I

104TH CONGRESS

2D SESSION H. R. 3005

To amend the Federal securities laws in order to promote efficiency and

capital formation in the financial markets, and to amend the Investment

Company Act of 1940 to promote more efficient management of mutual

funds, protect investors, and provide more effective and less burdensome

regulation.

IN THE HOUSE OF REPRESENTATIVES

MARCH 5, 1996

Mr. FIELDS of Texas introduced the following bill; which was referred to the

Committee on Commerce

A BILL

To amend the Federal securities laws in order to promote

efficiency and capital formation in the financial markets,

and to amend the Investment Company Act of 1940

to promote more efficient management of mutual funds,

protect investors, and provide more effective and less

burdensome regulation.

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; TABLE OF CONTENTS.

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

5 ‘‘Securities Amendments of 1996’’.
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1 (b) TABLE OF CONTENTS.—The table of contents of

2 this Act is as follows:

Sec. 1. Short title; table of contents.

TITLE I—CAPITAL MARKETS DEREGULATION AND

LIBERALIZATION

Sec. 101. Short title.

Sec. 102. Investment recommendations to institutional clients.

Sec. 103. Creation of national securities markets.

Sec. 104. Securities margin requirements.

Sec. 105. Williams act study.

Sec. 106. Prospectus delivery.

Sec. 107. Exemptive authority.

Sec. 108. Promotion of efficiency, competition, and capital formation.

Sec. 109. Reduction in number of members of Commission.

Sec. 110. Privatization of EDGAR.

Sec. 111. Designation of primary SRO and examining authority.

Sec. 112. Treatment of press conferences.

Sec. 113. Report on Trust Indenture Act of 1939.

TITLE II—INVESTMENT COMPANY ACT AMENDMENTS

Sec. 201. Short title.

Sec. 202. Funds of funds.

Sec. 203. Registration of securities.

Sec. 204. Investment company advertising prospectus.

Sec. 205. Variable insurance contracts.

Sec. 206. Reports to the Commission and shareholders.

Sec. 207. Books, records and inspections.

Sec. 208. Investment company names.

Sec. 209. Excepted investment companies.

3 TITLE I—CAPITAL MARKETS DE4 REGULATION AND LIBERAL5 IZATION

6 SEC. 101. SHORT TITLE.

7 This title may be cited as the ‘‘Capital Markets De8 regulation and Liberalization Act of 1996’’.

9 SEC. 102. INVESTMENT RECOMMENDATIONS TO INSTITU10 TIONAL CLIENTS.

11 (a) RULES OF NATIONAL SECURITIES EXCHANGES

12 PERTAINING TO INVESTMENT RECOMMENDATIONS TO IN-
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1 STITUTIONAL CLIENTS.—Section 6(b) of the Securities

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

3 inserting after paragraph (9) the following new paragraph:

4 ‘‘(10) INVESTMENT RECOMMENDATIONS TO IN5 STITUTIONAL CLIENTS.—

6 ‘‘(A) IN GENERAL.—The rules of the ex7 change do not provide that a member has an

8 obligation to form a belief as to the suitability

9 of an investment recommendation made by a

10 member to an institutional client, except that

11 the rules of the association may contain a provi12 sion in accordance with subparagraph (B).

13 ‘‘(B) PROVISION FOR WRITTEN AGREE14 MENTS.—The rules of the exchange may pro15 vide that a broker or dealer has an obligation

16 to form a reasonable belief as to the suitability

17 of an investment recommendation made by the

18 broker or dealer client if the following condi19 tions are met:

20 ‘‘(i) the broker or dealer and the insti21 tutional client expressly agree in writing,

22 prior to or contemporaneously with the

23 recommendation, that the recommendation

24 will be made by the broker or dealer on a

25 reasonable belief that the recommendation
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1 is suitable for such institutional client,

2 based upon facts disclosed by such institu3 tional client as to its other security hold4 ings and as to its financial situation and

5 needs; and

6 ‘‘(ii) such other conditions as the ex7 change may establish in accordance with

8 the requirements of this section.

