II 

109TH CONGRESS 

1ST SESSION S. 1037 

To require disclosure of financial relationships between brokers and mutual 

fund companies, and of certain brokerage commissions paid by mutual 

fund companies. 

IN THE SENATE OF THE UNITED STATES 

MAY 16, 2005 

Mr. AKAKA introduced the following bill; which was read twice and referred 

to the Committee on Banking, Housing, and Urban Affairs 

A BILL

To require disclosure of financial relationships between brokers and mutual fund companies, and of certain brokerage commissions paid by mutual fund companies.

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 Fund Trans5 parency Act of 2005’’. 
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1 SEC. 2. DISCLOSURE OF FINANCIAL RELATIONSHIPS BE2 TWEEN BROKERS AND MUTUAL FUND COM3 PANIES. 

4 (a) IN GENERAL.—Section 15(b) of the Securities 

5 Exchange Act of 1934 (15 U.S.C. 78o(b)) is amended by 

6 adding at the end the following: 

7 ‘‘(13) CONFIRMATION OF TRANSACTIONS FOR

8 MUTUAL FUNDS.— 

9 ‘‘(A) IN GENERAL.—Each broker shall dis10 close in writing to customers that purchase the 

11 shares of an open-end company registered 

12 under section 8 of the Investment Company Act 

13 of 1940 (15 U.S.C. 80a–8)— 

14 ‘‘(i) the amount of any compensation 

15 received or to be received by the broker in 

16 connection with such transaction from any 

17 sources; and 

18 ‘‘(ii) such other information as the 

19 Commission determines appropriate. 

20 ‘‘(B) REVENUE SHARING.—The term ‘com21 pensation’ under subparagraph (A) shall in22 clude any direct or indirect payment made by 

23 an investment adviser (or any affiliate of an in24 vestment adviser) to a broker or dealer for the 

25 purpose of promoting the sales of securities of 

26 an open-end company. 
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1 ‘‘(C) TIMING OF DISCLOSURE.—The disclo2 sure required under subparagraph (A) shall be 

3 made to a customer not later than as of the 

4 date of the completion of the transaction. 

5 ‘‘(D) LIMITATION.—The disclosures re6 quired under subparagraph (A) may not be 

7 made exclusively in— 

8 ‘‘(i) a registration statement or pro9 spectus of an open-end company; or 

10 ‘‘(ii) any other filing of an open-end 

11 company with the Commission. 

12 ‘‘(E) COMMISSION AUTHORITY.— 

13 ‘‘(i) IN GENERAL.—The Commission 

14 shall promulgate such final rules as are 

15 necessary to carry out this paragraph not 

16 later than 1 year after the date of enact17 ment of the Mutual Fund Transparency 

18 Act of 2005. 

19 ‘‘(ii) FORM OF DISCLOSURE.—Disclo20 sures under this paragraph shall be in 

21 such form as the Commission, by rule, 

22 shall require. 

23 ‘‘(F) DEFINITION.—In this paragraph, the 

24 term ‘open-end company’ has the same meaning 
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1 as in section 5 of the Investment Company Act 

2 of 1940 (15 U.S.C. 80a–5).’’. 

3 (b) DISCLOSURE OF BROKERAGE COMMISSIONS.—

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

5 U.S.C. 80a–29) is amended by adding at the end the fol6 lowing: 

7 ‘‘(k) DISCLOSURE OF BROKERAGE COMMISSIONS.—

8 The Commission, by rule, shall require that brokerage 

9 commissions as an aggregate dollar amount and percent10 age of assets paid by an open-end company be included 

11 in any disclosure of the amount of fees and expenses that 

12 may be payable by the holder of the securities of such com13 pany for purposes of— 

14 ‘‘(1) the registration statement of that open-end 

15 company; and 

16 ‘‘(2) any other filing of that open-end company 

17 with the Commission, including the calculation of ex18 pense ratios.’’. 

