IB 

Union Calendar No. 205

108TH CONGRESS 

1ST SESSION H. R. 2420

[Report No. 108–351] 

To improve transparency relating to the fees and costs that mutual fund 

investors incur and to improve corporate governance of mutual funds. 

IN THE HOUSE OF REPRESENTATIVES 

JUNE 11, 2003

Mr. BAKER (for himself, Mr. GILLMOR, Mr. OSE, Mr. SHAYS, Mr. TIBERI, 

and Ms. GINNY BROWN-WAITE of Florida) introduced the following bill; 

which was referred to the Committee on Financial Services 

NOVEMBER 4, 2003

Additional sponsors: Mr. OXLEY, Mr. FRANK of Massachusetts, Mr. CASTLE, 

Ms. WATERS, Mrs. MALONEY, Ms. HOOLEY of Oregon, Mr. MOORE, Mr. 

FORD, Mr. JONES of North Carolina, Mr. GONZALEZ, Mr. EMANUEL, Mr. 

MATHESON, Mr. SCOTT of Georgia, Mr. HINOJOSA, Mr. HENSARLING, 

Mrs. CAPITO, Mr. GARRETT of New Jersey, and Mrs. BIGGERT

NOVEMBER 4, 2003 

Reported with an amendment, committed to the Committee of the Whole 

House on the State of the Union, and ordered to be printed 

[Strike out all after the enacting clause and insert the part printed in italic] 

[For text of introduced bill, see copy of bill as introduced on June 11, 2003] 

A BILL

To improve transparency relating to the fees and costs that 

mutual fund investors incur and to improve corporate 

governance of mutual funds.
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1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled,

3 SECTION 1. SHORT TITLE. 

4 This Act may be cited as the ‘‘Mutual Funds Integrity 

5 and Fee Transparency Act of 2003’’. 

6 SEC. 2. IMPROVED TRANSPARENCY OF MUTUAL FUND 

7 COSTS. 

8 (a) REGULATION REVISION REQUIRED.—Within 270 

9 days after the date of enactment of this Act, the Securities 

10 and Exchange Commission shall revise regulations under 

11 the Securities Act of 1933, the Securities Exchange Act of 

12 1934, or the Investment Company Act of 1940, or any com13 bination thereof, to require, consistent with the protection 

14 of investors and the public interest, improved disclosure 

15 with respect to an open-end management investment com16 pany, in the quarterly statement or other periodic report 

17 to shareholders or other appropriate disclosure document, 

18 of the following: 

19 (1) The estimated amount, in dollars for each 

20 $1,000 of investment in the company, of the operating 

21 expenses of the company that are borne by share22 holders. 

23 (2) The structure of, or method used to deter24 mine, the compensation of individuals employed by 

25 the investment adviser of the company to manage the 
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1 portfolio of the company, and the ownership interest 

2 of such individuals in the securities of the company. 

3 (3) The portfolio turnover rate of the company, 

4 set forth in a manner that facilitates comparison 

5 among investment companies, and a description of 

6 the implications of a high turnover rate for portfolio 

7 transaction costs and performance. 

8 (4) Information concerning the company’s poli9 cies and practices with respect to the payment of com10 missions for effecting securities transactions to a 

11 member of an exchange, broker, or dealer who—

12 (A) furnishes advice, either directly or 

13 through publications or writings, as to the value 

14 of securities, the advisability of investing in, 

15 purchasing, or selling securities, and the avail16 ability of securities or purchasers or sellers of se17 curities; 

18 (B) furnishes analyses and reports con19 cerning issuers, industries, securities, economic 

20 factors and trends, portfolio strategy, and the 

21 performance of accounts; or 

22 (C) facilitates the sale and distribution of 

23 the company’s shares. 

24 (5) Information concerning payments by any 

25 person other than the company that are intended to 
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1 facilitate the sale and distribution of the company’s 

2 shares. 

3 (6) Information concerning discounts on front4 end sales loads for which investors may be eligible, in5 cluding the minimum purchase amounts required for 

6 such discounts. 

