[Congressional Record Volume 155, Number 158 (Wednesday, October 28, 2009)]
[Senate]
[Pages S10855-S10858]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. AKAKA:
  S. 1964. A bill to require disclosure of financial relationships 
between brokers and dealers and mutual fund companies, and of certain 
commissions paid by mutual fund companies; to the Committee on Banking, 
Housing, and Urban Affairs.
  Mr. AKAKA. Mr. President, today, I am introducing the Mutual Fund 
Transparency Act of 2009. Mutual funds are vital investment vehicles 
for middle-income Americans that provide diversification and 
professional money management. Many working families rely on their 
mutual fund investments to pay for their children's education, prepare 
for retirement, and attain other financial goals.
  I first introduced a version of this legislation in 2003. That fall, 
appalling abuses of investor trust were exposed. Ordinary investors 
were being harmed by the greed of brokers, mutual fund employees, and 
institutional and large investors. The transgressions made it clear 
that the boards of mutual fund companies were not providing sufficient 
oversight and failed to adequately protect the interests of their 
shareholders.
  After the introduction of my bill, Securities and Exchange 
Commission, SEC, Chairman William Donaldson proposed several rules that 
mirrored the provisions in my bill, including a requirement that funds 
relying on certain exemptive rules have an independent chairman and 
that 75 percent of board directors be independent. However, legal 
actions taken against the SEC by the Chamber of Commerce and subsequent 
inaction under his successor, Chairman Christopher Cox, have prevented 
the adoption of these rules. The SEC needs additional statutory 
authority to finish these reforms and ensure that investors can rely on 
independent mutual fund boards to protect their interests.
  My bill will ensure the independence of mutual fund boards, increase 
the transparency of fees and expenses of mutual funds, and impose a 
fiduciary duty on all investment advisors.
  I have included in this legislation a number of provisions intended 
to ensure the independence of mutual fund boards. Poor board governance 
was a contributing factor to the mutual fund scandals in 2003. 
Independent directors must have a dominant presence on the board to 
ensure that investors' interests are the top priority. Once again, my 
legislation requires mutual fund boards to have an independent chairman 
and that 75 percent of their members be independent. The legislation 
strengthens the definition of an independent director. These changes 
will ensure that the interest of investors will be the paramount 
priority of the board.
  My legislation will ensure that investors are provided with relevant 
and meaningful disclosures from which they can make better informed 
decisions. Mr. President, my bill will increase the transparency of the 
complex financial relationship between brokers and mutual fund 
companies in ways that are both meaningful and easy to understand for 
investors. Shelf-space payments and revenue-sharing agreements between 
mutual fund companies and brokers present conflicts of interest that 
must be disclosed to investors. Without such disclosures, investors 
cannot make informed financial decisions. Investors may believe that 
brokers are recommending funds based on the expectation of solid 
returns or low volatility, when the broker's recommendation may be 
influenced by hidden broker commissions. I have included a point-of-
sale disclosure requirement in my legislation. In my bill, investors 
would have to be provided with the amount of differential payments and 
average fees for comparable transactions. My legislation also requires 
that confirmation notices be provided for mutual fund transactions, 
which will indicate how their broker was compensated.
  Investors are not provided with a complete and accurate idea of the 
expenses involved with owning a particular fund. Consumers often 
compare the expense ratios of funds when making investment decisions. 
However, expense ratios fail to take into account the cost of 
commissions in the purchase and sale of securities. To further increase 
the transparency of the actual costs of the fund, brokerage commissions 
must be counted as an expense in filings with the SEC and included in 
the calculation of the expense ratio. Currently, brokerage commissions 
are disclosed to the SEC, but not to individual investors. Brokerage 
commissions are only disclosed to investors upon request. My bill 
strengthens brokerage commission disclosure provisions and ensures that 
commissions will be included in a document that investors have access 
to and can utilize. The inclusion of brokerage commissions in the 
expense ratio creates an incentive to reduce the use of soft dollars. 
Soft dollars can be used to lower expenses since most purchases using 
soft dollars do not count as expenses and are not calculated into the 
expense ratio. This change will make it easier for investors to know 
the true cost of the fund and compare the expense ratios of funds 
meaningfully.
  When I reintroduced a version of this bill in 2005, I added a 
provision pertaining to the fiduciary duty of brokers. Although I have 
modified that provision for the current bill, my intent to apply a 
fiduciary duty to brokers remains the same. This is an essential 
provision because it ensures that all financial professionals have the 
same responsibility to act in the best interests of their clients 
whether they are an investment advisor or a broker.
  We must improve the financial literacy of mutual fund investors so 
that they can make more sound investment decisions. I have included a 
requirement that the SEC study financial literacy among mutual fund 
investors. The SEC would be required to develop a strategy to increase 
the financial literacy of investors that results in positive change in 
investor behavior. In addition, the bill requires the Comptroller 
General of the United States to conduct a study on mutual fund 
advertising and make recommendations to improve investor protections 
and ensure that investors can make informed financial decisions when 
purchasing shares.
  We must enact this vital legislation to help protect the investments 
that our working families make in mutual