19 SEC. 3. MUTUAL FUND GOVERNANCE. 

20 (a) INDEPENDENT FUND BOARDS.—Section 10(a) of 

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

22 10(a)) is amended— 

23 (1) by striking ‘‘shall have’’ and inserting the 

24 following: ‘‘shall— 

25 ‘‘(1) have’’; 
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1 (2) by striking ‘‘60 per centum’’ and inserting 

2 ‘‘25 percent’’; 

3 (3) by striking the period at the end and insert4 ing a semicolon; and 

5 (4) by adding at the end the following: 

6 ‘‘(2) have as chairman of its board of directors 

7 an interested person of such registered company; or 

8 ‘‘(3) have as a member of its board of directors 

9 any person that is an interested person of such reg10 istered investment company— 

11 ‘‘(A) who has served without being ap12 proved or elected by the shareholders of such 

13 registered investment company at least once 

14 every 5 years; and 

15 ‘‘(B) unless such director has been found, 

16 on an annual basis, by a majority of the direc17 tors who are not interested persons, after rea18 sonable inquiry by such directors, not to have 

19 any material business or familial relationship 

20 with the registered investment company, a sig21 nificant service provider to the company, or any 

22 entity controlling, controlled by, or under com23 mon control with such service provider, that is 

24 likely to impair the independence of the direc25 tor.’’. 
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1 (b) ACTION BY INDEPENDENT DIRECTORS.—Section 

2 10 of the Investment Company Act of 1940 (15 U.S.C. 

3 80a–10) is amended by adding at the end the following: 

4 ‘‘(i) ACTION BY BOARD OF DIRECTORS.—No action 

5 taken by the board of directors of a registered investment 

6 company may require the vote of a director who is an in7 terested person of such registered investment company. 

8 ‘‘(j) INDEPENDENT COMMITTEE.— 

9 ‘‘(1) IN GENERAL.—The members of the board 

10 of directors of a registered investment company who 

11 are not interested persons of such registered invest12 ment company shall establish a committee comprised 

13 solely of such members, which committee shall be re14 sponsible for— 

15 ‘‘(A) selecting persons to be nominated for 

16 election to the board of directors; and 

17 ‘‘(B) adopting qualification standards for 

18 the nomination of directors. 

19 ‘‘(2) DISCLOSURE.—The standards developed 

20 under paragraph (1)(B) shall be disclosed in the reg21 istration statement of the registered investment com22 pany.’’. 

23 (c) DEFINITION OF INTERESTED PERSON.—Section 

24 2(a)(19) of the Investment Company Act of 1940 (15 

25 U.S.C. 80a–2) is amended— 
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1 (1) in subparagraph (A)— 

2 (A) in clause (iv), by striking ‘‘two’’ and 

3 inserting ‘‘5’’; and 

4 (B) by striking clause (vii) and inserting 

5 the following: 

6 ‘‘(vii) any natural person who has 

7 served as an officer or director, or as an 

8 employee within the preceding 10 fiscal 

9 years, of an investment adviser or principal 

10 underwriter to such registered investment 

11 company, or of any entity controlling, con12 trolled by, or under common control with 

13 such investment adviser or principal under14 writer; 

15 ‘‘(viii) any natural person who has 

16 served as an officer or director, or as an 

17 employee within the preceding 10 fiscal 

18 years, of any entity that has within the 

19 preceding 5 fiscal years acted as a signifi20 cant service provider to such registered in21 vestment company, or of any entity con22 trolling, controlled by, or under the com23 mon control with such service provider; 

24 ‘‘(ix) any natural person who is a 

25 member of a class of persons that the 
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1 Commission, by rule or regulation, deter2 mines is unlikely to exercise an appropriate 

3 degree of independence as a result of— 

4 ‘‘(I) a material business relation5 ship with the investment company or 

6 an affiliated person of such invest7 ment company; 

