IIB 

108TH CONGRESS 

1ST SESSION H. R. 2420

IN THE SENATE OF THE UNITED STATES 

NOVEMBER 20, 2003

Received; read twice and referred to the Committee on Banking, Housing, and 

Urban Affairs 

AN ACT

To improve transparency relating to the fees and costs that 

mutual fund investors incur and to improve corporate 

governance of mutual funds.

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled,
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1 SECTION 1. SHORT TITLE. 

2 (a) SHORT TITLE.—This Act may be cited as the 

3 ‘‘Mutual Funds Integrity and Fee Transparency Act of 

4 2003’’. 

5 (b) TABLE OF CONTENTS.—

Sec. 1. Short title. 

TITLE I—INTEGRITY AND FEE TRANSPARENCY 

Sec. 101. Improved transparency of mutual fund costs. 

Sec. 102. Obligations regarding certain distribution and soft dollar arrangements. 

Sec. 103. Mutual fund governance. 

Sec. 104. Audit committee requirements for investment companies. 

Sec. 105. Trading restrictions. 

Sec. 106. Definition of no-load mutual fund. 

Sec. 107. Informing directors of significant deficiencies. 

Sec. 108. Exemption from in person meeting requirements. 

Sec. 109. Proxy voting disclosure. 

Sec. 110. Incentive compensation and mutual fund sales. 

Sec. 111. Commission study and report regulating soft dollar arrangements. 

Sec. 112. Study of arbitration claims. 

TITLE II—PREVENTION OF ABUSIVE MUTUAL FUND PRACTICES 

Sec. 201. Prevention of fraud; internal compliance and control procedures. 

Sec. 202. Ban on joint management of mutual funds and hedge funds. 

Sec. 203. Short term trading by interested persons prohibited. 

Sec. 204. Elimination of stale prices. 

Sec. 205. Prevention of unfair after-hours trading. 

Sec. 206. Report on adequacy of remedial actions.

6 TITLE I—INTEGRITY AND FEE 

7 TRANSPARENCY 

8 SEC. 101. IMPROVED TRANSPARENCY OF MUTUAL FUND 

9 COSTS. 

10 (a) REGULATION REVISION REQUIRED.—Within 270 

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

12 and Exchange Commission shall revise regulations under 

13 the Securities Act of 1933, the Securities Exchange Act 

14 of 1934, or the Investment Company Act of 1940, or any 
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1 combination thereof, to require, consistent with the protec2 tion of investors and the public interest, improved disclo3 sure with respect to an open-end management investment 

4 company, in the quarterly statement or other periodic re5 port to shareholders or other appropriate disclosure docu6 ment, of the following: 

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

8 $1,000 of investment in the company, of the oper9 ating expenses of the company that are borne by 

10 shareholders. 

11 (2) The structure of, or method used to deter12 mine, the compensation of individuals employed by 

13 the investment adviser of the company to manage 

14 the portfolio of the company, and the ownership in15 terest of such individuals in the securities of the 

16 company. 

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

18 set forth in a manner that facilitates comparison 

19 among investment companies, and a description of 

20 the implications of a high turnover rate for portfolio 

21 transaction costs and performance. 

22 (4) Information concerning the company’s poli23 cies and practices with respect to the payment of 

24 commissions for effecting securities transactions to a 

25 member of an exchange, broker, or dealer who—
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1 (A) furnishes advice, either directly or 

2 through publications or writings, as to the value 

3 of securities, the advisability of investing in, 

4 purchasing, or selling securities, and the avail5 ability of securities or purchasers or sellers of 

6 securities; 

7 (B) furnishes analyses and reports con8 cerning issuers, industries, securities, economic 

9 factors and trends, portfolio strategy, and the 

10 performance of accounts; or 

11 (C) facilitates the sale and distribution of 

12 the company’s shares. 

13 (5) Information concerning payments by any 

14 person other than the company that are intended to 

15 facilitate the sale and distribution of the company’s 

16 shares. 

17 (6) Information concerning discounts on front18 end sales loads for which investors may be eligible, 

19 including the minimum purchase amounts required 

20 for such discounts. 

21 (b) APPROPRIATE DISCLOSURE DOCUMENT.—

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

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

24 in an appropriate disclosure document if the disclo25 sure is made exclusively in a prospectus or state-
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1 ment of additional information, or both such docu2 ments. 

3 (2) EXCEPTIONS.—Notwithstanding paragraph 

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

5 (4) of subsection (a) may be considered to be made 

6 in an appropriate disclosure document if the disclo7 sure is made exclusively in a prospectus or state8 ment of additional information, or both such docu9 ments.

10 (c) CONCEPT RELEASE REQUIRED.—

11 (1) IN GENERAL.—The Commission shall issue 

12 a concept release examining the issue of portfolio 

13 transaction costs incurred by investment companies, 

14 including commission, spread, opportunity, and mar15 ket impact costs, with respect to trading of portfolio 

16 securities and how such costs may be disclosed to 

17 mutual fund investors in a manner that will enable 

18 investors to compare such costs among funds.

19 (2) REPORT AND RECOMMENDATIONS RE20 QUIRED.—The Commission shall submit a report on 

21 the findings from the concept release required by 

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

23 recommendations, if any, to the Committee on Fi24 nancial Services of the House of Representatives and 

25 the Committee on Banking, Housing, and Urban Af-
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1 fairs of the Senate, no later than 270 days after the 

2 date of enactment of this Act. 