7 (b) APPROPRIATE DISCLOSURE DOCUMENT.—

8 (1) IN GENERAL.—For purposes of subsection 

9 (a), a disclosure shall not be considered to be made 

10 in an appropriate disclosure document if the disclo11 sure is made exclusively in a prospectus or statement 

12 of additional information, or both such documents. 

13 (2) EXCEPTIONS.—Notwithstanding paragraph 

14 (1), the disclosures required by paragraph (2) and (4) 

15 of subsection (a) may be considered to be made in an 

16 appropriate disclosure document if the disclosure is 

17 made exclusively in a prospectus or statement of ad18 ditional information, or both such documents.

19 (c) CONCEPT RELEASE REQUIRED.—

20 (1) IN GENERAL.—The Commission shall issue a 

21 concept release examining the issue of portfolio trans22 action costs incurred by investment companies, in23 cluding commission, spread, opportunity, and market 

24 impact costs, with respect to trading of portfolio secu25 rities and how such costs may be disclosed to mutual 
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1 fund investors in a manner that will enable investors 

2 to compare such costs among funds.

3 (2) REPORT AND RECOMMENDATIONS RE4 QUIRED.—The Commission shall submit a report on 

5 the findings from the concept release required by 

6 paragraph (1), as well as legislative and regulatory 

7 recommendations, if any, to the Committee on Finan8 cial Services of the House of Representatives and the 

9 Committee on Banking, Housing, and Urban Affairs 

10 of the Senate, no later than 270 days after the date 

11 of enactment of this Act. 

12 (d) ADDITIONAL REQUIREMENT FOR FEE STATE13 MENT.—

14 (1) IN GENERAL.—Not later than 270 days after 

15 the date of enactment of this Act, the Commission 

16 shall prescribe a rule to require, with respect to an 

17 open-end management investment company, in the 

18 quarterly statement or other periodic report, or other 

19 appropriate disclosure document, a statement inform20 ing shareholders that such shareholders have paid fees 

21 on their investments, that such fees have been de22 ducted from the amounts shown on the statements, 

23 and where such shareholders may find additional in24 formation regarding the amount of these fees. 
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1 (2) APPROPRIATE DISCLOSURE DOCUMENT.—The 

2 statement required by paragraph (1) shall not be con3 sidered to be made in an appropriate disclosure docu4 ment unless such statement is—

5 (A) made in each periodic statement to a 

6 shareholder that discloses the value of the hold7 ings of the shareholder in the securities of the 

8 company; and 

9 (B) prominently displayed, in a location in 

10 close proximity to the statement of the shares ac11 count value. 

12 (e) REDUCING BURDENS ON SMALL FUNDS.—In pre13 scribing rules under this section, the Commission shall give 

14 consideration to methods for reducing for small investment 

15 companies the burdens of making the disclosures required 

16 by such rules, consistent with the public interest and the 

17 protection of investors. 

18 SEC. 3. OBLIGATIONS REGARDING CERTAIN DISTRIBUTION 

19 AND SOFT DOLLAR ARRANGEMENTS. 

20 (a) REPORTING REQUIREMENT.—Section 15 of the In21 vestment Company Act of 1940 (15 U.S.C. 80a–15) is 

22 amended by adding at the end the following new subsection: 

23 ‘‘(g) OBLIGATIONS REGARDING CERTAIN DISTRIBU24 TION AND SOFT DOLLAR ARRANGEMENTS.—
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1 ‘‘(1) REPORTING REQUIREMENTS.—Each invest2 ment adviser to a registered investment company 

3 shall, no less frequently than annually, submit to the 

4 board of directors of the company a report on—

5 ‘‘(A) payments during the reporting period 

6 by the adviser (or an affiliated person of the ad7 viser) that were directly or indirectly made for 

8 the purpose of promoting the sale of shares of the 

9 investment company (referred to in paragraph 

10 (2) as a ‘revenue sharing arrangement’); 

