I 

108TH CONGRESS 

1ST SESSION H. R. 2420

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 

A BILL

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,

3 SECTION 1. SHORT TITLE. 

4 This Act may be cited as the ‘‘Mutual Funds Integ5 rity 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 
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1 and Exchange Commission shall revise regulations under 

2 the Securities Act of 1933, the Securities Exchange Act 

3 of 1934, or the Investment Company Act of 1940, or any 

4 combination thereof, to require, consistent with the protec5 tion of investors and the public interest, improved disclo6 sure with respect to an open-end management investment 

7 company, in the quarterly statement or other periodic re8 port to shareholders or other appropriate disclosure docu9 ment, of the following: 

10 (1) The estimated amount, in dollars, of the op11 erating expenses of the company that are borne by 

12 each shareholder. 

13 (2) The structure of, or method used to deter14 mine, the compensation of individuals employed by 

15 the investment adviser of the company to manage 

16 the portfolio of the company. 

17 (3) The portfolio transaction costs of the com18 pany, including commissions paid with respect to the 

19 trading of portfolio securities, set forth in a manner 

20 that facilitates comparison among investment com21 panies. 

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) DEFINITION.—For purposes of subsection (a), a 

22 disclosure shall not be considered to be made in an appro23 priate disclosure document if the disclosure is made exclu24 sively in a prospectus or statement of additional informa25 tion, or both such documents. 
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1 SEC. 3. OBLIGATIONS REGARDING CERTAIN DISTRIBUTION 

2 AND SOFT DOLLAR ARRANGEMENTS. 

3 Section 15 of the Investment Company of 1940 (15 

4 U.S.C. 80a–15) is amended by adding at the end the fol5 lowing new subsection: 

6 ‘‘(g) OBLIGATIONS REGARDING CERTAIN DISTRIBU7 TION AND SOFT DOLLAR ARRANGEMENTS.—

8 ‘‘(1) REPORTING REQUIREMENTS.—Each in9 vestment adviser to a registered investment company 

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

11 board of directors of the company a report on—

12 ‘‘(A) payments during the reporting period 

13 by the adviser (or an affiliated person of the 

14 adviser) that were directly or indirectly made 

15 for the purpose of promoting the sale of shares 

16 of the investment company (referred to in para17 graph (2) as a ‘revenue sharing arrangement’); 

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

19 paid for by a broker or dealer or an affiliated 

20 person of the broker or dealer (other than bro21 kerage and research services) in exchange for 

22 the direction of brokerage to the broker or deal23 er (referred to in paragraph (2) as a ‘directed 

24 brokerage arrangement’); and 

25 ‘‘(C) research services obtained by the ad26 viser (or an affiliated person of the adviser) 
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1 during the reporting period from a broker or 

2 dealer the receipt of which may reasonably be 

3 attributed to securities transactions effected on 

4 behalf of the company or any other company 

5 that is a member of the same group of invest6 ment companies (referred to in paragraph (2) 

7 as a ‘soft dollar arrangement’). 

8 ‘‘(2) FIDUCIARY DUTY OF BOARD OF DIREC9 TORS.—The board of directors of a registered invest10 ment company shall have a fiduciary duty—

11 ‘‘(A) to supervise the investment adviser’s 

12 direction of the company’s brokerage trans13 actions, including directed brokerage arrange14 ments and soft dollar arrangements, and to de15 termine that the direction of such brokerage is 

16 in the best interests of the shareholders of the 

17 company; and 

18 ‘‘(B) to supervise any revenue sharing ar19 rangements to ensure compliance with this Act

20 and the rules adopted thereunder, and to deter21 mine that such revenue sharing arrangements 

22 are in the best interests of the shareholders of 

23 the company. 

24 ‘‘(3) REGULATIONS.—The Commission shall 

25 adopt rules and regulations implementing this sec-
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1 tion, which rules and regulations shall, among other 

2 things, prescribe the content of the required reports. 

