizing or eliminating conflicts with the best
interests of shareholders of a registered investment company;
``(C) enhancing market negotiation for and price
competition in trade execution services, and products and
services previously obtained under arrangements prohibited by
this section;
``(D) ensuring the transparency of transactions for trade
executions, and products and services previously obtained
under arrangements prohibited by this section, and disclosure
to shareholders of costs associated with trade executions,
and products and services previously obtained under
arrangements prohibited by this section, that is simplified,
clear, and comprehensible; and
``(E) providing reasonable safe harbors for conduct
otherwise consistent with such purposes.''.
(b) Technical and Conforming Amendment.--Section 28(e)(1)
of the Securities Exchange Act of 1934 (15 U.S.C. 78bb(e)(1))
is amended by striking ``This section is exclusive'' and
inserting ``Except as provided under section 12A of the
Investment Company Act of 1940, this section is exclusive''.
SEC. 312. MARKET TIMING.
(a) In General.--The Commission shall, by rule, require--
(1) the disclosure in any registration statement filed with
the Commission by a registered investment company of the
market timing policies of that company and the procedures
adopted to enforce such policies; and
(2) that any registered investment company that declines to
adopt restrictions on market timing disclose such fact in the
registration statement of the company, and in any advertising
or other publicly available documents, as the Commission
determines necessary.
(b) Fundamental Investment Policy.--The policies required
to be disclosed under paragraph (1) shall be deemed
``fundamental investment policies'' for purposes of sections
8(b)(3) and 13(a)(3) of the Investment Company Act of 1940
(15 U.S.C. 80a-8(b)(3) and 80a-13(a)(3)).
SEC. 313. ELIMINATION OF STALE PRICES.
(a) In General.--Not later than 90 days after the date of
enactment of this Act, the Commission shall prescribe, by
rule or regulation, standards concerning the obligation of
registered 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 portfolio securities of such a company, in order
to prevent dilution of the interests of long-term
shareholders or as necessary in the public interest or for
the protection of shareholders.
(b) Content.--The rule or regulation prescribed under
subsection (a) shall identify, in addition to significant
events, the conditions or circumstances from which such an
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. 314. PROHIBITION OF SHORT TERM TRADING; 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.--
``(1) Prohibition.--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
any short-term transaction, in any securities issued by such
company, or any affiliate of such company.
``(2) Limitation.--This subsection does not prohibit any
transaction in a money market fund, or in funds, the
investment policy of which expressly permits short-term
transactions, or such other category of registered investment
company as the Commission shall specify, by rule.
``(3) Definition.--For purposes of this subsection, the
term `short-term transaction' has the meaning given that term
by the Commission, by rule.''.
(b) Mandatory Redemption Fees.--The Commission shall, by
rule, require any registered 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. In determining the application of mandatory
redemption fees, shares shall be considered in the reverse
order of their purchase.
(c) Increased Redemption Fees Permitted for Short-Term
Trading.--Not later than 90 days after the date of enactment
of this Act, the Commission shall permit a registered
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 deter short term
trading that is unfair to the shareholders of such company.
[[Page S802]]
(d) Deadline for Rules.--The Commission shall prescribe
rules to implement section 17(k) of the Investment Company
Act of 1940, as added by subsection (a) of this section, not
later than 90 days after the date of enactment of this Act.
SEC. 315. PREVENTION OF AFTER-HOURS TRADING.
(a) Additional Rules Required.--The Commission shall issue
rules to prevent transactions in the securities of any
registered 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.--The Commission
shall determine the circumstances under which to permit,
subject to rules of the Commission and an annual independent
audit of such trades, the execution of after-hours trades
that are provided to a registered investment company by a
broker, dealer, retirement plan administrator, insurance
company, or other intermediary, after the time as of which
the net asset value was determined.
SEC. 316. 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 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
shareholders, provided that such rule, regulation, or order
requires--
``(A) enhanced disclosure by the registered open-end
investment company to shareholders 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 Commission shall prescribe
rules to implement section 15(h) of the Investment Company
Act of 1940, as added by subsection (a) of this section, not
later than 90 days after the date of enactment of this Act.
SEC. 317. SELECTIVE DISCLOSURES.
(a) In General.--The Commission shall promulgate such rules
as the Commission determines necessary to prevent the
selective disclosure by a registered investment company of
material information relating to the portfolio of securities
held by such company.
(b) Requirements.--The rules promulgated under subsection
(a) shall treat selective disclosures of material information
by a registered investment company in substantially the same
manner as selective disclosures by issuers of securities
registered under section 12 of the Securities Exchange Act of
1934 under the rules of the Commission.
TITLE IV--STUDIES
SEC. 410. STUDY OF ADVISER CONFLICT OF INTEREST.
(a) In General.--The Commission shall conduct a study of--
(1) the consequences of the inherent conflicts of interest
confronting investment advisers employed by registered
investment companies;
(2) the extent to which legislative or regulatory measures
could minimize such conflicts of interest; and
(3) the extent to which legislative or regulatory measures
could incentivize internal management of a registered
investment company.
(b) Report.--Not later than 1 year after the date of
enactment of this Act, the Commission shall submit a report
on the results of 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. 411. STUDY OF COORDINATION OF ENFORCEMENT EFFORTS.
(a) In General.--The Comptroller General of the United
States, with the cooperation of the Commission, shall conduct
a study of the coordination of enforcement efforts between--
(1) the headquarters of the Commission;
(2) the regional offices of the Commission; and
(3) State regulatory and law enforcement agencies.
(b) Report.--Not later than 1 year after the date of
enactment of this Act, the Commission shall submit a report
on the results of 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. 412. STUDY OF COMMISSION ORGANIZATIONAL STRUCTURE.
(a) In General.--The Comptroller General of the United
States, with the cooperation of the Commission, shall conduct
a study of--
(1) the current organizational structure of the Commission
with respect to the regulation of investment companies;
(2) whether the organizational structure and resources of
the Commission sufficiently credit the importance of
oversight of investment companies to the 95 million investors
in such companies within the United States;
(3) whether certain organizational features of that
structure, such as the separation of regulatory and
enforcement functions, are sufficient to promote the optimal
understanding of the current practices of investment
companies; and
(4) whether a separate regulatory entity would improve or
impair effective oversight.
(b) Report.--Not later than 1 year after the date of
enactment of this Act, the Comptroller General shall submit a
report on the results of 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. 413. TRENDS IN ARBITRATION CLAUSES.
(a) In General.--The Commission shall conduct a study on
the trends in arbitration clauses between brokers, dealers,
and investors since December 31, 1995, and alternative means
to avert the filing of claims in Federal or State courts.
(b) Report.--Not later than 1 year after the date of
enactment of this Act, the Commission shall submit a report
on the results of 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. 414. HEDGE FUND REGULATION.
(a) In General.--The Commission shall conduct a study of
whether additional regulation of alternative investment
vehicles, such as hedge funds, is appropriate to deter the
recurrence of trading abuses, manipulation of registered
investment companies by unregistered investment companies, or
other distortions that may harm investors in registered
investment companies.
(b) Report.--Not later than 1 year after the date of
enactment of this Act, the Commission shall submit a report
on the results of 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. 415. INVESTOR EDUCATION AND THE INTERNET.
(a) In General.--The Commission shall conduct a study of--
(1) the means of enhancing the role of the Internet in
educating investors and providing timely information
regarding laws, regulations, enforcement proceedings, and
individual registered investment companies;
(2) the feasibility of mandating that each registered
investment company maintain a website on which shall be
posted filings of the registered investment company with the
Commission and any other material information related to the
registered investment company; and
(3) the means of ensuring that the EDGAR database
maintained by the Commission is user-friendly and contains a
search engine that facilitates the expeditious location of
material information.
(b) Report.--Not later than 1 year after the date of
enactment of this Act, the Commission shall submit a report
on the results of 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.