[[Page S10856]]

funds. These reforms are long overdue. I will build upon the 
administration's regulatory modernization proposal on fiduciary duty 
for brokers and pre-sale disclosure of mutual fund expenses.
  I look forward to working with my friend, SEC Chairman Mary Schapiro, 
to bring about structural reform in the mutual fund industry and 
increase disclosures in order to provide useful and relevant 
information to mutual fund investors.
  Mr. President, I ask unanimous consent that the text of the bill and 
letters of support be printed in the Record.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:

                                S. 1964

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

     SECTION 1. SHORT TITLE.

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

     SEC. 2. DISCLOSURE OF FINANCIAL RELATIONSHIPS BETWEEN BROKERS 
                   AND DEALERS AND MUTUAL FUND COMPANIES.

       (a) In General.--Section 15(b) of the Securities Exchange 
     Act of 1934 (15 U.S.C. 78o(b)) is amended by adding at the 
     end the following:
       ``(13) Confirmation of transactions for mutual funds.--
       ``(A) In general.--Each broker and dealer shall disclose in 
     writing to customers that purchase the shares of any open-end 
     or closed-end company registered under section 8 of the 
     Investment Company Act of 1940 (15 U.S.C. 80a-8) or any 
     interest in a unit investment trust or municipal securities 
     registered under this title used for education savings 
     plans--
       ``(i) the amount of any compensation received or to be 
     received by the broker or dealer in connection with such 
     transaction from any sources; and
       ``(ii) such other information as the Commission determines 
     appropriate.
       ``(B) Revenue sharing.--The term `compensation' under 
     subparagraph (A) includes any direct or indirect payment made 
     by an investment adviser (or any affiliate of an investment 
     adviser) to a broker or dealer for the purpose of promoting 
     the sales of securities of an entity described in 
     subparagraph (A), and payments made by an underwriter of the 
     fund to a broker or dealer.
       ``(C) Timing of disclosure.--The disclosure required under 
     subparagraph (A) shall be provided or sent to a customer not 
     later than the date of the completion of the transaction.
       ``(D) Limitation.--The disclosures required under 
     subparagraph (A) may not be made exclusively in--
       ``(i) a registration statement or prospectus of an entity 
     described in subparagraph (A); or
       ``(ii) any other filing of an entity described in 
     subparagraph (A) with the Commission.
       ``(E) Commission authority.--
       ``(i) In general.--The Commission shall issue such final 
     rules or regulations as are necessary to carry out this 
     paragraph, not later than 1 year after the date of enactment 
     of the Mutual Fund Transparency Act of 2009.
       ``(ii) Form of disclosure.--Disclosures under this 
     paragraph shall be in such form as the Commission shall 
     require by rule.
       ``(F) Definitions.--In this paragraph--
       ``(i) the terms `open-end company' and `closed-end company' 
     have the same meanings as in section 5 of the Investment 
     Company Act of 1940 (15 U.S.C. 80a-5);
       ``(ii) the term `unit investment trust' has the same 
     meaning as in section 4 of the Investment Company Act of 1940 
     (15 U.S.C. 80a-4); and
       ``(iii) the term `education savings plan' means a qualified 
     tuition program described in section 529(b)(1)(A)(ii) of the 
     Internal Revenue Code of 1986.''.
       (b) Disclosure of Brokerage Commissions.--Section 30 of the 
     Investment Company Act of 1940 (15 U.S.C. 80a-29) is amended 
     by adding at the end the following:
       ``(k) Disclosure of Brokerage Commissions.--The Commission, 
     by rule, shall require that brokerage commissions as an 
     aggregate dollar amount and percentage of assets paid by an 
     open-end or closed-end company or a unit investment trust or 
     issuer of municipal securities during the 5-year period 
     preceding the date of the transaction be included in any 
     disclosure of the amount of fees and expenses that may be 
     payable by the holder of the securities of such company for 
     purposes of--
       ``(1) the registration statement of that company; and
       ``(2) any other filing of that company with the Commission, 
     including the calculation of expense ratios.''.