3 ‘‘(4) DEFINITION.—For purposes of this sub4 section—

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

6 services’ has the same meaning as in section 

7 28(e)(3) of the Securities Exchange Act of 

8 1934; and 

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

10 the services described in subparagraphs (A) and 

11 (B) of such section.’’. 

12 SEC. 4. MUTUAL FUND GOVERNANCE. 

13 (a) DIRECTOR AND CHAIRMAN INDEPENDENCE.—

14 Section 10(a) of the Investment Company Act of 1940 (15 

15 U.S.C. 80a–10) is amended—

16 (1) by striking ‘‘60 per centum’’ and inserting 

17 ‘‘one-third’’; and 

18 (2) by inserting ‘‘, nor shall such registered 

19 company have as chairman of such board an inter20 ested person of such registered company’’ before the 

21 period. 

22 (b) DEFINITION OF INTERESTED PERSON.—Section 

23 2(a)(19) of the Investment Company Act of 1940 (15 

24 U.S.C. 80a–2(a)(19)) is amended—

25 (1) in subparagraph (A)—
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1 (A) by striking clause (vi) and redesig2 nating clause (vii) as clause (vi); and 

3 (B) by amending clause (v) to read as fol4 lows: 

5 ‘‘(v) any natural person who is a 

6 member of a class of persons who the 

7 Commission, by rule or regulation, deter8 mines are unlikely to exercise an appro9 priate degree of independence as a result 

10 of—

11 ‘‘(I) a material business or pro12 fessional relationship with the com13 pany or any affiliated person of the 

14 company, or 

15 ‘‘(II) a close familial relationship 

16 with any natural person who is an af17 filiated person of the company,’’; and 

18 (2) in subparagraph (B)—

19 (A) by striking clause (vi) and redesig20 nating clause (vii) as clause (vi); and 

21 (B) by amending clause (v) to read as fol22 lows: 

23 ‘‘(v) any natural person who is a 

24 member of a class of persons who the 

25 Commission, by rule or regulation, deter-
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1 mines are unlikely to exercise an appro2 priate degree of independence as a result 

3 of—

4 ‘‘(I) a material business or pro5 fessional relationship with such invest6 ment adviser or principal underwriter 

7 (or affiliated person thereof), or 

8 ‘‘(II) a close familial relationship 

9 with a natural person who is such in10 vestment adviser or principal under11 writer (or affiliated person thereof).’’. 

12 SEC. 5. AUDIT COMMITTEE REQUIREMENTS FOR INVEST13 MENT COMPANIES. 

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

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

16 (1) by striking paragraphs (1) and (2) of sub17 section (a) and inserting the following: 

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

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

20 beginning of the fiscal year or before the annual 

21 meeting of stockholders in that year by the vote, 

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

23 audit committee of such registered company; 

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

25 for ratification or rejection at the next succeeding 
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1 annual meeting of stockholders if such meeting be 

2 held, except that any vacancy occurring between an3 nual meetings, due to the death or resignation of the 

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

5 of the members of the audit committee of such reg6 istered company, cast in person at a meeting called 

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

8 (2) by adding at the end the following new sub9 section: 

10 ‘‘(d) AUDIT COMMITTEE REQUIREMENTS.—

11 ‘‘(1) REQUIREMENTS AS PREREQUISITE TO FIL12 ING FINANCIAL STATEMENTS.—Any registered man13 agement company or registered face-amount certifi14 cate company that files with the Commission any fi15 nancial statement signed or certified by an inde16 pendent public accountant shall comply with the re17 quirements of paragraphs (2) through (6) of this

18 subsection and any rule or regulation of the Com19 mission issued thereunder. 