____
S. 2059
Summary of Key Provisions of the Mutual Fund Reform Act of 2004
The Mutual Fund Reform Act of 2004 makes fund governance
truly accountable, requires genuinely transparent total fund
costs, enhances comprehension and comparison of fund fees,
confronts trading abuses, creates a culture of compliance,
eliminates hidden transactions that mislead investors and
drive up costs--and saves billions of dollars for the 95
million Americans who invest in mutual funds. MFRA strives
above all to preserve the attractiveness of mutual funds as a
flexible and investor-friendly vehicle for long-term,
diversified investment.
Title 1: Truly Fiduciary Fund Governance
The Mutual Fund Reform Act of 2004 puts the interests of
investors first by:
Ensuring independent and empowered boards of directors;
[[Page S803]]
Clarifying and making specific fund directors' foremost
fiduciary duty to shareholders;
Strengthening the fund advisers' fiduciary duty regarding
negotiating fees and providing fund information; and
Instituting Sarbanes-Oxley-style provisions for independent
accounting and auditing, codes of ethics, chief compliance
officers, compliance certifications, and whistleblower
protections.
Title 2: Meaningful Fund Transparency
The Mutual Reform Act of 2004 empowers both investors and
free markets with clear, comprehensible fund transaction
information by:
Standardizing computation and disclosure of (i) fund
expenses and (ii) transaction costs, which yield a total
investment cost ratio, and tell investors actual dollar
costs;
Providing disclosure and definitions of all types of costs
and requiring that the SEC approve imposition of any new
types of costs;
Disclosing portfolio managers' compensation and stake in
fund;
Disclosing broker compensation at the point of sale;
Disclosing and explaining portfolio turnover ratios to
investors; and
Disclosing proxy voting policies and record.
Title 3: Straightforward Fund Transactions
The Mutual Fund Reform Act of 2004 vastly simplifies
disclosure regime by:
Eliminating asset-based distribution fees (Rule 12b-1
fees), the original purpose of which has been lost and the
current use of which is confusing and misleading--and
amending the Investment Company Act of 1940 to permit the use
of the adviser's fee for distribution expenses, which locates
the incentive to keep distribution expenses reasonable
exactly where it belongs--with the fund adviser;
Prohibiting shadow transactions--such as revenue sharing,
directed brokerage, and soft-dollar arrangements--that are
riddled with conflicts of interest, serve no reasonable
business purpose, and drive up costs;
``Unbundling'' commissions, such that research and other
services, heretofore covered by hidden soft-dollar
arrangements, will be the subject of separate negotiation and
a freer and fairer market;
Requiring enforceable market timing policies and mandatory
redemption fees--as well as provision by omnibus account
intermediaries of basic customer information to funds to
enable funds to enforce their market timing, redemption fee,
and breakpoint discount policies; and
Requiring fair value pricing and strengthening late trading
rules.
____
Mutual Fund Reform Act of 2004
The Mutual Fund Reform Act of 2004 (MFRA) restores truly
fiduciary fund governance, simplifies fund fees, confronts
trading abuses, creates a culture of compliance, and
eliminates the conflict-riddled shadow transactions that
drive up costs. The essence of the legislation is not any
regulatory regime it creates, but the market forces it
liberates. Obscurity is the enemy of a free market. Too
little information--and too much incomprehensible
information--equally undermine informed investor decision-
making. The Mutual Fund Reform Act lifts the veil off
mislabeled and misleading transactions, ensures genuine
transparency, and promotes true price competition.
With 95 million American stakeholders, mutual funds are
truly America's investment vehicle of choice. MFRA strives
above all to preserve the attractiveness of mutual funds as a
flexible and investor-friendly vehicle for long-term,
diversified investment. That goal requires a careful
balancing of accountability and incentive--or carrot and
stick. Federal and state governments cannot police, much less
micromanage, over 8,000 funds. The overriding duty to
shareholders rests primarily with the funds themselves, and
secondarily with the funds' service providers--each guided by
a clearer statement of purpose and priority, incentivized by
a more robust and transparent market that rewards low cost
and good performance--because it can truly identify them--and
accountable for failures that privilege fund managers' or
brokers' interests over shareholders.
Vanguard Founder and industry savant John Bogle calls the
Mutual Fund Reform Act of 2004 ``the gold standard in putting
mutual fund shareholders back in the driver's seat.''The
Consumer Federation of America says the Mutual Fund Reform
Act of 2004 ``will save mutual fund investors potentially
tens of billions of dollars a year by wringing out excess
costs.'' The Securities and Exchange Commission's (SEC)
recent spate of regulatory initiatives is a testament to
Washington's will in redressing the scandals and excessive
fees that erode America's retirement and college savings. But
the SEC cannot take the range of initiatives that are
necessary to rationalize an industry governed by 64-year-old
legislation. It is time for Congress to take the step that
truly empowers America's investors and invigorates market
forces. It is time for reforms that finally put investors
first.
MFRA is divided into four titles: Title 1 (Fund
Governance); Title 2 (Fund Transparency); Title 3 (Fund
Regulation and Oversight); and Title 4 (Studies). The
provisions under each title are analyzed below.
title 1: Fund Governance
Independent directors
The Mutual Fund Reform Act empowers a truly independent
board of directors to exercise its essential ``watchdog''
role as the original Investment company Act of 1940
envisioned. An inherent tendency to defer to authority--or to
parties with more information--must be countered with both
numbers and authority for the board to reliably flex its
independent muscle in the best interests of shareholders.
Thus, at least 75% of the board must be independent--
including the chair.
That independence must be self-perpetuating. Thus,
independent directors will nominate new directors and adopt
qualification standards for such nomination.
Close relationships with fund advisers, or other
significant service providers, can easily compromise
independence. Thus, the legislation tightens the definition
of independence to exclude individuals with material business
or close family relationships with such service providers.
Further, the legislation directs the SEC to study whether
substantial aggregate compensation from a fund adviser,
especially when directors serve on multiple boards,
compromises independence.
Directors' fiduciary duty
Building on the ringing declaration in the Investment
Company Act's Preamble, section 36(a) refers specifically to
the fiduciary duty of directors--but it has been a relatively
empty reference. Merely to recite ``fiduciary duty,'' it
appears, will not ensure fidelity to it. Directors need
direction--and content--in discharging their fiduciary
duties. MFRA supplies both. MFRA amends the Investment
Company Act to make expressly clear that the directors'
fiduciary duty obliges them to act in the best interests
of shareholders.
A ``fiduciary'' duty is supposed to be a rigorous one--yet
its content has been unenforced guesswork. Mindful of the
industry's complexity, NFRA thus directs the SEC to provide
directors with specific guidance on the content of their
fiduciary duty. Such content will include, at a minimum,
determining the extent to which independent and reliable
sources of information are sufficient to discharge director
responsibilities, negotiating management and advisory fees
with due regard for the actual cost of services, including
economies of scale, evaluating management quality and
considering potentially superior alternatives, evaluating the
quality, comprehensiveness, and clarity of disclosures to
shareholders regarding costs, evaluating any distribution or
marketing plan of the company, including its costs and
benefits, evaluating the size of the fund's portfolio and its
suitability to the interests of shareholders, implementing
and monitoring policies and procedures to ensure compliance
with applicable securities laws, and implementing and
monitoring policies with respect to predatory trading
practices, such as market timing.
Investment advisers' fiduciary duty
After Wharton School and SEC studies in the 1960s found
that mutual fund shareholders pay excessive fees because they
lack bargaining power, the SEC recommended to Congress that
it require that fees be ``reasonable.'' That did not happen.
Instead, in 1970, Congress imposed a ``fiduciary'' duty on
fund advisers with respect to fees. As with the directors'
``fiduciary'' duty, however, the term lost any meaningful
moorning in client-first professional stewardship. Indeed, in
a watershed judicial interpretation of the adviser's
``fiduciary'' duty under section 36(b), the Second Circuit
deemed the duty satisfied unless the adviser charged ``a fee
that is so disproportionately large that it bears no
reasonable relationship to the services rendered and could
not have been the product of arm's-length bargaining.''