3 (d) ADDITIONAL REQUIREMENT FOR FEE STATE4 MENT.—

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

6 after the date of enactment of this Act, the Commis7 sion shall prescribe a rule to require, with respect to 

8 an open-end management investment company, in 

9 the quarterly statement or other periodic report, or 

10 other appropriate disclosure document, a statement 

11 informing shareholders that such shareholders have 

12 paid fees on their investments, that such fees have 

13 been deducted from the amounts shown on the state14 ments, and where such shareholders may find addi15 tional information regarding the amount of these 

16 fees. 

17 (2) APPROPRIATE DISCLOSURE DOCUMENT.—

18 The statement required by paragraph (1) shall not 

19 be considered to be made in an appropriate disclo20 sure document unless such statement is—

21 (A) made in each periodic statement to a 

22 shareholder that discloses the value of the hold23 ings of the shareholder in the securities of the 

24 company; and 
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1 (B) prominently displayed, in a location in 

2 close proximity to the statement of the shares 

3 account value. 

4 (e) REDUCING BURDENS ON SMALL FUNDS.—In pre5 scribing rules under this section, the Commission shall 

6 give consideration to methods for reducing for small in7 vestment companies the burdens of making the disclosures 

8 required by such rules, consistent with the public interest 

9 and the protection of investors. 

10 SEC. 102. OBLIGATIONS REGARDING CERTAIN DISTRIBU11 TION AND SOFT DOLLAR ARRANGEMENTS. 

12 (a) REPORTING REQUIREMENT.—Section 15 of the 

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

14 amended by adding at the end the following new sub15 section: 

16 ‘‘(g) OBLIGATIONS REGARDING CERTAIN DISTRIBU17 TION AND SOFT DOLLAR ARRANGEMENTS.—

18 ‘‘(1) REPORTING REQUIREMENTS.—Each in19 vestment adviser to a registered investment company 

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

21 board of directors of the company a report on—

22 ‘‘(A) payments during the reporting period 

23 by the adviser (or an affiliated person of the 

24 adviser) that were directly or indirectly made 

25 for the purpose of promoting the sale of shares 
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1 of the investment company (referred to in para2 graph (2) as a ‘revenue sharing arrangement’); 

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

4 paid for by a broker or dealer or an affiliated 

5 person of the broker or dealer (other than bro6 kerage and research services) in exchange for 

7 the direction of brokerage to the broker or deal8 er (referred to in paragraph (2) as a ‘directed 

9 brokerage arrangement’); and 

10 ‘‘(C) research services obtained by the ad11 viser (or an affiliated person of the adviser) 

12 during the reporting period from a broker or 

13 dealer the receipt of which may reasonably be 

14 attributed to securities transactions effected on 

15 behalf of the company or any other company 

16 that is a member of the same group of invest17 ment companies (referred to in paragraph (2) 

18 as a ‘soft dollar arrangement’). 

19 ‘‘(2) FIDUCIARY DUTY OF BOARD OF DIREC20 TORS.—The board of directors of a registered invest21 ment company shall have a fiduciary duty—

22 ‘‘(A) to review the investment adviser’s di23 rection of the company’s brokerage trans24 actions, including directed brokerage arrange25 ments and soft dollar arrangements, and to de-
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1 termine that the direction of such brokerage is 

2 in the best interests of the shareholders of the 

3 company; and 

4 ‘‘(B) to review any revenue sharing ar5 rangements to ensure compliance with this Act 

6 and the rules adopted thereunder, and to deter7 mine that such revenue sharing arrangements 

8 are in the best interests of the shareholders of 

9 the company. 

10 ‘‘(3) SUMMARIES OF REPORTS IN ANNUAL RE11 PORTS TO SHAREHOLDERS.—In accordance with reg12 ulations prescribed by the Commission under para13 graph (4), annual reports to shareholders of a reg14 istered investment company shall include a summary 

15 of the most recent report submitted to the board of 

16 directors under paragraph (1). 

17 ‘‘(4) REGULATIONS.—The Commission shall 

18 adopt rules and regulations implementing this sec19 tion, which rules and regulations shall, among other 

20 things, prescribe the content of the required reports. 

21 ‘‘(5) DEFINITION.—For purposes of this sub22 section—

23 ‘‘(A) the term ‘brokerage and research 

24 services’ has the same meaning as in section 
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1 28(e)(3) of the Securities Exchange Act of 

2 1934; and 

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

4 the services described in subparagraphs (A) and 

5 (B) of such section.’’.

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

7 the date of enactment of this Act, the Securities and Ex8 change Commission shall, by rule prescribed pursuant to 

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

10 U.S.C. 78bb(e)), require that—

11 (1) if any research services (as such term is de12 fined in section 15(g)(5)(B) of the Investment Com13 pany Act of 1940, as amended by subsection (a) of 

14 this section)—

15 (A) are provided by a member of an ex16 change, broker, or dealer who effects securities 

17 transactions in an account, and 

18 (B) are prepared or provided by a party 

19 that is unaffiliated with such member, broker, 

20 or dealer, 

21 any person exercising investment discretion with re22 spect to such account shall maintain a copy of the 

23 written contract between the person preparing such 

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

25 dealer; and 
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1 (2) such contract shall describe the nature and 

2 value of the services provided. 