11 ‘‘(B) services to the company provided or 

12 paid for by a broker or dealer or an affiliated 

13 person of the broker or dealer (other than broker14 age and research services) in exchange for the di15 rection of brokerage to the broker or dealer (re16 ferred to in paragraph (2) as a ‘directed broker17 age arrangement’); and 

18 ‘‘(C) research services obtained by the ad19 viser (or an affiliated person of the adviser) dur20 ing the reporting period from a broker or dealer 

21 the receipt of which may reasonably be attrib22 uted to securities transactions effected on behalf 

23 of the company or any other company that is a 

24 member of the same group of investment compa-
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1 nies (referred to in paragraph (2) as a ‘soft dol2 lar arrangement’). 

3 ‘‘(2) FIDUCIARY DUTY OF BOARD OF DIREC4 TORS.—The board of directors of a registered invest5 ment company shall have a fiduciary duty—

6 ‘‘(A) to review the investment adviser’s di7 rection of the company’s brokerage transactions, 

8 including directed brokerage arrangements and 

9 soft dollar arrangements, and to determine that 

10 the direction of such brokerage is in the best in11 terests of the shareholders of the company; and 

12 ‘‘(B) to review any revenue sharing ar13 rangements to ensure compliance with this Act 

14 and the rules adopted thereunder, and to deter15 mine that such revenue sharing arrangements 

16 are in the best interests of the shareholders of the 

17 company. 

18 ‘‘(3) SUMMARIES OF REPORTS IN ANNUAL RE19 PORTS TO SHAREHOLDERS.—In accordance with reg20 ulations prescribed by the Commission under para21 graph (4), annual reports to shareholders of a reg22 istered investment company shall include a summary 

23 of the most recent report submitted to the board of di24 rectors under paragraph (1). 
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1 ‘‘(4) REGULATIONS.—The Commission shall 

2 adopt rules and regulations implementing this sec3 tion, which rules and regulations shall, among other 

4 things, prescribe the content of the required reports. 

5 ‘‘(5) DEFINITION.—For purposes of this sub6 section—

7 ‘‘(A) the term ‘brokerage and research serv8 ices’ has the same meaning as in section 28(e)(3) 

9 of the Securities Exchange Act of 1934; and 

10 ‘‘(B) the term ‘research services’ means the 

11 services described in subparagraphs (A) and (B) 

12 of such section.’’.

13 (b) CONTRACTUAL RECORDS.—Within 270 days after 

14 the date of enactment of this Act, the Securities and Ex15 change Commission shall, by rule prescribed pursuant to 

16 section 28(e) of the Securities Exchange Act of 1934 (15 

17 U.S.C. 78bb(e)), require that—

18 (1) if any research services (as such term is de19 fined in section 15(g)(5)(B) of the Investment Com20 pany Act of 1940, as amended by subsection (a) of 

21 this section)—

22 (A) are provided by a member of an ex23 change, broker, or dealer who effects securities 

24 transactions in an account, and 
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1 (B) are prepared or provided by a party 

2 that is unaffiliated with such member, broker, or 

3 dealer, 

4 any person exercising investment discretion with re5 spect to such account shall maintain a copy of the 

6 written contract between the person preparing such 

7 research and the member of an exchange, broker, or 

8 dealer; and 

9 (2) such contract shall describe the nature and 

10 value of the services provided. 

11 SEC. 4. MUTUAL FUND GOVERNANCE. 

12 (a) DIRECTOR INDEPENDENCE.—Section 10(a) of the 

13 Investment Company Act of 1940 (15 U.S.C. 80a–10) is 

14 amended by striking ‘‘60 per centum’’ and inserting ‘‘one15 third’’. 

16 (b) DEFINITION OF INTERESTED PERSON.—Section 

17 2(a)(19) of the Investment Company Act of 1940 (15 U.S.C. 