Gartenberg v. Merrill Lynch Asset Mgt., Inc., 694 F.2d 923
(2d Cir. 1982). Against such a startling hurdle, no plaintiff
ever wins an excessive fee case--and the SEC has declined to
hold fund directors accountable for failing adequately to
review adviser fee agreements (under section 36(a)).
Once again, merely invoking the phrase ``fiduciary'' will
not ensure fair stewardship. MFRA makes clear that the fund
adviser's fiduciary duty with respect to fees ``may require
reasonable reference to actual costs of the adviser and
economies of scale.'' Advisers are entitled to a fair
profit--and nothing in MFRA ``caps'' or ``legislates'' fees,
or otherwise imposes a ``price control.'' But MFRA does
ensure that accountability is fairly allocated in the
interests of shareholders.
MFRA also addresses another fiduciary deficit in the
relationship between fund adviser and fund director.
Conscientious independent directors may experience reckless
intimidation and misdirection trying to penetrate the
adviser's monopoly on critical fund information. Indeed, as
Fund Democracy founder Mercer Bullard noted three years ago,
under the current regime, ``fund directors who try to do
their jobs may do so at their own risk. In 1997, the
directors of the Navellier Aggressive Small-Cap fund
complained to the SEC that the fund's adviser, Louis
Navellier, had refused to provide information they needed to
evaluate his services. . . . Intent on proving that no good
deed goes unpunished, Navellier dragged the fund's directors
through years of litigation,'' which was finally resolved in
the directors' favor.
Subjecting directors to the sufferance of fund advisers
turns the fiduciary duties of
[[Page S804]]
both on their heads. MFRA cures this damaging imbalance by
specifying that fund advisers owe a specific fiduciary duty
to provide information that is material to fund governance.
In other words, directors will no longer be obliged to think
of every possible question necessary to obtain essential
information--much less be bullied by resistant advisers.
Termination of fund adviser
When fund managers cease to perform as effective stewards
of the investments entrusted to them, they should be subject
to the market discipline facing most Americans on the job--
termination. Independent directors, exercising their
fiduciary duties in the best interests of shareholders,
should have the latitude to replace fund managers without
undue fear of reprisal, spurious litigation, and other
tactics by recalcitrant advisers. MFRA accordingly directs
the SEC to issue regulations that facilitate the process by
which independent directors, upon critical evaluation of fund
management, terminate the service of fund management in the
exercise of their fiduciary duties without undue exposure to
financial or litigation risk.
Independent accounting and auditing
Last December, Business Week magazine called for Congress
to ``reverse the embarrassing exemption it gave to the
mutual-fund industry from the Sarbanes-Oxley corporate reform
law's requirement that outside auditors evaluate internal
controls.'' MFRA requires an audit committee, with
requirements that track Sarbanes-Oxley provisions, and
selection by that committee of an independent accountant.
Compliance provisions
MFRA, like S.1971 introduced by Senators Corzine and Dodd,
draws significant inspiration from the lessons of the
corporate scandals that gave rise to the Sarbanes-Oxley Act
of 2002. While those corporate scandals triggered a massive
public outcry, it is noteworthy that the total cost to the
American public was far less than the trading abuses and
excessive fees in the $7 trillion mutual fund industry. Thus,
MFRA engenders a culture of compliance--employing tools from
the landmark Sarbanes-Oxley Act.
MFRA requires adoption--by funds, investment advisers, and
principal underwriters--of a code of ethics, which is
reasonably designed to prevent violation of securities laws.
This code must be disclosed to the public and reviewed
annually. MFRA further requires appointment of a chief
compliance officer, whose compensation is set by independent
directors, who reports directly to independent directors, who
may be an employee of the fund adviser, but who may be
terminated only with the consent of the independent
directors.
MFRA requires certain certifications to ensure careful
monitoring and accountability. And finally, mindful of the
singular contribution of whistleblowers to illumination of
the current scandals, MFRA installs rigorous protections
against retaliation for disclosing violations of securities
laws or codes of ethics.
Title 2: Fund Transparency
Cost consolidation and clarity
For the market to discipline excessively high-cost funds,
investors must know total costs in comprehensive and
accessible disclosures. Current regulations require
disclosure of a fund's ``expense ratio''--but that figure
excludes significant costs borne directly by investors. These
largely hidden ``transaction costs'' occur when the fund buys
and sells securities in its portfolio. As the SEC recently
noted in its Concept Release on transaction costs, ``for many
funds, the amount of transaction costs incurred during a
typical year is substantial. One study estimates that
commissions and spreads alone cost the average equity fund as
much as 75 basis points.'' In other words, transaction costs
may sometimes double the cost of investment. Additional
transaction costs, such as market impact and opportunity
costs, may cost even more.
MFRA enhances cost disclosure in several ways. First, MFRA
requires standardized computation and disclosure of two cost
ratios: the first is the expense ratio, designed to capture
fund operating expenses, and the second is the transaction
cost ratio, designed to capture the true costs of portfolio
management. These two ratios must then be combined and
disclosed as a single ``investment cost ratio.'' MFRA
recognizes that certain transaction costs, such as
commissions and bid-ask spreads, are indisputable candidates
for disclosure in the ``transaction cost ratio''--while
others, such as market impact and opportunity costs, may more
precisely reflect simply the principal price a manager is
willing to pay (or accept) for securities, and thus may not,
in the ultimate judgment of the SEC, warrant computation and
disclosure as part of the transaction cost ratio.
Additionally, MFRA assists investors confronting
voluminous fund information with clear, simple, and at-least
annual actual dollar cost disclosure. Including actual cost
disclosure in the one document that investors do routinely
review--their own statement--simplifies cost analysis for all
investors and promotes genuine cost competition.
Some say that mutual fund reform invites the proverbial
``rock on jello''--and that a wily industry will react to
reasonable restraints of one type of cost by simply shifting
the cost to a new label. MFRA stabilizes the mutual fund fee
structure. The SEC is directed to standardize all allowable
types or categories of fees, expenses, loads, or charges
borne by fund shareholders. New costs cannot be created
without an SEC determination that the new cost is in the best
interests of shareholders of (i) a particular fund, (ii)
certain types of funds, or (iii) funds generally. Everyone,
including (or perhaps especially) the mutual fund industry,
acknowledges the critical importance of restoring investor
trust. By stabilizing the fee structure--and building in
safeguards against cynical manipulation of complex fee
structures--MFRA takes the long stride toward ensuring
sustained investor confidence.
Finally, MFRA addresses financial literacy by requiring
clear explanation and definition of all types of fees,
charges, expenses, loads, commissions, and payments--as well
as where investors may find additional information about
them.
Advisor compensation and ownership of fund shares
The Sarbanes-Oxley Act turned the spotlight on executive
compensation--not merely to satisfy casual investor curiosity
but to deter conflicts of interest and distorted incentives.
MFRA does the same--albeit only with respect to portfolio
management. If, as a consequence of disclosure, fund managers
feel more motivated to earn their compensation, so much the
better for investors. It may likewise be relevant whether
fund managers are invested in the very funds they manage--and
investors are entitled to know. Finally, insider transactions
in the fund must be disclosed to the board of directors.
Insider transactions are not per se problematic--quite the
contrary, it may be a strong positive to have fund managers
invested in the funds they manage. But to help deter
potential abuses, the board should be informed of insider
transactions. (In Title 3, MFRA prohibits short-term insider
transactions to prevent abusive rapid trading by insiders.)
Broker confirmations
MFRA requires point-of-sale disclosure of the source and
compensation to be received by the broker in connection with
the transaction. Such disclosure is standard with other
financial instruments--and broker/dealers can do the same for
mutual fund investors. Significantly, however, as discussed
below, MFRA vastly simplifies broker disclosures by
prohibiting certain conflict-riddled broker-compensation
practices--such as revenue sharing, directed brokerage and
soft-dollar arrangements--that artificially inflate broker
commissions and introduce distorted sales incentives.