20 ‘‘(2) RESPONSIBILITY RELATING TO INDE21 PENDENT PUBLIC ACCOUNTANTS.—The audit com22 mittee of the registered company, in its capacity as 

23 a committee of the board of directors, shall be di24 rectly responsible for the appointment, compensa25 tion, and oversight of the work of any independent 
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1 public accountant employed by such registered com2 pany (including resolution of disagreements between 

3 management and the auditor regarding financial re4 porting) for the purpose of preparing or issuing the 

5 audit report or related work, and each such inde6 pendent public accountant shall report directly to 

7 the audit committee. 

8 ‘‘(3) INDEPENDENCE.—

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

10 audit committee of the registered company shall 

11 be a member of the board of directors of the 

12 company, and shall otherwise be independent. 

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

14 to be independent for purposes of this para15 graph, a member of an audit committee of a 

16 registered company may not, other than in his 

17 or her capacity as a member of the audit com18 mittee, the board of directors, or any other 

19 board committee—

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

21 or other compensatory fee from the reg22 istered company or any affiliated person of 

23 the registered 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 affiliated persons of concerns regarding 

13 questionable accounting or auditing matters. 

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

15 audit committee of the registered company shall 

16 have the authority to engage independent counsel 

17 and other advisers, as it determines necessary to 

18 carry out its duties. 

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

20 provide appropriate funding, as determined by the 

21 audit committee, in its capacity as a committee of 

22 the board of directors, for payment of compensa23 tion—

24 ‘‘(A) to the independent public accountant 

25 employed by the registered company for the 
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1 purpose of rendering or issuing the audit re2 port; and 

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

4 committee under paragraph (5). 

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

6 subsection, the term ‘audit committee’ means—

7 ‘‘(A) a committee (or equivalent body) es8 tablished by and amongst the board of directors 

9 of a registered investment company for the pur10 pose of overseeing the accounting and financial 

11 reporting processes of the company and audits 

12 of the financial statements of the company; and 

13 ‘‘(B) if no such committee exists with re14 spect to a registered investment company, the 

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

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

17 the Securities Exchange Act of 1934 is amended by add18 ing at the end the following new paragraph: 

19 ‘‘(7) EXEMPTION FOR INVESTMENT COMPA20 NIES.—Effective one year after the date of enact21 ment of the Mutual Funds Integrity and Fee Trans22 parency Act of 2003, for purposes of this subsection, 

23 the term ‘issuer’ shall not include any investment 

24 company that is registered under section 8 of the In25 vestment Company Act of 1940.’’. 
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1 (c) IMPLEMENTATION.—Not later than 180 days 

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

3 Exchange Commission shall issue final regulations to 

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

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

6 SEC. 6. COMMISSION STUDY AND REPORT REGULATING 

7 SOFT DOLLAR ARRANGEMENTS. 

8 (a) STUDY REQUIRED.—

9 (1) IN GENERAL.—The Commission shall con10 duct a study of the use of soft dollar arrangements 

11 by investment advisers as contemplated by section 

12 28(e) of the Securities Exchange Act of 1934 (15 

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

14 (2) AREAS OF CONSIDERATION.—The study re15 quired by this section shall examine—

16 (A) the trends in the average amounts of 

17 soft dollar commissions paid by investment ad18 visers and investment companies in the past 3 

19 years; 

20 (B) the types of services provided through 

21 soft dollar arrangements; 

22 (C) the extent to which use of soft dollar 

23 arrangements impairs the ability of mutual 

24 fund investors to evaluate and compare the ex25 penses of different mutual funds; 
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1 (D) the conflicts of interest created by soft 

2 dollar arrangements; 

3 (E) the transparency of such soft dollar 

4 arrangements to investment company share5 holders and investment advisory clients of in6 vestment advisers; and 

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

8 repealed or modified. 

9 (b) REPORT REQUIRED.—The Commission shall sub10 mit a report on the study required by subsection (a) to 

11 the Committee on Financial Services of the House of Rep12 resentatives and the Committee on Banking, Housing and 

13 Urban Affairs of the Senate, no later than 18 months 

14 after the date of enactment of this Act.

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