18 80a–2(a)(19)) is amended—

19 (1) in subparagraph (A)—

20 (A) by striking clause (vi) and redesig21 nating clause (vii) as clause (vi); and 

22 (B) by amending clause (v) to read as fol23 lows: 

24 ‘‘(v) any natural person who is a 

25 member of a class of persons who the Com-
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1 mission, by rule or regulation, determines 

2 are unlikely to exercise an appropriate de3 gree of independence as a result of—

4 ‘‘(I) a material business or profes5 sional relationship with the company 

6 or any affiliated person of the com7 pany, or 

8 ‘‘(II) a close familial relationship 

9 with any natural person who is an af10 filiated person of the company,’’; and 

11 (2) in subparagraph (B)—

12 (A) by striking clause (vi) and redesig13 nating clause (vii) as clause (vi); and 

14 (B) by amending clause (v) to read as fol15 lows: 

16 ‘‘(v) any natural person who is a 

17 member of a class of persons who the Com18 mission, by rule or regulation, determines 

19 are unlikely to exercise an appropriate de20 gree of independence as a result of—

21 ‘‘(I) a material business or profes22 sional relationship with such invest23 ment adviser or principal underwriter 

24 (or affiliated person thereof), or 
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1 ‘‘(II) a close familial relationship 

2 with a natural person who is such in3 vestment adviser or principal under4 writer (or affiliated person thereof),’’. 

5 SEC. 5. AUDIT COMMITTEE REQUIREMENTS FOR INVEST6 MENT COMPANIES. 

7 (a) AMENDMENTS.—Section 32 of the Investment Com8 pany Act of 1940 (15 U.S.C. 80a–31) is amended—

9 (1) in subsection (a)—

10 (A) by striking paragraphs (1) and (2) and 

11 inserting the following: 

12 ‘‘(1) such accountant shall have been selected at 

13 a meeting held within 30 days before or after the be14 ginning of the fiscal year or before the annual meet15 ing of stockholders in that year by the vote, cast in 

16 person, of a majority of the members of the audit 

17 committee of such registered company; 

18 ‘‘(2) such selection shall have been submitted for 

19 ratification or rejection at the next succeeding annual 

20 meeting of stockholders if such meeting be held, except 

21 that any vacancy occurring between annual meetings, 

22 due to the death or resignation of the accountant, 

23 may be filled by the vote of a majority of the members 

24 of the audit committee of such registered company, 
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1 cast in person at a meeting called for the purpose of 

2 voting on such action;’’; and 

3 (B) by adding at the end the following new 

4 sentence: ‘‘The Commission, by rule, regulation, 

5 or order, may exempt a registered management 

6 company or registered face-amount certificate 

7 company subject to this subsection from the re8 quirement in paragraph (1) that the votes by the 

9 members of the audit committee be cast at a 

10 meeting in person when such a requirement is 

11 impracticable, subject to such conditions as the 

12 Commission may require.’’; and 

13 (2) by adding at the end the following new sub14 section: 

15 ‘‘(d) AUDIT COMMITTEE REQUIREMENTS.—

16 ‘‘(1) REQUIREMENTS AS PREREQUISITE TO FIL17 ING FINANCIAL STATEMENTS.—Any registered man18 agement company or registered face-amount certifi19 cate company that files with the Commission any fi20 nancial statement signed or certified by an inde21 pendent public accountant shall comply with the re22 quirements of paragraphs (2) through (6) of this sub23 section and any rule or regulation of the Commission 

24 issued thereunder. 
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1 ‘‘(2) RESPONSIBILITY RELATING TO INDE2 PENDENT PUBLIC ACCOUNTANTS.—The audit com3 mittee of the registered company, in its capacity as 

4 a committee of the board of directors, shall be directly 

5 responsible for the appointment, compensation, and 

6 oversight of the work of any independent public ac7 countant employed by such registered company (in8 cluding resolution of disagreements between manage9 ment and the auditor regarding financial reporting) 

10 for the purpose of preparing or issuing the audit re11 port or related work, and each such independent pub12 lic accountant shall report directly to the audit com13 mittee. 

14 ‘‘(3) INDEPENDENCE.—

15 ‘‘(A) IN GENERAL.—Each member of the 

16 audit committee of the registered company shall 

17 be a member of the board of directors of the com18 pany, and shall otherwise be independent. 