Breakpoint discounts
Breakpoint discounts are essentially ``volume discounts''--
reductions in sales charges for purchases beyond certain
thresholds. The policies for applying breakpoint discounts,
however, can be complicated. For example, an investor may be
entitled to a breakpoint discount based on total shares
purchased over a period of time, or from different accounts
or together with other family members.
The National Association of Securities Dealers (the self-
regulatory organization of brokers and dealers) estimated
that more than $86 million in breakpoint discounts were not
correctly applied by broker/dealers in 2001 and 2002, which
indicates investor overcharges in one out of every five
eligible transactions.
MFRA requires more prominent disclosure of information and
policies about breakpoint discounts, so that investors are
better equipped to help themselves. Perhaps more importantly
as discussed below under Customer Information from Account
Intermediaries, MFRA bridges one critical gap in the uniform
application of breakpoint discount policies.
Portfolio turnover ratio
Many investors do not understand that the benign, or even
enticing, term--``actively managed''--may conceal
inordinately high transaction costs. When fund managers buy
and sell securities in the fund portfolio, they incur
transaction costs, such as commissions, bid-ask spread costs,
market impact costs and opportunity costs. All of these costs
diminish performance. To be sure, some actively managed funds
do very well. But investors have a right to know, in
straightforward terms, just how ``actively'' the portfolio is
managed. The portfolio turnover ratio is a good indicator.
MFRA requires prominent disclosure of the portfolio turnover
ratio, as well as explanation of its meaning and implications
for cost and performance. Thus, MFRA takes no legislative
position on the propriety of active or passive management--
but merely equips investors with clearer and more
comprehensible information so that they can make decisions
based upon their own investment objectives.
Proxy voting policies and record
Mutual funds are a seven-trillion-dollar industry--and
control nearly one-third of U.S. equity voting power. See
Alan R. Palmiter, Mutual Fund Voting of Portfolio Shares: Why
Not Disclose? 23 Cardozo L. Rev. 1419, 1421 (March 2002).
That is an impressive stake in U.S. corporate governance.
Such enormous power is ill-suited to the shadows. MFRA
requires disclosure of the fund's proxy voting record, as
well as any proxy voting policies that may better equip
investors to align their mutual fund purchasing with their
corporate governance preferences.
[[Page S805]]
Customer information from account intermediaries
Rules against market timing, application of breakpoint
discounts, imposition of redemption fees on short-term
trading--all of these salutary practices work only if the
fund knows the identify and trading activity of its
investors. But many financial intermediaries, including
broker/dealers, convey aggregate trading information to funds
through ``omnibus accounts,'' consisting of multiple
anonymous fund customers. Failure of a fund to know its own
investors seriously impairs fair and uniform enforcement of
its trading policies.
As Niels Holch, Executive Director of the Coalition of
Mutual Fund Investors, stated in a December 12, 2003 letter
to the SEC, ``individual, long-term shareholders will not
be guaranteed equal and fair application of fund policies,
procedures, fees and charges, unless and until each mutual
fund is provided information from its intermediaries about
the identity of all shareholders in omnibus accounts and
the individual transactions engaged in by those
shareholders.''
MFRA requires that intermediaries convey to funds the basic
customer identification and trading activity information
needed to enforce fund policies fairly and uniformly.
However, such information may only be used to enforce fund
policies, and all proprietary rights to such customer
information under state and federal law are preserved.
Advertising
Mutual funds fairly compete for investor attention and
purchase. Indeed, because a certain percentage of investors
can be expected to sell their shares every year, mutual funds
want to meet these redemptions with new purchases so that
``net redemptions'' do not force funds to sell off too many
portfolio assets. Advertising is one way to stimulate demand.
However, some funds engage in questionable claims.
Performance advertising, in particular, is fertile territory
for misleading investors. Former SEC Chief Economist Susan
Woodward put the matter bluntly in a recent Wall street
Journal op-ed: ``A fund's past performance provides zero
guidance about its future performance.''
MFRA directs the SEC to address several aspects of
performance advertising, including unrepresentative short-
term performance, performance based upon undisclosed non-
recurring or improbable events, and performance based upon
technically accurate but incomplete or misleading data.
Truthful and non-misleading advertising is a right
guaranteed by the United States Constitution. MFRA respects
that right--with requisite emphasis on ``non-misleading.''
Title 3: Fund Regulation and Oversight
MFRA is truly structural reform. It does not merely mandate
yet more ``disclosure'' in an industry already saturated with
voluminous disclosure rules. MFRA's essence is not the
regulatory regime that it creates, but the free market forces
that it liberates. MFRA fuels a competitive mutual fund
market by making its transactions honest and comprehensible.
Market distortions occur when market players can obscure
their activities and mislead consumers. Examples addressed in
MFRA include 12b-1 fees, revenue sharing, soft-dollar
arrangements, and directed brokerage. MFRA lifts the veil of
mislabeled and misleading transactions, creates true
transparency and promotes meaningful competition. Merely
demanding more disclosure--while salutary up to a point--
risks encyclopedic and incomprehensible data dumps on
investors.
A more honest and straightforward, and thus more vibrantly
competitive, mutual fund market well serves the 95 million
Americans who entrust their savings to mutual funds--and not
incidentally, well serves the robustness of the mutual fund
industry itself. Mercer Bullar, founder of Fund Democracy and
sponsor of the recent Fund Summit in Oxford, Mississippi--
where 11 lawmakers, regulators, and industry leaders convened
to debate the direction of the industry--said of his
panelists that they all share the aspiration for ``America's
favorite retirement vehicle, a great institution, a great
industry, to provide the best service it can for America's
investors.'' That aspiration permeates the Mutual Fund Reform
Act of 2004. And central to that aspiration is the
recognition that scandal, cynicism, and revolt are inevitable
consequences of confusing and opaque cost schemes.
Time magazine notes, for example, that investors have been
flocking to ``separately managed accounts''--customized
investment vehicles with minimum investment requirements. One
noteworthy virtue, writes Time, of separately managed
accounts: ``fee transparency. Typically, separate-account
mangers charge a flat annual fee of 1.5% to 2.5% of assets.
In most cases there are none of the loads, redemption fees,
12b-1 marketing fees, trading commissions, or soft-dollar
costs that proliferate in the mutual-fund world and drive
annual expenses far higher than disclosed levels.'' The
vexation here is not merely with the ``hiddenness'' of many
of these costs--but with the very existence of such a
confusing and cynical welter of ways to siphon investors'
money. MFRA is a decisive answer to that vexation--and an
answer that well serves all Americans, not only the ones who
can afford the minimum investment requirements of separately
managed accounts and hedge funds.
Asset-based distribution expenses (Rule 12b-1)
A sales load was once an honest sales load. Then came Rule
12b-1. Designed in 1980 by the SEC, Rule 12b-1 permitted
funds to use fund assets, temporarily, for distribution and
market--to (1) stimulate purchases and thus redress temporary
net redemptions, and (2) increase the size of the fund so
that cost savings from economies of scale could be passed
along to investors. The theory was sound. But Rule 12b-1 has
wandered far from its original moorings. It has become a
permanent fixture of most fee schedules, and can cost
investors up to 1% of their investment every year. Over the
life of a retirement plan, that 1% can cost an investor 35%
to 40% of his or her retirement income. And it does not
appear that investors have benefited from economies of scale.
Nearly two-thirds of 12b-1 fees end up in the hands of
brokers. In other words, 12b-1 fees have become disguised
loads.
Fund management properly includes fund distribution. MFRA
accordingly places the distribution duty where it belongs.