     SEC. 3. MUTUAL FUND GOVERNANCE.

       (a) Independent Fund Boards.--Section 10(a) of the 
     Investment Company Act of 1940 (15 U.S.C. 80a-10(a)) is 
     amended--
       (1) by striking ``shall have'' and inserting the following: 
     ``shall--
       ``(1) have'';
       (2) by striking ``60 per centum'' and inserting ``25 
     percent'';
       (3) by striking the period at the end and inserting a 
     semicolon; and
       (4) by adding at the end the following:
       ``(2) have as chairman of its board of directors an 
     interested person of such registered company; or
       ``(3) permit any person (other than an interested person, 
     as described in paragraph (1)) to serve as a member of its 
     board of directors, unless that person--
       ``(A) is approved or elected by the shareholders of such 
     registered investment company at least once every 5 years; 
     and
       ``(B) has been found, on an annual basis, by a majority of 
     the directors who are not interested persons, after 
     reasonable inquiry by such directors, not to have any 
     material business or familial relationship with the 
     registered company, a significant service provider to the 
     company, or any entity controlling, controlled by, or under 
     common control with such service provider, that could 
     reasonably be interpreted as a conflict of interest or cast 
     doubt on the independence of the director.''.
       (b) Action by Independent Directors.--Section 10 of the 
     Investment Company Act of 1940 (15 U.S.C. 80a-10) is amended 
     by adding at the end the following:
       ``(i) Action by Board of Directors.--No action taken by the 
     board of directors of a registered investment company may 
     require the vote of a director who is an interested person of 
     such registered investment company.
       ``(j) Independent Committee.--
       ``(1) In general.--The members of the board of directors of 
     a registered investment company who are not interested 
     persons of such registered investment company shall establish 
     a committee comprised solely of such members, which committee 
     shall be responsible for--
       ``(A) selecting persons to be nominated for election to the 
     board of directors; and
       ``(B) adopting qualification standards for the nomination 
     of directors.
       ``(2) Disclosure.--The standards developed under paragraph 
     (1)(B) shall be disclosed in the registration statement of 
     the registered investment company.''.
       (c) Definition of Interested Person.--Section 2(a)(19) of 
     the Investment Company Act of 1940 (15 U.S.C. 80a-2(a)(19)) 
     is amended--
       (1) in subparagraph (A)--
       (A) in clause (iv), by striking ``two'' and inserting 
     ``5''; and
       (B) by striking clause (vii) and inserting the following:
       ``(vii) any natural person who has served as an officer or 
     director, or as an employee within the preceding 10 fiscal 
     years, of an investment adviser or principal underwriter to 
     such registered investment company, or of any entity 
     controlling, controlled by, or under common control with such 
     investment adviser or principal underwriter;
       ``(viii) any natural person who has served as an officer or 
     director, or as an employee within the preceding 10 fiscal 
     years, of any entity that has within the preceding 5 fiscal 
     years acted as a significant service provider to such 
     registered investment company, or of any entity controlling, 
     controlled by, or under the common control with such service 
     provider;
       ``(ix) any natural person who is a member of a class of 
     persons that the Commission, by rule or regulation, 
     determines is unlikely to exercise an appropriate degree of 
     independence as a result of--