3 SEC. 103. MUTUAL FUND GOVERNANCE. 

4 (a) DIRECTOR INDEPENDENCE.—Section 10(a) of 

5 the Investment Company Act of 1940 (15 U.S.C. 80a–

6 10) is amended by striking ‘‘60 per centum’’ and inserting 

7 ‘‘one-third’’. 

8 (b) DEFINITION OF INTERESTED PERSON.—Section 

9 2(a)(19) of the Investment Company Act of 1940 (15 

10 U.S.C. 80a–2(a)(19)) is amended—

11 (1) in subparagraph (A)—

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 

18 Commission, by rule or regulation, deter19 mines are unlikely to exercise an appro20 priate degree of independence as a result 

21 of—

22 ‘‘(I) a material business or pro23 fessional relationship with the com24 pany or any affiliated person of the 

25 company, or 
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1 ‘‘(II) a close familial relationship 

2 with any natural person who is an af3 filiated person of the company,’’; and 

4 (2) in subparagraph (B)—

5 (A) by striking clause (vi) and redesig6 nating clause (vii) as clause (vi); and 

7 (B) by amending clause (v) to read as fol8 lows: 

9 ‘‘(v) any natural person who is a 

10 member of a class of persons who the 

11 Commission, by rule or regulation, deter12 mines are unlikely to exercise an appro13 priate degree of independence as a result 

14 of—

15 ‘‘(I) a material business or pro16 fessional relationship with such invest17 ment adviser or principal underwriter 

18 (or affiliated person thereof), or 

19 ‘‘(II) a close familial relationship 

20 with a natural person who is such in21 vestment adviser or principal under22 writer (or affiliated person thereof),’’. 
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1 SEC. 104. AUDIT COMMITTEE REQUIREMENTS FOR INVEST2 MENT COMPANIES. 

3 (a) AMENDMENTS.—Section 32 of the Investment 

4 Company Act of 1940 (15 U.S.C. 80a–31) is amended—

5 (1) in subsection (a)—

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

7 inserting the following: 

8 ‘‘(1) such accountant shall have been selected 

9 at a meeting held within 30 days before or after the 

10 beginning of the fiscal year or before the annual 

11 meeting of stockholders in that year by the vote, 

12 cast in person, of a majority of the members of the 

13 audit committee of such registered company; 

14 ‘‘(2) such selection shall have been submitted 

15 for ratification or rejection at the next succeeding 

16 annual meeting of stockholders if such meeting be 

17 held, except that any vacancy occurring between an18 nual meetings, due to the death or resignation of the 

19 accountant, may be filled by the vote of a majority 

20 of the members of the audit committee of such reg21 istered company, cast in person at a meeting called 

22 for the purpose of voting on such action;’’; and 

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

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

25 or order, may exempt a registered management 

26 company or registered face-amount certificate 
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1 company subject to this subsection from the re2 quirement in paragraph (1) that the votes by 

3 the members of the audit committee be cast at 

4 a meeting in person when such a requirement 

5 is impracticable, subject to such conditions as 

6 the Commission may require.’’; and 

7 (2) by adding at the end the following new sub8 section: 

9 ‘‘(d) AUDIT COMMITTEE REQUIREMENTS.—

10 ‘‘(1) REQUIREMENTS AS PREREQUISITE TO FIL11 ING FINANCIAL STATEMENTS.—Any registered man12 agement company or registered face-amount certifi13 cate company that files with the Commission any fi14 nancial statement signed or certified by an inde15 pendent public accountant shall comply with the re16 quirements of paragraphs (2) through (6) of this 

17 subsection and any rule or regulation of the Com18 mission issued thereunder. 

19 ‘‘(2) RESPONSIBILITY RELATING TO INDE20 PENDENT PUBLIC ACCOUNTANTS.—The audit com21 mittee of the registered company, in its capacity as 

22 a committee of the board of directors, shall be di23 rectly responsible for the appointment, compensa24 tion, and oversight of the work of any independent 

25 public accountant employed by such registered com-
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1 pany (including resolution of disagreements between 

2 management and the auditor regarding financial re3 porting) for the purpose of preparing or issuing the 

4 audit report or related work, and each such inde5 pendent public accountant shall report directly to 

6 the audit committee. 

7 ‘‘(3) INDEPENDENCE.—

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

9 audit committee of the registered company shall 

10 be a member of the board of directors of the 

11 company, and shall otherwise be independent. 

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

13 to be independent for purposes of this para14 graph, a member of an audit committee of a 

15 registered company may not, other than in his 

16 or her capacity as a member of the audit com17 mittee, the board of directors, or any other 

18 board committee—

19 ‘‘(i) accept any consulting, advisory, 

20 or other compensatory fee from the reg21 istered company or the investment adviser 

22 or principal underwriter of the registered 

23 company; or
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1 ‘‘(ii) be an ‘interested person’ of the 

2 registered company, as such term is de3 fined in section 2(a)(19). 

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

5 registered company shall establish procedures for—

6 ‘‘(A) the receipt, retention, and treatment 

7 of complaints received by the registered com8 pany regarding accounting, internal accounting 

9 controls, or auditing matters; and 

10 ‘‘(B) the confidential, anonymous submis11 sion by employees of the registered company 

12 and its investment adviser or principal under13 writer of concerns regarding questionable ac14 counting or auditing matters. 

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

16 audit committee of the registered company shall 

17 have the authority to engage independent counsel 

18 and other advisers, as it determines necessary to 

19 carry out its duties. 