MFRA gets funds out of the distribution business by
prohibiting asset-based distribution fees (such as 12b-1
fees)--but, importantly, amends the Investment Company Act of
1940 to make clear that fund advisers may use their adviser
fees for distribution expenses. What happens when fund
advisers use their own profits--instead of tapping directly
into investors' money--for distribution expenses?
Distribution expenses become very reasonable.
In negotiating their fees with an empowered and independent
board, advisers will now have to make the case that their
costs necessarily include specified distribution expenses.
And once advisers receive their fee, distribution expenses
will, dollar for dollar, reduce adviser profits. That dynamic
locates the incentive to keep distribution expenses
reasonable precisely where it belongs. And MFRA incorporates
one additional structural check on unreasonable distribution
expenses--one that goes to the heart of the inherent conflict
between fund managers and fund shareholders. If the board of
directors determines that certain distribution expenses are
not in the best interests of existing shareholders, then the
board may stipulate that no part of the adviser's fee may be
used for that expense. A distribution expense designed solely
to pump up the asset base of an already large fund, for
example, and not otherwise necessary to meet net redemptions,
would obviously well-serve the adviser, who collects a
percentage of net assets, but not necessarily existing
shareholders.
Importantly, MFRA does not prohibit distribution expenses
or sales charges. Charging a load (subject to NASD rules) is
fully justified--but call it a load, make it account-based
and don't disguise it in a permanent asset-based distribution
fee.
Indefensible brokerage practices
There is a reflexive preference in approaching our markets
for demanding ``disclosure'' as a total solution--and
sometimes as a total substitute for clear ethical and
practical judgments. But some practices cannot be rationally
defended. And some clear rules enrich and enliven our
markets. We do not tell football players that they can clip,
hold, or jump offside as long as they do so openly. We should
not tell fund advisers and broker-dealers that they may
misuse investor money with soft-dollar arrangements, revenue
sharing and directed brokerage as long as they file reports.
``Disclosure'' of these practices merely precipitates an even
more confusing blizzard of incomprehensible information--and
even further alienates average investors from meaningful
participation in the mutual fund market. As former SEC
Chairman Arthur Levitt aptly remarked, ``[t]he law of
unintended results has come into play: Our passion for full
disclosure has created fact-bloated reports, and prospectuses
that are more redundant than revealing.'' Three practices--
soft dollar arrangements, revenue sharing, and directed
brokerage--ought not clutter any mutual fund prospectus. And
neither funds nor fund advisers should be spending time and
money crafting elaborate disclosures and justifications of
ultimately indefensible practices. By simply prohibiting
these practices, MFRA vastly simplifies the disclosure
regime, and benefits all stakeholders.
Revenue sharing
Kiplinger.com commentator Steven Goldberg calls revenue
sharing ``the fund industry's most insidious practice . . .
It sounds benign, but it boils down to mutual fund payola,
giving brokers, financial planners or other financial
advisers a little extra compensation if they sell a load fund
to you. That is, a little something extra over and above the
load you're already paying.'' A ``little something''? Annual
revenue sharing payments to brokerage firms total an
estimated $2 billion. And investors listening to a broker's
``advice'' may not realize that the broker's ``Preferred
List'' of mutual funds is a function of this payola.
Moreover, revenue-sharing, like nearly two-thirds of 12b-1
money, goes to brokers, as a presumptive ``distribution''
expense--yet revenue sharing effectively circumvents the
elaborate rules capping 12b-1 fees at no more than 1% of
assets. The only difference is that revenue sharing payments
are made by the fund adviser, out of the adviser's fee--which
of course comes from the fund assets. Consumer Federation of
America, along with several consumer groups that have
endorsed MFRA, note the negative impact of revenue sharing,
despite the fact that such payments come from the adviser
rather than directly
[[Page S806]]
from fund assets: ``At best, by eating into the manager's
bottom line, the payments may reduce the likelihood that the
management fee will be reduced in response to economies of
scale. At worst, fund managers will pass along those costs to
shareholders in a form that is even less transparent than
directed brokerage payments.''
Revenue sharing aggravates the conflicted interests of both
brokers and fund advisers at the expense of fund
shareholders. On the one hand, brokers get payola out of the
fund adviser's management fee--and peddle funds they're paid
to peddle without the requisite regard for the investor's
best interests. On the other hand, fund advisers collectively
give away $2 billion of their evidently abundant fees to
promote yet further sales of fund shares, which increases
fund assets, which increases the adviser's fee, which makes
more money available for payola. MFRA breaks this investor-
hostile circular enrichment, and restores rational solicitude
for investors' money.
Soft dollar arrangements
Under soft dollar arrangements, brokers inflate their
commissions on portfolio trades and give credits to fund
managers in return. These credits are then used for research
services, software, hardware, and other manager
``overhead''--which directly and immediately benefit fund
managers, but only indirectly, if at all, benefit the
shareholders who pay for them. Moreover, these direct costs
to shareholders are not even reflected in the expense ratio,
because commissions--as with all transaction costs--are
excluded from the expense ratio. Thus, by using surreptitious
soft dollars, instead of honest hard dollars, the industry
effectively hides yet another significant cost of mutual fund
investment.
Soft dollars also effectively suppress entire markets.
Soft dollar arrangements distort the markets in both trade
executions and products and services ``purchased'' with soft
dollars--because there is little or no meaningful price
negotiation or competition in these markets. Why would there
be? Fund advisers use investors' money, through artificially
inflated brokerage commissions, and competition inevitably
and severely suffers when demand is driven by someone else's
money.
Managers should pay for their overhead out of their
management fee instead of forcing shareholders to pick up the
tab through artificially inflated brokerage commissions. MFRA
effectively ``unbundles'' the commission dollar. All
stakeholders can then more readily assess the true cost of
trade execution. And industry research and other unbundled
services, now purchased with hard dollars through traditional
negotiation, will acquire more authentic market values. Some
services will thrive; others will crater. That happens when
the market is healthy and transparent, and the demand side
cannot spend someone else's money.
MFRA's treatment of soft dollar arrangements, like its
treatment of 12b-1 fees, is inspired not by intent to
regulate private transactions--but to label such transactions
honestly. Just as a load is a load, and should be charged as
such, so research expense should be the fruit of competitive
negotiation for research--not the backdoor largesse of
forcing investors to pay inflated brokerage commissions.
John Montgomery of Bridgeway Funds perfectly summarized
the justification for banning soft dollars (as opposed to
mandating yet more elaborate ``disclosures'') when he
testified before the House Capital Markets Subcommittee in
March 2003: ``The bottom lines: Congress should not work to
improve disclosure of soft dollars; it should simply stop the
practice altogether. Ultimately, this will improve the
quality of decisions made on things soft dollars buy, save
shareholders some money, and greatly reduce the time that
advisers, auditors, regulators, and lawyers spend trying to
document the fairness of a firm's practice.''
Directed brokerage
Directed brokerage is the practice by a customer (such as
a mutual fund or affiliated person) of directing brokerage
business to a particular broker or dealer in exchange for
services other than trade executions. Examples of such
services include sales support (as with revenue sharing), or
administrative services. Directed brokerage seems benign--but
the effect is yet a further hidden cost to investors, in the
form of higher brokerage costs. Once brokerage is
``directed'' by a customer, the manager's ability to obtain
better or less expensive execution from a different broker is
disabled.
Last December, Louis Harvey, president of Dalbar Inc., a
Boston-based research company, told Investment News that the
practice of directed commissions obscures what best execution
actually costs. Thus, funds pay more than retail investors to
buy and sell stock. ``If the practice is done away with, it
will be replaced by competitive forces.''
In recognition of the indefensibility of the practice,
several funds announced recently that they are ceasing
directed brokerage arrangements. The industry's leading trade
association, the Investment Company Institute, likewise
recently advocated prohibiting directed brokerage.