8 ‘‘(II) a close familial relationship 

9 with any natural person who is an af10 filiated person of such investment 

11 company; or 

12 ‘‘(III) any other reason deter13 mined by the Commission.’’; 

14 (2) in subparagraph (B)— 

15 (A) in clause (iv), by striking ‘‘two’’ and 

16 inserting ‘‘5’’; and 

17 (B) by striking clause (vii) and inserting 

18 the following: 

19 ‘‘(vii) any natural person who is a 

20 member of a class of persons that the 

21 Commission, by rule or regulation, deter22 mines is unlikely to exercise an appropriate 

23 degree of independence as a result of— 

24 ‘‘(I) a material business relation25 ship with such investment adviser or 
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1 principal underwriter or affiliated per2 son of such investment adviser or 

3 principal underwriter; 

4 ‘‘(II) a close familial relationship 

5 with any natural person who is an af6 filiated person of such investment ad7 viser or principal underwriter; or 

8 ‘‘(III) any other reason as deter9 mined by the Commission:’’. 

10 (d) DEFINITION OF SIGNIFICANT SERVICE PRO11 VIDER.—Section 2(a) of the Investment Company Act of 

12 1940 (15 U.S.C. 80a–2(a)) is amended by adding at the 

13 end the following: 

14 ‘‘(53) SIGNIFICANT SERVICE PROVIDER.— 

15 ‘‘(A) IN GENERAL.—Not later than 270 

16 days after the date of enactment of the Mutual 

17 Fund Transparency Act of 2005, the Securities 

18 and Exchange Commission shall issue final 

19 rules defining the term ‘significant service pro20 vider’. 

21 ‘‘(B) REQUIREMENTS.—The definition de22 veloped under paragraph (1) shall include, at a 

23 minimum, the investment adviser and principal 

24 underwriter of a registered investment company 

25 for purposes of paragraph (19).’’. 
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1 SEC. 4. FINANCIAL LITERACY AMONG MUTUAL FUND IN2 VESTORS STUDY. 

3 (a) IN GENERAL.—The Securities and Exchange 

4 Commission shall conduct a study to identify— 

5 (1) the existing level of financial literacy among 

6 investors that purchase shares of open-end compa7 nies, as that term is defined under section 5 of the 

8 Investment Company Act of 1940, that are reg9 istered under section 8 of that Act; 

10 (2) the most useful and understandable relevant 

11 information that investors need to make sound fi12 nancial decisions prior to purchasing such shares; 

13 (3) methods to increase the transparency of ex14 penses and potential conflicts of interest in trans15 actions involving the shares of open-end companies; 

16 (4) the existing private and public efforts to 

17 educate investors; and 

18 (5) a strategy to increase the financial literacy 

19 of investors that results in a positive change in in20 vestor behavior. 

21 (b) REPORT.—Not later than 1 year after the date 

22 of enactment of this Act, the Securities and Exchange 

23 Commission shall submit a report on the study required 

24 under subsection (a) to— 

25 (1) the Committee on Banking, Housing, and 

26 Urban Affairs of the Senate; and 
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1 (2) the Committee on Financial Services of the 

2 House of Representatives. 

3 SEC. 5. STUDY REGARDING MUTUAL FUND ADVERTISING. 

4 (a) IN GENERAL.—The Comptroller General of the 

5 United States shall conduct a study on mutual fund adver6 tising to identify— 

7 (1) existing and proposed regulatory require8 ments for open-end investment company advertise9 ments; 

10 (2) current marketing practices for the sale of 

11 open-end investment company shares, including the 

12 use of unsustainable past performance data, funds 

13 that have merged, and incubator funds; 

14 (3) the impact of such advertising on con15 sumers; and 

16 (4) recommendations to improve investor pro17 tections in mutual fund advertising and additional 

18 information necessary to ensure that investors can 

19 make informed financial decisions when purchasing 

20 shares. 