20 ‘‘(6) FUNDING.—The registered company shall 

21 provide appropriate funding, as determined by the 

22 audit committee, in its capacity as a committee of 

23 the board of directors, for payment of compensa24 tion—
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1 ‘‘(A) to the independent public accountant 

2 employed by the registered company for the 

3 purpose of rendering or issuing the audit re4 port; and 

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

6 committee under paragraph (5). 

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

8 subsection, the term ‘audit committee’ means—

9 ‘‘(A) a committee (or equivalent body) es10 tablished by and amongst the board of directors 

11 of a registered investment company for the pur12 pose of overseeing the accounting and financial 

13 reporting processes of the company and audits 

14 of the financial statements of the company; and 

15 ‘‘(B) if no such committee exists with re16 spect to a registered investment company, the 

17 entire board of directors of the company.’’. 

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

19 the Securities Exchange Act of 1934 is amended by add20 ing at the end the following new paragraph: 

21 ‘‘(7) EXEMPTION FOR INVESTMENT COMPA22 NIES.—Effective one year after the date of enact23 ment of the Mutual Funds Integrity and Fee Trans24 parency Act of 2003, for purposes of this subsection, 

25 the term ‘issuer’ shall not include any investment 
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1 company that is registered under section 8 of the In2 vestment Company Act of 1940.’’. 

3 (c) IMPLEMENTATION.—Not later than 180 days 

4 after the date of enactment of this Act, the Securities and 

5 Exchange Commission shall issue final regulations to 

6 carry out section 32(d) of the Investment Company Act 

7 of 1940, as added by subsection (a) of this section.

8 SEC. 105. TRADING RESTRICTIONS. 

9 Subsection (e) of section 22 of the Investment Com10 pany Act of 1940 (15 U.S.C. 80a–22(e)) is amended to 

11 read as follows: 

12 ‘‘(e) TRADING RESTRICTIONS.—

13 ‘‘(1) PROHIBITION AND EXCEPTIONS.—No reg14 istered investment company shall suspend the right 

15 of redemption, or postpone the date of payment or 

16 satisfaction upon redemption of any redeemable se17 curity in accordance with its terms for more than 

18 seven days after the tender of such security to the 

19 company or its agents designated for that purpose 

20 for redemption, except—

21 ‘‘(A) for any period (i) during which the 

22 principal market for the securities in which the 

23 company invests is closed, other than customary 

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

25 which trading on such exchange is restricted; 
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1 ‘‘(B) for any period during which an emer2 gency exists as a result of which (i) disposal by 

3 the company of securities owned by it is not 

4 reasonably practicable; or (ii) it is not reason5 ably practicable for such company fairly to de6 termine the value of its net assets; or 

7 ‘‘(C) for such other periods as the Com8 mission may by order permit for the protection 

9 of security holders of the company. 

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

11 shall by rules and regulations—

12 ‘‘(A) determine the conditions under which 

13 trading shall be deemed to be restricted; 

14 ‘‘(B) determine the conditions under which 

15 an emergency shall be deemed to exist; and 

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

17 company, subject to such limitations as the 

18 Commission shall determine are necessary and 

19 appropriate for the protection of investors, of 

20 the principal market for the securities in which 

21 the company invests.’’.

22 SEC. 106. DEFINITION OF NO-LOAD MUTUAL FUND. 

23 Within 270 days after the date of enactment of this 

24 Act, the Securities and Exchange Commission shall, by 
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1 rule adopted by the Commission or a self-regulatory orga2 nization (or both)—

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

4 term is used by investment companies that impose 

5 any fee under a plan adopted pursuant to rule 12b6 1 of the Commission’s rules (17 C.F.R. 270.12b–1); 

7 and 

8 (2) require disclosure to prevent investors from 

9 being misled by the use of such terminology by the 

10 company or its adviser or principal underwriter.

11 SEC. 107. INFORMING DIRECTORS OF SIGNIFICANT DEFI12 CIENCIES. 

13 Section 42 of the Investment Company Act of 1940 

14 (15 U.S.C. 80a–41) is amended by adding at the end the 

15 following new subsection: 

16 ‘‘(f) INFORMING DIRECTORS OF SIGNIFICANT DEFI17 CIENCIES.—If the report of an inspection by the Commis18 sion of a registered investment company identifies signifi19 cant deficiencies in the operations of such company, or of 

20 its investment adviser or principal underwriter, the com21 pany shall provide such report to the directors of such 

22 company.’’. 
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1 SEC. 108. EXEMPTION FROM IN PERSON MEETING RE2 QUIREMENTS. 

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

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

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

6 rule, regulation, or order, may exempt a registered invest7 ment company subject to this subsection from the require8 ment that the votes of its directors be cast at a meeting 

9 in person when such a requirement is impracticable, sub10 ject to such conditions as the Commission may require.’’. 