Late trading
Late trading is already illegal. The policy problem with
late trading is not with the law, but with the practice of
processing some orders after the calculation of ``net asset
value'' (NAV), and thus share price, for that day. Typically,
mutual funds calculate their NAVs as of 4:00 p.m. EST, the
closing time of the major U.S. stock exchanges. The SEC's
Rule 22c-1 requires funds to calculate NAV at least once a
day. All orders to buy or sell mutual fund shares received
on a particular day are executed at the same price. Under
Rule 22c-1, orders to buy or sell mutual fund shares must
be executed at a price based on the NAV next calculated
after receipt of the order. The Rule therefore requires
that orders for most funds received after 4:00 p.m. be
executed using the next day's price.
``Late trading'' refers to the practice of submitting an
order to buy or redeem fund shares after the 4:00 p.m.
pricing time yet receiving that day's price rather than the
price set at 4:00 p.m. the following day, or placing a
conditional order prior to 4:00 p.m. that is either confirmed
or canceled after 4:00 p.m. A late trader typically seeks to
trade profitably on developments after 4:00 p.m., such as
earnings announcements or events in overseas markets. As
noted, late trading is already illegal.
But when is an order to buy or sell ``received'' under Rule
22c-1--when the fund receives the order, or when an
intermediary (such as a retail broker or a 401k
administrator) receives the order? To date, the SEC has
interpreted ``receipt'' as used in Rule 22c-1 to include
receipt of an order to buy or sell mutual fund shares by
retail brokers and other intermediaries. Investors may thus
place orders to buy or sell fund shares through broker-
dealers, through retirement accounts and through variable
insurance carriers, confident that they will receive that
day's price for the shares. According to some estimates,
mutual funds receive over half of their orders in the form of
aggregated orders provided by intermediaries after 4:00 p.m.
The SEC is currently reexamining its rules.
MFRA directs the SEC to enforce the current strict terms of
Rule 22c-1--but gives the SEC the authority to fashion rules
that accommodate investors transacting through their
preferred intermediaries. For example, if it can be verified
that intermediaries received their orders from their
customers before 4:00 p.m.--and the intermediaries have
systems in place that ensure compliance and permit
independent verification--then the rules developed by the SEC
may permit processing of such orders by the mutual fund after
the 4:00 p.m. close. MFRA's ultimate purpose is two-fold: (1)
preserve the appeal of mutual funds as a flexible and
investor-friendly vehicle for long-term investment; and (2)
prevent the unfair dilution of mutual fund value by short-
term predators.
Market timing
``I have no interest in building a business around market
timers, but at the same time I do not want to turn away $10-
20m,'' wrote Richard Garland, then head of Janus Capital
Groups international business to a colleague. Thus did Mr.
Garland succinctly describe the sirenic tug that triggered
the current industry scandals.
``Market timing'' refers to a form of trading mutual fund
shares in which short-term investors seek to exploit a
perceived difference between the fund's calculated NAV and
the actual underlying value of the fund's portfolio holdings.
As earlier noted, funds must calculate their NAV and set
their share price at least once a day--typically at 4 p.m.
EST. Sometimes, the closing price of a portfolio security at
4:00 p.m. EST may not reflect its current market value. For
example, an event may occur or news may be released after
4:00 p.m. that can reasonably be expected to have an impact
on a security's price when trading resumes. Securities that
trade overseas are especially fertile ground for market
timers, because many hours may elapse between the close of
trading in an overseas market and the calculation of the
fund's NAV.
Market timers seek to reap quick profits in mutual fund
shares from these arbitrage opportunities. A market timer
seeks to purchase a fund's shares based on events occurring
before the fund's NAV calculation. For example, a market
timer might guess that rising prices in the U.S. securities
markets indicate likely higher prices in overseas markets the
next day. The market timer would purchase mutual fund shares
that reflect stale closing prices in overseas markets. The
market timer would then redeem the fund's shares the next
day, when the fund's next NAV calculation would reflect the
presumably higher prices in overseas markets. The market
timer seeks to make a quick and relatively risk-free profit.
Market timing is not specifically illegal--hence the
conundrum facing many fund advisers and other industry
players. But many mutual funds discourage market timing,
often resolutely, because timers take their profits directly
out of the value of shares held by long-term investors--i.e.,
the very category of the 95 million American mutual fund
investors most likely to have entrusted retirement and
college savings to mutual funds. Sale of fund shares at an
artificially low price based on stale information dilutes the
ownership interest of existing shareholders. Similarly,
redemption of fund shares at an artificially high price
dilutes the interest of remaining shareholders.
Some question whether market timing strategies really work.
Importantly, however, merely the perception that market
timing works, and is available, encourages rapid trading,
which burdens funds regardless of whether the underlying
timing strategy works. A fund forced to meet multiple
redemptions from rapid trading activity may be obliged to
keep more fund assets in cash
[[Page S807]]
or sell more portfolio securities to meet such redemptions--
which increases the fund's transactions costs at the expense
of existing shareholders.
As noted earlier, MFRA's overriding purpose with respect to
trading abuses is two-fold: (1) preserve the appeal of mutual
funds as a flexible and investor-friendly vehicle for long-
term investment; and (2) prevent the unfair dilution of
mutual fund value by short-term predators. MFRA thus
addresses the problem of market timing with solicitude for
the long-term investor, and steers market timing away from
the mutual funds. MFRA provisions include:
Requiring explicit disclosure in fund offering documents of
market timing policies and specific procedures to enforce
policies--and requiring that such a policy be deemed a
``fundamental investment policy'' (which cannot, under the
Investment Company Act of 1940, be changed without a
shareholder vote).
Requiring that any fund that declines to adopt enforceable
restrictions on market timing must so advise prospective
investors in its prospectus, advertising, and otherwise as
determined by the SEC.
Requiring regular fair value pricing--so that NAV more
fairly reflects actual portfolio value, and opportunities for
predatory arbitrage are diminished.
Requiring mandatory redemption fees for short-term trading
(which fees are deposited back into fund assets, thus
benefiting all shareholders, while discouraging arbitrage by
increasing its cost).
Permitting (but not requiring) redemption fees exceeding
two percent for short-term transactions that are unfair to
shareholders.
title 4: studies
Learning from experiences: Further study
MFRA seeks to perpetuate the dialogue and to preserve the
wisdom gathered from hard experience. Several studies are
directed:
A study and report by the SEC on the consequences of the
inherent conflict of interest confronting fund advisers, the
extent to which legislative or regulatory measures could
minimize this conflict of interest, and the extent to which
legislative or regulatory measures could incentivize internal
management of mutual funds.
A study and report by the General Accounting Office (GAO)
on coordination of enforcement efforts between SEC
headquarters, SEC regional offices, and state regulatory and
law enforcement entities.
A study and report by GAO on the SEC's current
organizational structure with respect to investment company
regulation, and whether that organizational structure
sufficiently credits the importance of mutual fund oversight
to the 95 million mutual fund investors in America, and
whether certain features of that organizational structure,
such as the separation of regulatory and enforcement
functions, conduce to optimal regulatory understanding of
current practices.
A study and report by the SEC on trends and causes in
arbitration claims since 1995, and means to avert claims.
A study and report by the SEC on whether additional
regulation of alternative investment vehicles, such as hedge
funds, is appropriate to deter recurrence of trading abuses,
manipulation of regulated investment companies by unregulated
investment companies, or other distortion that may harm
investors in shares of registered investment companies.
A study by the SEC, coupled with regulatory and acquisition
initiatives as appropriate, designed to enhance the role of
the internet in educating investors and providing timely
information about laws, regulations, enforcement proceedings
and individual funds. Further, the SEC should study the
feasibility of mandating that funds have websites, and
disclosure thereupon of material filings and fund
information. Further, the SEC should take necessary steps to
ensure that its EDGAR system is user-friendly and contains a
search-engine that facilitates expeditious location of
material information in the SEC's database.
______
By Mr. REID:
S. 2060. A bill to permit certain local law enforcement officers to
carry firearms on aircraft; to the Committee on Commerce, Science, and
Transportation.