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

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

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

       (d) Definition of Significant Service Provider.--Section 
     2(a) of the Investment Company Act of 1940 (15 U.S.C. 80a-
     2(a)) is amended by adding at the end the following:
       ``(54) Significant service provider.--
       ``(A) In general.--Not later than 270 days after the date 
     of enactment of the Mutual Fund Transparency Act of 2009, the 
     Commission shall issue final rules defining the term 
     `significant service provider'.
       ``(B) Requirements.--The definition developed under 
     paragraph (1) shall include, at a minimum, the investment 
     adviser and principal underwriter of a registered investment 
     company for purposes of paragraph (19).''.

     SEC. 4. FINANCIAL LITERACY AMONG MUTUAL FUND INVESTORS STUDY.

       (a) In General.--The Securities and Exchange Commission 
     shall conduct a study to identify--
       (1) the existing level of financial literacy among 
     investors that purchase shares of open-end companies, as that 
     term is defined

[[Page S10857]]

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

     SEC. 5. STUDY REGARDING MUTUAL FUND ADVERTISING.

       (a) In General.--The Comptroller General of the United 
     States shall conduct a study on mutual fund advertising to 
     identify--
       (1) existing and proposed regulatory requirements for open-
     end investment company advertisements;
       (2) current marketing practices for the sale of open-end 
     investment company shares, including the use of unsustainable 
     past performance data, funds that have merged, and incubator 
     funds;
       (3) the impact of such advertising on consumers; and
       (4) recommendations to improve investor protections in 
     mutual fund advertising and additional information necessary 
     to ensure that investors can make informed financial 
     decisions when purchasing shares.
       (b) Report.--Not later than 1 year after the date of 
     enactment of this Act, the Comptroller General of the United 
     States shall submit a report on the results of the study 
     conducted under subsection (a) to--
       (1) the Committee on Banking, Housing, and Urban Affairs of 
     the United States Senate; and
       (2) the Committee on Financial Services of the House of 
     Representatives.

     SEC. 6. POINT-OF-SALE DISCLOSURE.

       (a) In General.--Section 15(b) of the Securities Exchange 
     Act of 1934 (15 U.S.C. 78o(b)), as amended by section 2 of 
     this Act, is amended by adding at the end the following:
       ``(14) Broker and dealer disclosures in mutual fund 
     transactions.--
       ``(A) In general.--Each broker and dealer shall disclose in 
     writing to each person that purchases the shares of an open-
     end or closed-end company registered under section 8 of the 
     Investment Company Act of 1940 (15 U.S.C. 80a-8) or any 
     interest in a unit investment trust or municipal securities 
     registered under this title--
       ``(i) the source and amount, in dollars and as a percentage 
     of assets, of any compensation received or to be received by 
     the broker or dealer in connection with such transaction from 
     any sources;
       ``(ii) the amount, in dollars and as a percentage of 
     assets, of compensation received in connection with 
     transactions in shares of other investment company shares 
     offered by the broker or dealer, if materially different from 
     the amount under clause (i);
       ``(iii) comparative information that shows the average 
     amount received by brokers and dealers in connection with 
     comparable transactions, as determined by the Commission; and
       ``(iv) such other information as the Commission determines 
     appropriate.
       ``(B) Revenue sharing.--The term `compensation' under 
     subparagraph (A) shall include any direct or indirect payment 
     made by an investment adviser (or any affiliate of an 
     investment adviser) to a broker or dealer for the purpose of 
     promoting the sales of securities of a registered investment 
     company.
       ``(C) Timing of disclosure.--The disclosures required under 
     subparagraph (A) shall be made to permit the person 
     purchasing the shares to evaluate such disclosures before 
     deciding to engage in the transaction.
       ``(D) Limitation.--The disclosures required under 
     subparagraph (A) may not be made exclusively in--
       ``(i) a registration statement or prospectus of a 
     registered investment company; or
       ``(ii) any other filing of a registered investment company 
     with the Commission.
       ``(E) Commission authority.--The Commission shall 
     promulgate such final rules as are necessary to carry out 
     this paragraph not later than 1 year after the date of 
     enactment of the Mutual Fund Transparency Act of 2009.''.
       (b) Fiduciary Duties.--Section 15 of the Securities 
     Exchange Act of 1934 (15 U.S.C. 78o) is amended by adding at 
     the end the following new subsection:
       ``(k) Standard of Care.--Notwithstanding any other 
     provision of this title or the Investment Advisers Act of 
     1940, the Commission shall promulgate rules, not later than 1 
     year after the date of enactment of the Mutual Fund 
     Transparency Act of 2009 to provide that the standard of care 
     for all brokers and dealers in providing investment advice 
     about securities to retail customers or clients (and such 
     other customers or clients as the Commission may by rule 
     provide) shall be the fiduciary duty established under the 
     Investment Advisers Act of 1940, including, without 
     limitation, the duty to act solely in the best interest of 
     the customer or client, without regard to the financial or 
     other interest of the broker or dealer providing the 
     advice.''.