19 ‘‘(B) CRITERIA.—In order to be considered 

20 to be independent for purposes of this paragraph, 

21 a member of an audit committee of a registered 

22 company may not, other than in his or her ca23 pacity as a member of the audit committee, the 

24 board of directors, or any other board com25 mittee—
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1 ‘‘(i) accept any consulting, advisory, or 

2 other compensatory fee from the registered 

3 company or the investment adviser or prin4 cipal underwriter of the registered com5 pany; or

6 ‘‘(ii) be an ‘interested person’ of the 

7 registered company, as such term is defined 

8 in section 2(a)(19). 

9 ‘‘(4) COMPLAINTS.—The audit committee of the 

10 registered company shall establish procedures for—

11 ‘‘(A) the receipt, retention, and treatment of 

12 complaints received by the registered company 

13 regarding accounting, internal accounting con14 trols, or auditing matters; and 

15 ‘‘(B) the confidential, anonymous submis16 sion by employees of the registered company and 

17 its investment adviser or principal underwriter 

18 of concerns regarding questionable accounting or 

19 auditing matters. 

20 ‘‘(5) AUTHORITY TO ENGAGE ADVISERS.—The 

21 audit committee of the registered company shall have 

22 the authority to engage independent counsel and other 

23 advisers, as it determines necessary to carry out its 

24 duties. 
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1 ‘‘(6) FUNDING.—The registered company shall 

2 provide appropriate funding, as determined by the 

3 audit committee, in its capacity as a committee of the 

4 board of directors, for payment of compensation—

5 ‘‘(A) to the independent public accountant 

6 employed by the registered company for the pur7 pose of rendering or issuing the audit report; 

8 and 

9 ‘‘(B) to any advisers employed by the audit 

10 committee under paragraph (5). 

11 ‘‘(7) AUDIT COMMITTEE.—For purposes of this 

12 subsection, the term ‘audit committee’ means—

13 ‘‘(A) a committee (or equivalent body) es14 tablished by and amongst the board of directors 

15 of a registered investment company for the pur16 pose of overseeing the accounting and financial 

17 reporting processes of the company and audits of 

18 the financial statements of the company; and 

19 ‘‘(B) if no such committee exists with re20 spect to a registered investment company, the en21 tire board of directors of the company.’’. 

22 (b) CONFORMING AMENDMENT.—Section 10A(m) of 

23 the Securities Exchange Act of 1934 is amended by adding 

24 at the end the following new paragraph: 
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1 ‘‘(7) EXEMPTION FOR INVESTMENT COMPA2 NIES.—Effective one year after the date of enactment 

3 of the Mutual Funds Integrity and Fee Transparency 

4 Act of 2003, for purposes of this subsection, the term 

5 ‘issuer’ shall not include any investment company 

6 that is registered under section 8 of the Investment 

7 Company Act of 1940.’’. 

8 (c) IMPLEMENTATION.—Not later than 180 days after 

9 the date of enactment of this Act, the Securities and Ex10 change Commission shall issue final regulations to carry 

11 out section 32(d) of the Investment Company Act of 1940, 

12 as added by subsection (a) of this section.

13 SEC. 6. TRADING RESTRICTIONS. 

14 Subsection (e) of section 22 of the Investment Com15 pany Act of 1940 (15 U.S.C. 80a–22(e)) is amended to read 

16 as follows: 

17 ‘‘(e) TRADING RESTRICTIONS.—

18 ‘‘(1) PROHIBITION AND EXCEPTIONS.—No reg19 istered investment company shall suspend the right of 

20 redemption, or postpone the date of payment or satis21 faction upon redemption of any redeemable security 

22 in accordance with its terms for more than seven days 

23 after the tender of such security to the company or its 

24 agents designated for that purpose for redemption, ex25 cept—
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1 ‘‘(A) for any period (i) during which the 

2 principal market for the securities in which the 

3 company invests is closed, other than customary 

4 week-end and holiday closings; or (ii) during 

5 which trading on such exchange is restricted; 

6 ‘‘(B) for any period during which an emer7 gency exists as a result of which (i) disposal by 

8 the company of securities owned by it is not rea9 sonably practicable; or (ii) it is not reasonably 

10 practicable for such company fairly to determine 

11 the value of its net assets; or 

12 ‘‘(C) for such other periods as the Commis13 sion may by order permit for the protection of 

14 security holders of the company. 