Mr. REID. Mr. President, I rise today to introduce legislation to
make it easier for local law enforcement officers to travel across the
country. Whether on official travel or personal travel, Federal law
enforcement officers are allowed to carry firearms with them throughout
their travel. The legislation I am introducing today would extend the
same privilege--and responsibility--to local law enforcement officers.
Ever since the horrific terrorist attacks that occurred on September
11, we have seen how our local emergency responders, including local
law enforcement officers, play a vital role in protecting not just
their local communities, but the entire Nation. We think of local law
enforcement officers as the Nation's first responders, but they are
also the Nation's early preventers. They are the first to identify
local crimes that could turn into National attacks. They are the first
to report suspicious behavior that could thwart a future terrorist
attack. Stopping a terrorist threat before it becomes an attack is the
best way to keep our Nation safe. That effort relies upon the eyes,
ears and experience of our Nation's law enforcement officers.
A terrorist attack in any city is a national concern. Local law
enforcement officers are a crucial element of the plan to protect our
Nation. I appreciate the help of Detective David Kallas and General
Counsel John Dean Harper for bringing this issue to my attention. This
bill will help give them and their law enforcement colleagues the
standing they deserve as they continue to protect our hometowns and the
Nation.
______
By Mr. CONRAD (for himself, Mr. Graham of Florida, Mr.
Rockefeller, Mr. Akaka, and Mr. Johnson):
S. 2063. A bill to require the Secretary of Veterans Affairs to carry
out a demonstration projects on priorities in the scheduling of
appointments of veterans for health care through the Department of
Veterans Affairs, and for other purposes; to the Committee on Veterans'
Affairs.
Mr. CONRAD. Mr. President, as I visit with veterans in North Dakota
and here in Washington, too often I hear that waiting periods for
medical care, and particularly for specialty care, are too long. We owe
an unbelievable debt to American's veterans, and it is just not right
that they cannot get the medical care they need when they need it. The
legislation I am introducing today begins to address this problem.
Last month, as Ranking Member of the Senate Budget committee, I
scheduled a field hearing in Bismarck, ND, to listen to the concerns of
veterans regarding funding for the VA. Because more than fifty percent
of veterans in North Dakota live in highly rural areas with limited
access to VA medical facilities, I was particularly concerned about
funding for VA medical care and the continuing reports from veterans
regarding access to care and delays in the scheduling of appointments
for medical care, especially speciality care.
Last September, I expressed similar concerns in testimony to the VA
CARES Commission during field hearings in Minneapolis. I emphasized to
Commission members that many North Dakota veterans have to travel
hundreds of miles to access health care from the Fargo VA Medical
Center or another FA facility in VISN 23 and that the VA must do more
to ensure timely access for appointments and other VA medical services.
Reports in the national press make clear, however, that significant
problems remain in the scheduling of appointments for medical care,
particularly specialty care. Further complicating matters, there are
many questions regarding the reliability of VA data on waiting list for
appointments and the causes for the waiting periods according to
reports in 2003 by the Department of Veterans Affairs Office of
Inspector General and in 2000 by the General Accounting Office.
In North Dakota, several veterans service officers have reported a
number of veterans waiting months for eye care, orthopedics and one
veteran waiting almost ten months for back surgery. Another veteran,
from the Bismarck area, was required to travel to Iowa for cancer
treatment.
In view of these continuing concerns, I am today introducing
legislation that would require the VA to undertake a two year pilot
demonstration to study the implementation, cost and impact on VA
services of several recent directives by the VA relating to the
scheduling of medical appointments. The demonstration would be
undertaken in three VISN networks, one highly rural, one rural, and one
urban, that represent a cross-section of VA providers.
Under the demonstration, the VA would offer participating veterans,
both new enrollees and established patients, service-connected and non-
service connected, an appointment for primary care evaluation,
hospitalization including specialty care or outpatient care within a 30
day period. If the VA facility is unable to provide the medical care
within the designated period, the Department would make arrangements
for the care at another VA facility or non-VA facility. Every effort,
[[Page S808]]
however, would be made to provide the medical care for the veteran
through the VA healthcare network.
Finally, because of concerns regarding the accuracy of VA data on
appointment periods, the bill requires the VA to report to Congress by
FY 2007 on waiting periods for health care appointments, primary care
and speciality care services. The VA would be required to report on the
waiting periods for appointments by VA facility and VISN, include a
breakdown of waiting periods by speciality, and submit recommendations
to Congress for addressing the shortages of medical personnel. Finally,
the legislation requests the Secretary, on the basis of the two year
demonstration, to report to Congress by FY 2007 on the costs associated
with implementation of the VA directive in the three VISNs and to
report on the estimated cost to fully implement the directive
throughout the VA system.
I am very pleased that my distinguished colleagues, Ranking Member of
the Senate Committee on Veterans Affairs, Senator Bob Graham and
Senators Jay Rockefeller, Tim Johnson and Daniel Akaka are joining me
in sponsoring this legislation. I am also honored to have the strong
support of the Disabled American Veterans and the AMVETS for this
legislative proposal. I want to express my appreciation to Dave Gorman,
DAV Executive Director; Joseph Violante, DAV National Legislative
Director; Mike Dobmeier, former National Commander of the DAV and Rick
Jones, AMVETS, National Legislative Director for their support.
It is critical that Congress and the Administration address the
concerns of our veterans on the issue of waiting periods for medical
care before adjourning of the 108th Congress. Veterans returning from
Iraq, Afghanistan and from other peacekeeping deployments around the
globe should not have to wait months for needed medical care. The needs
of injured military personnel are great and the VA system will play a
key role in their recovery. I encourage the Senate Committee on
Veterans Affairs to review this legislation carefully and to act
favorably on the measure before Congressional adjournment this fall.
I ask unanimous consent that the text of this legislation along with
the letters of endorsement from the Disabled American Veterans and the
AMVETS be printed in the Record.
There being no objection, the material was ordered to be printed in
the Record, as follows:
S. 2063
Be it enacted by the Senate and House of Representatives of
the United States of America in Congress assembled,
SECTION 1. DEMONSTRATION PROJECT ON PRIORITIES IN SCHEDULING
OF APPOINTMENTS OF VETERANS FOR HEALTH CARE
THROUGH THE DEPARTMENT OF VETERANS AFFAIRS.
(a) Project Required.--The Secretary of Veterans Affairs
shall carry out a demonstration project to assess the
feasibility and advisability of providing for priorities in
the scheduling of appointments of veterans for health care
through the Department of Veterans Affairs in accordance with
the following:
(1) The Department of Veterans Affairs Waiting Time for
Appointments goals (30-30-20) of 2000.
(2) The provisions of the Veterans Health Administration
directive entitled ``Priority For Outpatient Medical Services
and Inpatient Hospital Care'' (VHA Directive 2002-059).
(3) The provisions of the Veterans Health Administration
directive entitled ``Priority Scheduling for Outpatient
Medical Services and Inpatient Hospital Care for Service
Connected Veterans'' (VHA Directive 2003-062), dated October
23, 2003.
(b) Period of Project.--The Secretary shall carry out the
demonstration project during the two-year period beginning on
October 1, 2004.
(c) Locations of Project.--(1) The Secretary shall carry
out the demonstration project throughout each of three
Veterans Integrated Service Networks (VISNs) selected by the
Secretary for purposes of the project.
(2) In selecting Veterans Integrated Service Networks under
paragraph (1), the Secretary shall ensure that the project is
carried out in urban, rural, and highly rural areas.
(d) Project Requirements and Authorities.--(1) Except as
provided in paragraphs (2) and (3), in carrying out the
demonstration project the Secretary shall schedule
appointments for veterans for outpatient medical services and
inpatient hospital care through the Department in accordance
with the goals and directives referred to in subsection (a).
(2) The veterans covered by the demonstration project shall
include any veterans residing in a Veterans Integrated
Service Network covered by the project, whether new or
current enrollees with the Department and including veterans
with service-connected disabilities and veterans with non-
service-connected disabilities.