                                                 October 21, 2009.
     Hon. Daniel K. Akaka,
     Hart Senate Office Building,
     Washington, DC.
       Dear Senator Akaka: We are writing to express our strong 
     support for your efforts to ensure that professionals who 
     advise America's investors are held to the highest standard 
     of care--the fiduciary standard. Section 6(b) of the Mutual 
     Fund Transparency Act of 2009 (``MFTA'') would clearly 
     establish that brokers are subject to a fiduciary duty with 
     respect to investment advice provided to retail investors. 
     This provision eliminates a regulatory gap that has long 
     exposed investors to unscrupulous and harmful sales practices 
     by brokers.
       Under current law, brokers are subject to a general 
     suitability standard when providing investment advice to 
     their retail clients. Under a suitability standard, a broker 
     is not required to ensure that his recommendations are what 
     is best for his clients, but only what is generally suitable. 
     The suitability standard allows brokers to recommend 
     investments, for example, based on the amount of compensation 
     the broker receives rather than what is in the best interest 
     of the client. The suitability standard does not even require 
     brokers to disclose their compensation so that their clients 
     can evaluate conflict of interest payments for themselves.
       In contrast, investment advisers are subject to a strict 
     fiduciary duty under the Advisers Act. As such, they are 
     required to make recommendations only if they are in the 
     client's best interest and to disclose all material 
     conflicts. By applying the fiduciary standard under the 
     Advisers Act to brokers, Section 6(b) of the MFTA ensures 
     that the protection of a fiduciary standard for retail 
     advisory clients will not depend on an arbitrary regulatory 
     distinction between brokers and investment advisers, but will 
     be applied rationally to provide all Americans who receive 
     investment advice with the regulatory protection that they 
     expect and deserve.
       We wish to express our enthusiastic support for your 
     proposal to establish a fiduciary duty for brokers and are 
     available to provide whatever assistance you may need in this 
     respect.
           Respectfully submitted,
     Mercer Bullard,
       Founder and President, Fund Democracy, Inc.
     Barbara Roper,
       Director of Investor Protection, Consumer Federation of 
     America.
     Denise Voigt Crawford,
       Texas Securities Commissioner and President, North American 
     Securities Administrators Association, Inc.
     Ellen Turf,
       CEO, National Association of Personal Financial Advisors.
     Kevin R. Keller,
       Chief Executive Officer, Certified Financial Planner Board 
     of Standards, Inc.
     Marvin W. Tuttle Jr.,
       CAE, Executive Director and CEO, Financial Planning 
     Association.
                                  ____

                                                 October 21, 2009.
     Hon. Daniel K. Akaka,
     Hart Senate Office Building,
     Washington, DC.
       Dear Senator Akaka: We are writing to express our 
     enthusiastic support for the Mutual Fund Transparency Act of 
     2009 because your bill will benefit fund shareholders in 
     three significant respects. First, it will strengthen the 
     independence of mutual fund boards to help ensure that the 
     gross abuses of trust committed by fund managers in 
     connection with the recent mutual fund scandal will not be 
     repeated. Second, the bill will require that fund 
     shareholders be provided with full and understandable 
     disclosure of brokers' fees and conflicts of interest, and 
     that when brokers provide individualized investment advice 
     they will be held to the same fiduciary standards to which 
     all other investment advisers are held. Third, the bill will 
     promote competition through increased price transparency, and 
     thereby improve services and reduce costs for the almost 100 
     million Americans who have entrusted their financial security 
     to mutual funds.