21 (b) REPORT.—Not later than 1 year after the date 

22 of enactment of this Act, the Comptroller General of the 

23 United States shall submit a report on the results of the 

24 study conducted under subsection (a) to— 
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1 (1) the Committee on Banking, Housing, and 

2 Urban Affairs of the United States Senate; and 

3 (2) the Committee on Financial Services of the 

4 House of Representatives. 

5 SEC. 6. POINT-OF-SALE DISCLOSURE. 

6 (a) IN GENERAL.—Section 15(b) of the Securities 

7 Exchange Act of 1934 (15 U.S.C. 78o(b)), as amended 

8 by section 2, is amended by adding at the end the fol9 lowing: 

10 ‘‘(14) BROKER DISCLOSURES IN MUTUAL FUND

11 TRANSACTIONS.— 

12 ‘‘(A) IN GENERAL.—Each broker shall dis13 close in writing to each person that purchases 

14 the shares of an investment company registered 

15 under section 8 of the Investment Company Act 

16 of 1940 (15 U.S.C. 80a-8)— 

17 ‘‘(i) the source and amount, in dollars 

18 and as a percentage of assets, of any com19 pensation received or to be received by the 

20 broker in connection with such transaction 

21 from any sources; 

22 ‘‘(ii) the amount, in dollars and as a 

23 percentage of assets, of compensation re24 ceived in connection with transactions in 

25 shares of other investment company shares 
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1 offered by the broker, if materially dif2 ferent from the amount under (i); 

3 ‘‘(iii) comparative information that 

4 shows the average amount received by bro5 kers in connection with comparable trans6 actions, as determined by the Commission; 

7 and 

8 ‘‘(iv) such other information as the 

9 Commission determines appropriate. 

10 ‘‘(B) REVENUE SHARING.—The term ‘com11 pensation’ under subparagraph (A) shall in12 clude any direct or indirect payment made by 

13 an investment adviser (or any affiliate of an in14 vestment adviser) to a broker or dealer for the 

15 purpose of promoting the sales of securities of 

16 a registered investment company. 

17 ‘‘(C) TIMING OF DISCLOSURE.—The disclo18 sures required under subparagraph (A) shall be 

19 made to permit the person purchasing the 

20 shares to evaluate such disclosures before decid21 ing to engage in the transaction. 

22 ‘‘(D) LIMITATION.—The disclosures re23 quired under subparagraph (A) may not be 

24 made exclusively in— 
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1 ‘‘(i) a registration statement or pro2 spectus of a registered investment com3 pany; or 

4 ‘‘(ii) any other filing of a registered 

5 investment company with the Commission. 

6 ‘‘(E) COMMISSION AUTHORITY.—The Com7 mission shall promulgate such final rules as are 

8 necessary to carry out this paragraph not later 

9 than 1 year after the date of enactment of the 

10 Mutual Fund Transparency Act of 2005.’’. 

11 (b) NATIONAL SECURITIES ASSOCIATION REQUIRE12 MENTS.—Section 15A of the Securities Exchange Act of 

13 1934 (15 U.S.C. 78o-3) is amended by adding at the end 

14 the following: 

15 ‘‘(n) NATIONAL SECURITIES ASSOCIATION REQUIRE16 MENTS.—Each national securities association registered 

17 pursuant to this section shall issue such rules as necessary 

18 not later than 1 year after the date of enactment of the 

19 Mutual Fund Transparency Act of 2005 to require that 

20 a broker that provides individualized investment advice to 

21 a person shall— 

22 ‘‘(1) have a fiduciary duty to that person; 

23 ‘‘(2) act solely in the best interests of that per24 son; and 
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1 ‘‘(3) fully disclose all potential conflicts of inter2 est and other information that is material to the re3 lationship to that person prior to the time that the 

4 investment advice is first provided to the person and 

5 at least annually thereafter.’’.

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