(3) The Secretary shall schedule each appointment under the
demonstration project in a Department facility unless, as
determined by the Secretary--
(A) the cost of scheduling the appointment in a Department
facility exceeds the cost of scheduling the appointment in a
non-Department facility to an unreasonable degree; or
(B) the scheduling of the appointment in a non-Department
facility is required for medical or other reasons.
(4) In carrying out the demonstration project, the
Secretary may utilize the Preferred Pricing Program (PPP) of
the Department, or similar programs or authorities, in the
locations covered by the project.
(5) In this subsection, the terms ``Department facility''
and ``non-Department facility'' have the meaning given such
terms in section 1701 of title 38, United States Code.
(e) Annual Reports on Waiting Times for Appointments for
Care and Services.--(1) Not later than January 31 each year,
the Secretary shall submit to the Committees on Veterans'
Affairs of the Senate and the House of Representatives a
report on the waiting times of veterans for appointments for
health care and services from the Department during the
preceding year.
(2) Each report under paragraph (1) shall specify, for the
year covered by the report, the following:
(A) A tabulation of the waiting time of veterans for
appointments with the Department for each category of primary
or specialty care or services furnished by the Department,
broken out by particular Department facility and by Veterans
Integrated Service Network.
(B) An identification of the categories of specialty care
or services for which there are lengthy delays for
appointments at particular Department facilities or
throughout particular Veterans Integrated Service Networks,
and, for each category so identified, recommendations for the
reallocation of personnel, financial, and other resources to
address such delays.
(f) Report on Project.--The report under subsection (e) in
2007 shall also include information on the demonstration
project under this section. That information shall include--
(1) a description of the project, including the Veterans
Integrated Service Networks selected for the project, the
number of veterans covered by the project, the number and
timeliness of appointments scheduled under the project, and
the costs of carrying out the project;
(2) an assessment of the feasibility and advisability of
implementing the project nationwide; and
(3) such other information with respect to the project as
the Secretary considers appropriate.
____
Disabled American Veterans,
Washington, DC, February 4, 2004.
Hon. Kent Conrad,
U.S. Senate, Hart Senate Office Building, Washington, DC.
Dear Senator Conrad: On behalf of the more than one million
members of the Disabled American Veterans (DAV), we are
pleased to support your proposed legislation to assess the
feasibility and advisability of providing priorities in the
scheduling of appointments through the Department of Veterans
Affairs (VA) in accordance with VA's own access directives
and goals.
The highest priority for VA health care must always be the
core group of veterans the system was designed to treat:
service-connected disabled veterans, the medically indigent,
and those with special needs and catastrophic disabilities.
As you are aware, in the past year, the Secretary of Veterans
Affairs has issued two directives relating to priority care
and the scheduling of appointments for service-connected
veterans. In addition, VA has set access standards for
patient appointments and struggled with improving its access
goals of 30-30-20 for primary and specialty care
appointments; specifically, access to non-urgent primary care
appointments within 30 days, non-urgent appointments with a
specialist within 30 days of the date of referral, and being
seen by a provider at VA health care facilities within 20
minutes of a patient's scheduled appointment. Despite VA's
efforts, we continue to hear reports from veterans of lengthy
delays in getting appointments for both primary and specialty
health care and services.
Through a pilot project in three Veterans Integrated
Service Networks representing urban, rural, and highly rural
areas, your bill seeks to improve access for veterans seeking
VA health care and to evaluate the personnel, cost, and other
resources necessary for VA to meet its own access goals. The
annual reporting requirements about delay times for primary
and specialty care appointments nationwide, and
recommendations for the allocation of personnel, financial,
and other resources needed to address such delays are
essential and will help Congress and VA better understand the
actual resources necessary to meet veterans health care needs
in a timely manner.
It has been abundantly clear for some time that our
government needs to develop long-term solutions to the
funding problems facing the veterans health care system. This
[[Page S809]]
proposed measure will help begin to address this issue. The
DAV and the other major veterans groups are united in our
support for legislation that would guarantee an adequate
level of funding for the VA medical system as the key to
ensuring timely access to quality health care for our
nation's veterans. The Congress and the Administration must
make the commitment to provide the necessary resources to
fulfill the obligation to care for America's sick and
disabled vetrans--now and in the future.
Thank you for your continued interest in this issue, and
for sponsoring this important legislation. We greatly
appreciate your efforts on behalf of our nation's sick and
disabled veterans.
Sincerely,
Alan W. Bowers,
National Commander.
____
AMVETS,
Lantham, MD, February 9, 2004.
Hon. Kent Conrad,
Hart Senate Office Building, U.S. Senate, Washington, DC.
Dear Senator Conrad: It is our understanding that you plan
to offer legislation that would help reduce the time veterans
must wait for a VA doctor's appointment. AMVETS, a nationwide
veterans service organization, is pleased to support your
proposal.
The need for reducing the time veterans wait for medical
exams is well documented. A report issued last year by the
President's task force on improving veterans health care
delivery said there were nearly 300,000 veterans waiting for
medical services at the start of 2003.
While progress is being made to gain more timely care for
veterans, the Secretary's decision to halt enrollment of
certain veterans for the remainder of the year and into the
next fiscal year is another clear indicator that VA cannot
meet its own standard for scheduling and appointment within
30 days.
Your proposal would establish a two-year pilot program in
three Veterans Integrated Service Networks--a highly rural
VISN, a rural VISN, and an urban VISN--to improve access for
veterans seeking care and determine how much such standards
would cost in terms of resources and impact on other VA
medical services.
In effect, the bill provides a valuable tool to use for
reducing waiting times and responding to the healthcare needs
of veterans. Moreover, it would provide vital information on
the actual resource needs necessary to ensure veterans earned
benefits are provided in a timely manner.
We are grateful for your leadership in proposing this
legislation, and we thank you for supporting the men and
women who have served America's Armed Forces.
Sincerely,
Richard A. Jones,
National Legislative Director.
Mr. GRAHAM. Mr. President, I rise today with my friend, Senator
Conrad, in support of legislation to ensure that the Department of
Veterans Affairs meets appropriate health care access standards.
With more than 60,000 veterans nationwide still on waiting lists to
see a doctor--in some cases for more than a year--we must take measures
to combat this problem. Right now, at the Gainesville VA Hospital in my
home State of Florida, there are 1,085 veterans that have been waiting
6 months or longer to see a primary care doctor. And at the Fort Myers
Outpatient Clinic, almost 600 veterans must wait at least a year to see
an eye doctor. While VA has made improvements over the past year, I
remain skeptical of their ability to rectify the problem. My concerns
were exacerbated by a May 2003 Inspector General report which concluded
that VA needed to improve their accuracy in tracking patients on
waiting lists.
The legislation Senator Conrad and I are introducing today would
establish three pilot programs that seek to improve the timeliness of
veterans' access to VA health care services. The programs would first
require VA to meet the access standards they set for themselves at 30
days for a primary care appointment and 30 days for a specialty care
appointment. If VA cannot schedule an appointment for a patient within
this timeline, then they must provide for the service elsewhere, such
as through contracts with local private health care facilities.
This initiative would merely put VA's already existing access
standards into law, reinforcing VA's own targets and sending a message
that we are willing to work with VA to help combat this problem. It has
been over a year now that the Department has dealt with waiting lists
and has yet to eliminate them. We cannot continue to sit back and
criticize--we have provided the funding VA needs, and now we must also
try to assist them in other ways.
Most importantly, the pilot program would be cost-neutral because it
grants the Secretary discretion to defer from the access requirements
if the cost of outside care exceeds that of VA's. Therefore, there will
be no detriment to the VA system for providing timely access to needed
health care services. I know my colleagues agree that our Nation's
veterans deserve quality health care within a reasonable time frame,
and I urge them to support this legislation.
____________________