                            Fund Governance

       The mutual fund scandal that erupted in September 2003 and 
     continues to be litigated to this day revealed ``a serious 
     breakdown in management controls in more than just a few 
     mutual fund complexes.'' As noted by the Securities and 
     Exchange Commission:

     The breakdown in fund management and compliance controls 
     evidenced by our enforcement cases raises troubling questions 
     about the ability of many fund boards, as presently 
     constituted, to effectively oversee the any management of 
     funds. The failure of a board to play its proper role can 
     result, in addition to serious compliance breakdowns, in 
     excessive fees and brokerage commissions, less than 
     forthright disclosure, mispricing of

[[Page S10858]]

     securities, and inferior investment performance.''
       The Act directly addresses the governance weaknesses 
     revealed by the scandal by strengthening the independence of 
     fund directors. It plugs loopholes that have allowed former 
     executives of fund managers and other fund service providers, 
     among others, to qualify as ``independent'' directors when 
     their independence is clearly compromised by their former 
     positions. The Act also ensures that the board's agenda will 
     be set by an independent chairman, and not by the CEO of the 
     fund's manager, as is common practice today, and that 
     independent directors will control board matters and the 
     evaluation of independent nominees. The Act's requirement 
     that independent directors seek shareholder approval at least 
     every five years will enhance the accountability of 
     independent directors to the shareholders whose interests 
     they are supposed to serve.
       The Act's requirement that funds have an independent 
     chairman and a 75 percent independent board of directors is 
     critical in light of the SEC's failure to take final action 
     on rules imposing similar requirements. Even if these rules 
     were adopted, they would not prevent fund managers from 
     terminating independent chairmen or reducing independent 
     representation on the board to the statutory minimum of 40 
     percent. The SEC's rules would apply only when the funds 
     choose to rely on certain exemptive rules. If there were a 
     conflict between the fund's independent directors and the 
     fund manager, the fund manager could simply stop relying on 
     the rules and seek to install its own executives in a 
     majority of board positions. More importantly, independent 
     directors know that the protection given them by the SEC is 
     limited, and they therefore will be less likely to stand up 
     for shareholders than they would be if--as you have 
     proposed--the SEC's proposals were codified.