15 ‘‘(2) COMMISSION RULES.—The Commission 

16 shall by rules and regulations—

17 ‘‘(A) determine the conditions under which 

18 trading shall be deemed to be restricted; 

19 ‘‘(B) determine the conditions under which 

20 an emergency shall be deemed to exist; and 

21 ‘‘(C) provide for the determination by each 

22 company, subject to such limitations as the Com23 mission shall determine are necessary and ap24 propriate for the protection of investors, of the 
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1 principal market for the securities in which the 

2 company invests.’’.

3 SEC. 7. DEFINITION OF NO-LOAD MUTUAL FUND. 

4 Within 270 days after the date of enactment of this 

5 Act, the Securities and Exchange Commission shall, by rule 

6 adopted by the Commission or a self-regulatory organiza7 tion (or both)—

8 (1) clarify the definition of ‘‘no-load’’ as such 

9 term is used by investment companies that impose 

10 any fee under a plan adopted pursuant to rule 12b11 1 of the Commission’s rules (17 C.F.R. 270.12b–1); 

12 and 

13 (2) require disclosure to prevent investors from 

14 being misled by the use of such terminology by the 

15 company or its adviser or principal underwriter.

16 SEC. 8. INFORMING DIRECTORS OF SIGNIFICANT DEFI17 CIENCIES. 

18 Section 42 of the Investment Company Act of 1940 (15 

19 U.S.C. 80a–41) is amended by adding at the end the fol20 lowing new subsection: 

21 ‘‘(f) INFORMING DIRECTORS OF SIGNIFICANT DEFI22 CIENCIES.—If the report of an inspection by the Commis23 sion of a registered investment company identifies signifi24 cant deficiencies in the operations of such company, or of 

25 its investment adviser or principal underwriter, the com-
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1 pany shall provide such report to the directors of such com2 pany.’’. 

3 SEC. 9. EXEMPTION FROM IN PERSON MEETING REQUIRE4 MENTS. 

5 Section 15(c) of the of the Investment Company Act 

6 of 1940 (15 U.S.C. 80a–15(c)) is amended by adding at 

7 the end the following new sentence: ‘‘The Commission, by 

8 rule, regulation, or order, may exempt a registered invest9 ment company subject to this subsection from the require10 ment that the votes of its directors be cast at a meeting 

11 in person when such a requirement is impracticable, subject 

12 to such conditions as the Commission may require.’’. 

13 SEC. 10. PROXY VOTING DISCLOSURE. 

14 Section 30 of the Investment Company Act of 1940 (15 

15 U.S.C. 80a–29) is amended by adding at the end the fol16 lowing new subsection: 

17 ‘‘(k) PROXY VOTING DISCLOSURE.—Every registered 

18 management investment company, other than a small busi19 ness investment company, shall file with the Commission 

20 not later than August 31 of each year an annual report, 

21 on a form prescribed by the Commission by rule, containing 

22 the registrant’s proxy voting record for the most recent 

23 twelve-month period ending on June 30. The financial 

24 statements of every such company shall state that informa25 tion regarding how the company voted proxies relating to 
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1 portfolio securities during the most recent 12-month period 

2 ending on June 30 is available— 

3 ‘‘(1) without charge, upon request, by calling a 

4 specified toll-free (or collect) telephone number; or on 

5 or through the company’s website at a specified Inter6 net address; or both; and 

7 ‘‘(2) on the Commission’s website.’’. 