11 SEC. 109. PROXY VOTING DISCLOSURE. 

12 Section 30 of the Investment Company Act of 1940 

13 (15 U.S.C. 80a–29) is amended by adding at the end the 

14 following new subsection: 

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

16 management investment company, other than a small 

17 business investment company, shall file with the Commis18 sion not later than August 31 of each year an annual re19 port, on a form prescribed by the Commission by rule, con20 taining the registrant’s proxy voting record for the most 

21 recent twelve-month period ending on June 30. The finan22 cial statements of every such company shall state that in23 formation regarding how the company voted proxies relat24 ing to portfolio securities during the most recent 12-month 

25 period ending on June 30 is available— 
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1 ‘‘(1) without charge, upon request, by calling a 

2 specified toll-free (or collect) telephone number; or 

3 on or through the company’s website at a specified 

4 Internet address; or both; and 

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

6 SEC. 110. INCENTIVE COMPENSATION AND MUTUAL FUND 

7 SALES. 

8 (a) COMMISSION RULE REQUIRED.—Within 270 

9 days after the date of enactment of this Act, the Commis10 sion shall by rule prohibit, as a means reasonably designed 

11 to prevent fraudulent, deceptive, or manipulative acts and 

12 practices, the sale of the securities of an investment com13 pany or of municipal fund securities by a broker or dealer 

14 or by a municipal securities broker or dealer without the 

15 disclosure of—

16 (1) the amount and source of sales fees, pay17 ments by persons other than the investment com18 pany that are intended to facilitate the sale and dis19 tribution of the securities, and commissions for ef20 fecting portfolio securities transactions, or other 

21 payments, paid to such broker or dealer, or munic22 ipal securities broker or dealer, or associated person 

23 thereof in connection with such sale; 
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1 (2) any commission or other fees or charges the 

2 investor has paid or will or might be subject to, in3 cluding as a result of purchases or redemptions; 

4 (3) any conflicts of interest that any associated 

5 person of the investor’s broker or dealer or munic6 ipal securities broker or dealer may face due to the 

7 receipt of differential compensation in connection 

8 with such sale; and

9 (4) information about the estimated amount of 

10 any asset-based distribution expenses incurred, or to 

11 be incurred, by the investment company in connec12 tion with the investor’s purchase of the securities. 

13 (b) BENCHMARKS.—In connection with the rule re14 quired by subsection (a), the Commission shall, to the ex15 tent practical, establish standards for such disclosures. 

16 (c) DEFINITIONS.—

17 (1) DIFFERENTIAL COMPENSATION.—For pur18 poses of this section, an associated person of a 

19 broker or dealer shall be considered to receive dif20 ferential compensation if such person receives any 

21 increased or additional remuneration, in whatever 

22 form—

23 (A) for sales of the securities of an invest24 ment company or municipal fund security that 

25 is affiliated with, or otherwise specifically des-
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1 ignated by, such broker or dealer or municipal 

2 securities broker or dealer, as compared with 

3 the remuneration for sales of securities of an 

4 investment company or municipal fund security 

5 offered by such broker or dealer or municipal 

6 securities broker or dealer that are not so affili7 ated or designated; or 

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

9 of an investment company or municipal fund se10 curity as compared with the remuneration for 

11 the sale of a class of securities of such invest12 ment company or municipal fund security (of13 fered by such broker or dealer or municipal se14 curities broker or dealer) that charges a sales 

15 load (as defined in section 2(a)(35) of the In16 vestment Company Act of 1940 (15 U.S.C. 

17 80a–2(a)(35)) only at the time of such a sale. 

18 (2) MUNICIPAL FUND SECURITY.—For pur19 poses of this section, a municipal fund security is 

20 any municipal security issued by an issuer that, but 

21 for the application of section 2(b) of the Investment 

22 Company Act of 1940 (15 U.S.C. 80a–2(b)), would 

23 constitute an investment company within the mean24 ing of section 3 of the Investment Company Act of 

25 1940 (15 U.S.C. 80a–3). 
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1 SEC. 111. COMMISSION STUDY AND REPORT REGULATING 

2 SOFT DOLLAR ARRANGEMENTS. 

3 (a) STUDY REQUIRED.—

4 (1) IN GENERAL.—The Commission shall con5 duct a study of the use of soft dollar arrangements 

6 by investment advisers as contemplated by section 

7 28(e) of the Securities Exchange Act of 1934 (15 

8 U.S.C. 78bb(e)). 

9 (2) AREAS OF CONSIDERATION.—The study re10 quired by this section shall examine—

11 (A) the trends in the average amounts of 

12 soft dollar commissions paid by investment ad13 visers and investment companies in the past 3 

14 years; 

15 (B) the types of services provided through 

16 soft dollar arrangements; 

17 (C) the benefits and disadvantages of the 

18 use of soft dollars for investors, including the 

19 extent to which use of soft dollar arrangements 

20 affects the ability of mutual fund investors to 

21 evaluate and compare the expenses of different 

22 mutual funds; 

23 (D) the potential or actual conflicts of in24 terest (or both potential and actual conflicts) 

25 created by soft dollar arrangements, including 

26 whether certain potential conflicts are being 
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1 managed effectively by other laws and regula2 tions specifically addressing those situations, 

3 the role of the board of directors in managing 

4 these potential or actual (or both) conflicts, and 

5 the effectiveness of the board in this capacity; 

6 (E) the transparency of such soft dollar 

7 arrangements to investment company share8 holders and investment advisory clients of in9 vestment advisers, the extent to which enhanced 

10 disclosure is necessary or appropriate to enable 

11 investors to better understand the impact of 

12 these arrangements, and an assessment of 

13 whether the cost of any enhanced disclosure or 

14 other regulatory change would result in benefits 

15 to the investor; and 

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

17 modified, and whether other regulatory or legis18 lative changes should be considered and adopted 

19 to benefit investors. 