    Fiduciary Duties and Full Disclosure for all Investment Advisers

       Recent regulatory investigations and enforcement actions 
     have uncovered persistent and widespread sales abuses by 
     brokers. Regulators have found that brokers have 
     systematically overcharged investors for commissions, 
     routinely made improper recommendations of B shares, accepted 
     undisclosed directed brokerage payments in return for 
     distribution services, and received revenue sharing payments 
     that create incentives to favor funds that pay the highest 
     compensation rather than funds that are the best investment 
     option for their clients.
       Five years ago, the Commission promised that it would 
     address the problems that have so long plagued brokers' sales 
     practices, but the Commission's efforts have fallen far short 
     of the mark. Its proposals failed to require full disclosure 
     of brokers' compensation, much less the disclosure of 
     information that would enable investors to fully evaluate 
     their brokers' conflicts of interests. The new disclosure 
     requirements that you have proposed will ensure that brokers 
     will be subject to a fiduciary duty and their conflicts of 
     interest will be fully transparent to investors. Investors 
     will be able to view the amount the broker is being paid for 
     the fund being recommended compared with the (often lesser) 
     amount the broker would receive for selling a different fund, 
     which cannot help but direct investors' attention to the 
     conflict of interest created by differential compensation 
     structures. We especially applaud your proposal to ensure 
     that all broker compensation, including revenue sharing 
     payments, is disclosed in the point-of-sale document, which 
     ensures that disclosure rules will not create an incentive 
     for brokers to favor revenue sharing as a means of avoiding 
     disclosure.
       Remarkably, in the wake of a longstanding pattern of 
     brokers' sales abuses, the Commission has effectively 
     repealed Congress's narrow exemption from advisory regulation 
     for brokers who provide only ``solely incidental'' advice. 
     The Commission's strained interpretation of ``solely 
     incidental'' advice to include any advice provided ``in 
     connection with and reasonably related to a broker's 
     brokerage services'' has effectively stripped advisory 
     clients of the protections of an entire statutory regime 
     solely on the ground that the investment advice happens to be 
     provided by a broker. The Commission's position flatly 
     contradicts the text and purpose of the Investment Advisers 
     Act, which, as the Supreme Court has stated: ``reflects a 
     congressional recognition `of the delicate fiduciary nature 
     of an investment advisory relationship,' as well as a 
     congressional intent to eliminate, or at least to expose, all 
     conflicts of interest which might incline an investment 
     adviser--consciously or unconsciously--to render advice which 
     was not disinterested.''

       Your proposal restores crucial components of Congress's 
     carefully constructed regulatory scheme for the distinct and 
     complementary regulation of brokerage and advisory services. 
     It properly recognizes that a ``fiduciary, which Congress 
     recognized the investment adviser to be,'' is also what 
     consumers expect an investment adviser to be, as is generally 
     the case when professional services are provided on a 
     personalized basis. The Act also recognizes the importance of 
     ``expos[ing] all conflicts of interest which might incline an 
     investment adviser--consciously or unconsciously--to render 
     advice which was not disinterested,'' by requiring full 
     disclosure of such conflicts of interests and other material 
     information at the time that the prospective client is 
     deciding whether to enter into the relationship.


                  Fee Disclosure and Price Competition

       Your fee disclosure provisions will do double duty, by 
     addressing conflicts of interest and brokers' sales abuses 
     while also promoting competition, thereby improving services 
     and driving down expenses. Requiring brokers to disclose the 
     amount of differential payments and average fees for 
     comparable transactions will provide the kind of price 
     transparency that is a necessary predicate for price 
     competition and the efficient operation of free markets. In 
     addition, the requirement that funds disclose the amount of 
     commissions they pay will ensure that the fund expense ratio 
     includes all of the costs of the fund's operations and will 
     enable investors to make more informed investment decisions. 
     The best regulator of fees is the market, but the market 
     cannot operate efficiently when brokers and funds are 
     permitted to hide the actual cost of the services they 
     provide.


               Financial Literacy and Fund Advertisements

       Finally, we strongly agree that there is a need for further 
     study of financial literacy, including especially information 
     that fund investors need to make informed investment 
     decisions and methods to increase the transparency of fees 
     and potential conflicts of interest. Your proposed study of 
     mutual fund advertisements is also timely, as the regulation 
     of fund ads continues to permit misleading touting of 
     outsized short-term performance and other abuses.
       Mutual funds are Americans' most important lifeline to 
     retirement security. The regulation of mutual funds, however, 
     has not kept pace with their enormous growth. We applaud your 
     continuing efforts to enhance investor protection, promote 
     vigorous market competition and create wealth for America's 
     mutual fund investors through effective disclosure and truly 
     independent board oversight.
           Respectfully submitted,
     Mercer Bullard,
       Founder and President, Fund Democracy, Inc.
     Barbara Roper,
       Director of Investor Protection, Consumer Federation of 
     America.
     Ken McEldowney,
       Executive Director, Consumer Action.
     Irene E. Leech,
       Virginia Citizens Consumer Council.
     Walter Dartland,
       Consumer Federation of the Southeast.
     Damon Silvers,
       Director of Policy and Special Counsel, AFL-CIO.
     Denise Voigt Crawford,
       Texas Securities Commissioner and President, North American 
     Securities Administrators Association, Inc.
                                 ______