8 SEC. 11. ETHICS COMPLIANCE BY MUTUAL FUNDS. 

9 Within 270 days after the date of enactment of this 

10 Act, the Commission shall, by rule pursuant to the Invest11 ment Company Act of 1940 and the Investment Advisers 

12 Act of 1940, require each investment company and invest13 ment adviser registered with the Commission—

14 (1) to adopt and implement policies and proce15 dures reasonably designed to prevent violation of the 

16 Securities Act of 1933 (15 U.S.C. 78a et seq.), the Se17 curities Exchange Act of 1934 (15 U.S.C. 78a et seq.), 

18 the Sarbanes-Oxley Act of 2002 (15 U.S.C. 7201 et 

19 seq.), the Trust Indenture Act of 1939 (15 U.S.C. 

20 77aaa et seq.), the Investment Company Act of 1940 

21 (15 U.S.C. 80a–1 et seq.), the Investment Advisers Act 

22 of 1940 (15 U.S.C. 80b et seq.), the Securities Investor 

23 Protection Act of 1970 (15 U.S.C. 78aaa et seq.), sub24 chapter II of chapter 53 of title 31, United States 

25 Code, chapter 2 of title I of Public Law 91–508 (12 
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1 U.S.C. 1951 et seq.), or section 21 of the Federal De2 posit Insurance Act (12 U.S.C. 1829b); 

3 (2) review those policies and procedures annu4 ally for their adequacy and the effectiveness of their 

5 implementation; and 

6 (3) appoint a chief compliance officer to be re7 sponsible for administering the policies and proce8 dures. 

9 SEC. 12. INCENTIVE COMPENSATION AND MUTUAL FUND 

10 SALES. 

11 (a) COMMISSION RULE REQUIRED.—Within 270 days 

12 after the date of enactment of this Act, the Commission shall 

13 by rule prohibit, as a means reasonably designed to prevent 

14 fraudulent, deceptive, or manipulative acts and practices, 

15 the sale of the securities of an investment company or of 

16 municipal fund securities by a broker or dealer or by a mu17 nicipal securities broker or dealer without the disclosure 

18 of—

19 (1) the amount and source of sales fees, pay20 ments by persons other than the investment company 

21 that are intended to facilitate the sale and distribu22 tion of the securities, and commissions for effecting 

23 portfolio securities transactions, or other payments, 

24 paid to such broker or dealer, or municipal securities 
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1 broker or dealer, or associated person thereof in con2 nection with such sale; 

3 (2) any commission or other fees or charges the 

4 investor has paid or will or might be subject to, in5 cluding as a result of purchases or redemptions; 

6 (3) any conflicts of interest that any associated 

7 person of the investor’s broker or dealer or municipal 

8 securities broker or dealer may face due to the receipt 

9 of differential compensation in connection with such 

10 sale; and

11 (4) information about the estimated amount of 

12 any asset-based distribution expenses incurred, or to 

13 be incurred, by the investment company in connection 

14 with the investor’s purchase of the securities. 

15 (b) BENCHMARKS.—In connection with the rule re16 quired by subsection (a), the Commission shall, to the extent 

17 practical, establish standards for such disclosures. 

18 (c) DEFINITIONS.—

19 (1) DIFFERENTIAL COMPENSATION.—For pur20 poses of this section, an associated person of a broker 

21 or dealer shall be considered to receive differential 

22 compensation if such person receives any increased or 

23 additional remuneration, in whatever form—

24 (A) for sales of the securities of an invest25 ment company or municipal fund security that 
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1 is affiliated with, or otherwise specifically des2 ignated by, such broker or dealer or municipal 

3 securities broker or dealer, as compared with the 

4 remuneration for sales of securities of an invest5 ment company or municipal fund security of6 fered by such broker or dealer or municipal secu7 rities broker or dealer that are not so affiliated 

8 or designated; or 

9 (B) for the sale of any class of securities of 

10 an investment company or municipal fund secu11 rity as compared with the remuneration for the 

12 sale of a class of securities of such investment 

13 company or municipal fund security (offered by 

14 such broker or dealer or municipal securities 

15 broker or dealer) that charges a sales load (as de16 fined in section 2(a)(35) of the Investment Com17 pany Act of 1940 (15 U.S.C. 80a–2(a)(35)) only 

18 at the time of such a sale. 