20 (b) REPORT REQUIRED.—The Commission shall sub21 mit a report on the study required by subsection (a) to 

22 the Committee on Financial Services of the House of Rep23 resentatives and the Committee on Banking, Housing, and 

24 Urban Affairs of the Senate, no later than one year after 

25 the date of enactment of this Act. 
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1 SEC. 112. STUDY OF ARBITRATION CLAIMS. 

2 (a) STUDY REQUIRED.—The Securities and Ex3 change Commission shall conduct a study of the increased 

4 rate of arbitration claims and decisions involving mutual 

5 funds since 1995 for the purposes of identifying trends 

6 in arbitration claim rates and, if applicable, the causes of 

7 such increased rates and the means to avert such causes. 

8 (b) REPORT.—The Securities and Exchange Commis9 sion shall submit a report on the study required by sub10 section (a) to the Committee on Financial Services of the 

11 House of Representatives and the Committee on Banking, 

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

13 one year after the date of enactment of this Act. 

14 TITLE II—PREVENTION OF ABU15 SIVE MUTUAL FUND PRAC16 TICES 

17 SEC. 201. PREVENTION OF FRAUD; INTERNAL COMPLIANCE 

18 AND CONTROL PROCEDURES. 

19 (a) AMENDMENT.—Subsection (j) of section 17 of the 

20 Investment Company Act of 1940 (15 U.S.C. 80a–17(j)) 

21 is amended to read as follows: 

22 ‘‘(j) DETECTION AND PREVENTION OF FRAUD.—

23 ‘‘(1) COMMISSION RULES TO PROHIBIT FRAUD, 

24 DECEPTION, AND MANIPULATION.—It shall be un25 lawful for any affiliated person of or principal under26 writer for a registered investment company or any 
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1 affiliated person of an investment adviser of or prin2 cipal underwriter for a registered investment com3 pany, to engage in any act, practice, or course of 

4 business in connection with the purchase or sale, di5 rectly or indirectly, by such person of any security 

6 held or to be acquired by such registered investment 

7 company, or any security issued by such registered 

8 investment company or by an affiliated registered in9 vestment company, in contravention of such rules 

10 and regulations as the Commission may adopt to de11 fine, and prescribe means reasonably necessary to 

12 prevent, such acts, practices, or courses of business 

13 as are fraudulent, deceptive or manipulative. 

14 ‘‘(2) CODES OF ETHICS.—Such rules and regu15 lations shall include requirements for the adoption of 

16 codes of ethics by registered investment companies 

17 and investment advisers of, and principal under18 writers for, such investment companies establishing 

19 such standards as are reasonably necessary to pre20 vent such acts, practices, or courses of business. 

21 Such rules and regulations shall require each such 

22 registered investment company to disclose such 

23 codes of ethics (and any changes therein) in the 

24 periodic report to shareholders of such company, and 

25 to disclose such code of ethics and any waivers and 
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1 material violations thereof on a readily accessible 

2 electronic public information facility of such com3 pany and in such additional form and manner as the 

4 Commission shall require by rule or regulation. 

5 ‘‘(3) ADDITIONAL COMPLIANCE PROCEDURES.—

6 Such rules and regulations shall—

7 ‘‘(A) require each investment company and 

8 investment adviser registered with the Commis9 sion to adopt and implement policies and proce10 dures reasonably designed to prevent violation 

11 of the Securities Act of 1933 (15 U.S.C. 78a et 

12 seq.), the Securities Exchange Act of 1934 (15 

13 U.S.C. 78a et seq.), the Sarbanes-Oxley Act of 

14 2002 (15 U.S.C. 7201 et seq.), the Trust In15 denture Act of 1939 (15 U.S.C. 77aaa et seq.), 

16 the Investment Company Act of 1940 (15 

17 U.S.C. 80a–1 et seq.), the Investment Advisers 

18 Act of 1940 (15 U.S.C. 80b et seq.), the Secu19 rities Investor Protection Act of 1970 (15 

20 U.S.C. 78aaa et seq.), subchapter II of chapter 

21 53 of title 31, United States Code, chapter 2 of 

22 title I of Public Law 91–508 (12 U.S.C. 1951 

23 et seq.), or section 21 of the Federal Deposit 

24 Insurance Act (12 U.S.C. 1829b); 
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1 ‘‘(B) require each such company and ad2 viser to review such policies and procedures an3 nually for their adequacy and the effectiveness 

4 of their implementation; 

5 ‘‘(C) require each such company to appoint 

6 a chief compliance officer to be responsible for 

7 overseeing such policies and procedures—

8 ‘‘(i) whose compensation shall be ap9 proved by the members of the board of di10 rectors of the company who are not inter11 ested persons of such company; 

12 ‘‘(ii) who shall report directly to the 

13 members of the board of directors of the 

14 company who are not interested persons of 

15 such company, privately as such members 

16 request, but no less frequently than annu17 ally; and 

18 ‘‘(iii) whose report to such members 

19 shall include any violations or waivers of, 

20 and any other significant issues arising 

21 under, such policies and procedures; and 

22 ‘‘(D) require each such company to estab23 lish policies and procedures reasonably designed 

24 to protect any officer, director, employee, con25 tractor, subcontractor, or agent of such com-
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1 pany from retaliation, including discharge, de2 motion, suspension, harassment, or any other 

3 manner of discrimination in the terms and con4 ditions of employment, because of any lawful 

5 act done by such officer, director, employee, 

6 contractor, subcontractor, or agent to provide 

7 information, cause information to be provided, 

8 or otherwise assist in an investigation that re9 lates to any conduct which such officer, direc10 tor, employee, contractor, subcontractor, or 

11 agent reasonably believes constitutes a violation 

12 of the securities laws or the code of ethics of 

13 such investment company. 