19 (2) MUNICIPAL FUND SECURITY.—For purposes 

20 of this section, a municipal fund security is any mu21 nicipal security issued by an issuer that, but for the 

22 application of section 2(b) of the Investment Com23 pany Act of 1940 (15 U.S.C. 80a–2(b)), would con24 stitute an investment company within the meaning of 
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1 section 3 of the Investment Company Act of 1940 (15 

2 U.S.C. 80a–3). 

3 SEC. 13. COMMISSION STUDY AND REPORT REGULATING 

4 SOFT DOLLAR ARRANGEMENTS. 

5 (a) STUDY REQUIRED.—

6 (1) IN GENERAL.—The Commission shall conduct 

7 a study of the use of soft dollar arrangements by in8 vestment advisers as contemplated by section 28(e) of 

9 the Securities Exchange Act of 1934 (15 U.S.C. 

10 78bb(e)). 

11 (2) AREAS OF CONSIDERATION.—The study re12 quired by this section shall examine—

13 (A) the trends in the average amounts of 

14 soft dollar commissions paid by investment ad15 visers and investment companies in the past 3 

16 years; 

17 (B) the types of services provided through 

18 soft dollar arrangements; 

19 (C) the benefits and disadvantages of the 

20 use of soft dollars for investors, including the ex21 tent to which use of soft dollar arrangements af22 fects the ability of mutual fund investors to 

23 evaluate and compare the expenses of different 

24 mutual funds; 
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1 (D) the potential or actual conflicts of inter2 est (or both potential and actual conflicts) cre3 ated by soft dollar arrangements, including 

4 whether certain potential conflicts are being 

5 managed effectively by other laws and regula6 tions specifically addressing those situations, the 

7 role of the board of directors in managing these 

8 potential or actual (or both) conflicts, and the ef9 fectiveness of the board in this capacity; 

10 (E) the transparency of such soft dollar ar11 rangements to investment company shareholders 

12 and investment advisory clients of investment 

13 advisers, the extent to which enhanced disclosure 

14 is necessary or appropriate to enable investors to 

15 better understand the impact of these arrange16 ments, and an assessment of whether the cost of 

17 any enhanced disclosure or other regulatory 

18 change would result in benefits to the investor; 

19 and 

20 (F) whether such section 28(e) should be 

21 modified, and whether other regulatory or legis22 lative changes should be considered and adopted 

23 to benefit investors. 

24 (b) REPORT REQUIRED.—The Commission shall sub25 mit a report on the study required by subsection (a) to the 
27

•HR 2420 RH 

1 Committee on Financial Services of the House of Represent2 atives and the Committee on Banking, Housing, and Urban 

3 Affairs of the Senate, no later than one year after the date 

4 of enactment of this Act. 

5 SEC. 14. STUDY OF ARBITRATION CLAIMS. 

6 (a) STUDY REQUIRED.—The Securities and Exchange 

7 Commission shall conduct a study of the increased rate of 

8 arbitration claims and decisions involving mutual funds 

9 since 1995 for the purposes of identifying trends in arbitra10 tion claim rates and, if applicable, the causes of such in11 creased rates and the means to avert such causes. 

12 (b) REPORT.—The Securities and Exchange Commis13 sion shall submit a report on the study required by sub14 section (a) to the Committee on Financial Services of the 

15 House of Representatives and the Committee on Banking, 

16 Housing, and Urban Affairs of the Senate not later than 

17 one year after the date of enactment of this Act.
Union Calendar No. 205

108TH CONGRESS 

1ST SESSION H. R. 2420

[Report No. 108–351] 

A BILL

To improve transparency relating to the fees and 

costs that mutual fund investors incur and to improve corporate governance of mutual funds. 

NOVEMBER 4, 2003

Reported with an amendment, committed to the Committee of the Whole House on the State of the Union, 

and ordered to be printed