14 ‘‘(4) SELF-CERTIFICATION.—Such rules and 

15 regulations shall require the members of the board 

16 of directors who are not interested persons of each 

17 registered open-end investment company to certify, 

18 in the periodic report to shareholders, or other ap19 propriate disclosure document, that—

20 ‘‘(A) procedures are in place for verifying 

21 that the determination of current net asset 

22 value of any redeemable security issued by the 

23 company used in computing periodically the 

24 current price for the purpose of purchase, re25 demption, and sale complies with the require-
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1 ments of the Investment Company Act of 1940 

2 and the rules and regulations thereunder, and 

3 the company is in compliance with such proce4 dures; 

5 ‘‘(B) procedures are in place for the over6 sight of the flow of funds into and out of the 

7 securities of the company, and the company is 

8 in compliance with such procedures; 

9 ‘‘(C) procedures are in place to ensure that 

10 investors are receiving any applicable discounts 

11 on front-end sales loads that are disclosed in 

12 the company’s prospectus; 

13 ‘‘(D) procedures are in place to ensure 

14 that, if the company’s shares are offered as dif15 ferent classes of shares, such classes are de16 signed in the interests of investors, and could 

17 reasonably be an appropriate investment option 

18 for an investor; 

19 ‘‘(E) procedures are in place to ensure that 

20 information about the company’s portfolio secu21 rities is not disclosed in violation of the securi22 ties laws or the company’s code of ethics; 

23 ‘‘(F) the members of the board of directors 

24 who are not interested persons of the company 

25 have reviewed and approved the compensation 
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1 of the company’s portfolio manager in connec2 tion with their consideration of the investment 

3 advisory contract under section 15(c); 

4 ‘‘(G) the company has established and en5 forces a code of ethics as required by paragraph 

6 (2) of this subsection; and 

7 ‘‘(H) the company is in compliance with 

8 the additional requirements of paragraph (3) of 

9 this subsection.’’. 

10 (b) DEADLINE FOR RULES.—The Securities and Ex11 change Commission shall prescribe rules to implement the 

12 amendment made by subsection (a) of this section within 

13 90 days after the date of enactment of this Act. 

14 SEC. 202. BAN ON JOINT MANAGEMENT OF MUTUAL FUNDS 

15 AND HEDGE FUNDS. 

16 (a) AMENDMENT.—Section 15 of the Investment 

17 Company Act of 1940 (15 U.S.C. 80a-15) is further 

18 amended by adding at the end the following new sub19 section: 

20 ‘‘(h) BAN ON JOINT MANAGEMENT OF MUTUAL

21 FUNDS AND HEDGE FUNDS.—

22 ‘‘(1) PROHIBITION OF JOINT MANAGEMENT.—It 

23 shall be unlawful for any individual to serve or act 

24 as the portfolio manager or investment adviser of a 

25 registered open-end investment company if such in-
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1 dividual also serves or acts as the portfolio manager 

2 or investment adviser of an investment company 

3 that is not registered or of such other categories of 

4 companies as the Commission shall prescribe by rule 

5 in order to prohibit conflicts of interest, such as con6 flicts in the selection of the portfolio securities. 

7 ‘‘(2) EXCEPTIONS.—Notwithstanding para8 graph (1), the Commission may, by rule, regulation, 

9 or order, permit joint management by a portfolio 

10 manager in exceptional circumstances when nec11 essary to protect the interest of investors, provided 

12 that such rule, regulation, or order requires—

13 ‘‘(A) enhanced disclosure by the registered 

14 open-end investment company to investors of 

15 any conflicts of interest raised by such joint 

16 management; and 

17 ‘‘(B) fair and equitable policies and proce18 dures for the allocation of securities to the port19 folios of the jointly managed companies, and 

20 certification by the members of the board of di21 rectors who are not interested persons of such 

22 registered open-end investment company, in the 

23 periodic report to shareholders, or other appro24 priate disclosure document, that such policies 
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1 and procedures of such company are fair and 

2 equitable. 

3 ‘‘(3) DEFINITION.—For purposes of this sub4 section, the term ‘portfolio manager’ means the indi5 vidual or individuals who are designated as respon6 sible for decision-making in connection with the se7 curities purchased and sold on behalf of a registered 

8 open-end investment company, but shall not include 

9 individuals who participate only in making research 

10 recommendations or executing transactions on behalf 

11 of such company.’’. 

12 (b) DEADLINE FOR RULES.—The Securities and Ex13 change Commission shall prescribe rules to implement the 

14 amendment made by subsection (a) of this section within 

15 90 days after the date of enactment of this Act. 

16 SEC. 203. SHORT TERM TRADING BY INTERESTED PERSONS 

17 PROHIBITED. 

18 (a) SHORT TERM TRADING PROHIBITED.—Section 

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

20 80a–17) is further amended by adding at the end the fol21 lowing new subsection: 

22 ‘‘(k) SHORT TERM TRADING PROHIBITED.—It shall 

23 be unlawful for any officer, director, partner, or employee 

24 of a registered investment company, any affiliated person, 

25 investment adviser, or principal underwriter of such com-
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1 pany, or any officer, director, partner, or employee of such 

2 an affiliated person, investment adviser, or principal un3 derwriter, to engage in short-term transactions, as such 

4 term is defined by the Commission by rule, in any securi5 ties of which such company, or any affiliate of such com6 pany, is the issuer, except that this subsection shall not 

7 prohibit transactions in money market funds, other funds 

8 the investment policy of which expressly permits short9 term transactions, or such other categories of registered 

10 investment companies as the Commission shall specify by 

11 rule.’’. 

12 (b) INCREASED REDEMPTION FEES PERMITTED FOR

13 SHORT TERM TRADING.—Within 90 days after the date 

14 of enactment of this Act, the Securities and Exchange 

15 Commission shall revise rule 11a–3 of its rules under the 

16 Investment Company Act of 1940 (17 CFR 270.11a–30), 

17 or other rules of the Commission, as necessary to permit 

18 an investment company to charge redemption fees in ex19 cess of 2 percent upon the redemption of any securities 

20 of such company that are redeemed within such period 

21 after their purchase as the Commission specifies in such 

22 rule to prevent short term trading that is unfair to the 

23 shareholders of such company. 

24 (c) DEADLINE FOR RULES.—The Securities and Ex25 change Commission shall prescribe rules to implement the 
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1 amendment made by subsection (a) of this section within 

2 90 days after the date of enactment of this Act. 

3 SEC. 204. ELIMINATION OF STALE PRICES. 

4 Within 90 days after the date of enactment of this 

5 Act, the Securities and Exchange Commission shall pre6 scribe, by rule or regulation, standards concerning the ob7 ligation of registered open-end investment companies 

8 under the Investment Company Act of 1940 to apply and 

9 use fair value methods of determination of net asset value 

10 when market quotations are unavailable or do not accu11 rately reflect the fair market value of the companies’ port12 folio securities, in order to prevent dilution of the interests 

13 of long-term investors or as necessary in the other inter14 ests of investors. Such rule or regulation shall identify, 

15 in addition to significant events, the conditions or cir16 cumstances from which such obligation will arise, such as 

17 the need to value securities traded on foreign exchanges, 

18 and the methods by which fair value methods shall be ap19 plied in such events, conditions, and circumstances. 

20 SEC. 205. PREVENTION OF UNFAIR AFTER-HOURS TRADING. 

21 (a) ADDITIONAL RULES REQUIRED.—Within 90 days 

22 after the date of enactment of this Act, the Securities and 

23 Exchange Commission shall issue rules to prevent trans24 actions in the securities of any registered open-end invest25 ment company in violation of section 22 of the Investment 
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1 Company Act of 1940 (15 U.S.C. 80a–22), including 

2 after-hours trades that are executed at a price based on 

3 a net asset value that was determined as of a time prior 

4 to the actual execution of the transaction. 

5 (b) TRADES COLLECTED BY INTERMEDIARIES.—

6 Such rules shall permit execution of such after-hours 

7 trades that are provided to the registered open-end invest8 ment company by a broker-dealer, retirement plan admin9 istrator, or other intermediary, after the time as of which 

10 such net asset value was determined, if such trades are 

11 collected by such intermediaries subject to procedures that 

12 are—

13 (1) designed to prevent the acceptance of trades 

14 by such intermediaries after the time as of which net 

15 asset value was determined; and 

16 (2) subject to an independent annual audit to 

17 verify that the procedures do not permit the accept18 ance of trades after the time as of which such net 

19 asset value was determined. 

20 (c) INDEPENDENTLY MAINTAINED SYSTEMS.—Such 

21 rules shall permit firms that utilize computer systems and 

22 procedures provided by unaffiliated entities to collect 

23 transactions to satisfy the independent audit requirements 

24 under subsection (b)(2) by means of an independent audit 

25 obtained by such unaffiliated entity. 
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1 SEC. 206. REPORT ON ADEQUACY OF REMEDIAL ACTIONS. 

2 (a) REPORT REQUIRED.—Within 180 days of enact3 ment, the Securities and Exchange Commission shall sub4 mit a report to the Committee on Financial Services of 

5 the House of Representatives and the Committee on 

6 Banking, Housing, and Urban Affairs of the Senate on 

7 market timing and late trading of mutual funds. 

8 (b) REQUIRED CONTENTS OF REPORT.—The report 

9 required by this section shall include the following: 

10 (1) The economic harm of market timing and 

11 late trading of mutual fund shares on long-term mu12 tual fund shareholders. 

13 (2) The findings by the Commission’s Office of 

14 Compliance, Inspections and Examinations, and the 

15 actions taken by the Commission’s Division of En16 forcement, regarding—

17 (A) illegal late trading practices; 

18 (B) illegal market timing practices; and 

19 (C) market timing practices that are not in 

20 violation of prospectus disclosures. 

21 (3) When the Commission became aware that 

22 the use of market timing practices was harming 

23 long-term shareholders, and the circumstances sur24 rounding the Commission’s discovery of that activity. 
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1 (4) The steps the Commission has taken since 

2 becoming aware of market timing practices to pro3 tect long-term mutual fund investors. 

4 (5) Any additional legislative or regulatory ac5 tion that is necessary to protect long-term mutual 

6 fund shareholders against the detrimental effects of 

7 late trading and market timing practices.

Passed the House of Representatives November 19, 

2003. 

Attest: JEFF TRANDAHL, 

Clerk.