9 ‘‘(C) DEFINITION OF INSTITUTIONAL CLI10 ENT.—For purposes of this paragraph, the

11 term ‘institutional client’ means any person

12 other than a natural person that has at least

13 $10,000,000 invested in securities in the aggre14 gate in its portfolio.’’.

15 (b) PRESUMPTION IN ACTIONS PERTAINING TO REC16 OMMENDATIONS TO INSTITUTIONAL CLIENTS.—Section

17 15 of the Securities Exchange Act of 1934 (15 U.S.C.

18 78o) is amended by inserting after subsection (g) the fol19 lowing new subsection:

20 ‘‘(h) INVESTMENT RECOMMENDATIONS TO INSTITU21 TIONAL CLIENTS.—

22 ‘‘(1) PRESUMPTION.—In any action brought

23 against a broker or dealer or a person associated

24 with a broker or dealer under this title or under any

25 rule or regulation thereunder pertaining to an in-
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1 vestment recommendation to an institutional client,

2 the broker or dealer or associated person shall be en3 titled to a presumption that it is not liable for the

4 investment decisions of an institutional client.

5 ‘‘(2) STANDARD FOR REBUTTING PRESUMP6 TION.—The presumption set out in paragraph (1)

7 may only be rebutted by proof that the broker or

8 dealer or associated person and the institutional cli9 ent expressly agreed in writing, prior to or contem10 poraneously with the recommendation, that the rec11 ommendation would be made by the broker or dealer

12 or associated person on a reasonable belief that the

13 recommendation would be suitable for such institu14 tional client, based upon facts disclosed by such in15 stitutional client as to its other security holdings and

16 as to its financial situation and needs.

17 ‘‘(3) DEFINITION OF INSTITUTIONAL CLIENT.—

18 For purposes of this subsection, the term ‘institu19 tional client’ means any person other than a natural

20 person that has at least $10,000,000 invested in se21 curities in the aggregate in its portfolio.

22 ‘‘(4) LIMITATION.—This subsection shall not be

23 deemed to create or affirm any private right of ac24 tion against a broker or dealer or associated person
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1 for any investment recommendation to an institu2 tional client.’’.

3 (c) RULES OF SECURITIES ASSOCIATIONS.—Section

4 15A(b) of the Securities Exchange Act of 1934 (15 U.S.C.

5 78o–3(b)) is amended by inserting after paragraph (13)

6 the following new paragraph:

7 ‘‘(14) INVESTMENT RECOMMENDATIONS TO IN8 STITUTIONAL CLIENTS.—

9 ‘‘(A) IN GENERAL.—The rules of the asso10 ciation do not provide that a member has an

11 obligation to form a belief as to the suitability

12 of an investment recommendation made by a

13 member to an institutional client, except that

14 the rules of the association may contain a provi15 sion in accordance with subparagraph (B).

16 ‘‘(B) PROVISION FOR WRITTEN AGREE17 MENTS.—The rules of the association may pro18 vide that a broker or dealer has an obligation

19 to form a reasonable belief as to the suitability

20 of an investment recommendation made by the

21 broker or dealer client if the following condi22 tions are met:

23 ‘‘(i) the broker or dealer and the insti24 tutional client expressly agree in writing,

25 prior to or contemporaneously with the
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1 recommendation, that the recommendation

2 will be made by the broker or dealer on

3 a reasonable belief that the recommenda4 tion is suitable for such institutional client,

5 based upon facts disclosed by such institu6 tional client as to its other security hold7 ings and as to its financial situation and

8 needs; and

9 ‘‘(ii) such other conditions as the as10 sociation may establish in accordance with

11 the requirements of this section.

12 ‘‘(C) DEFINITION OF INSTITUTIONAL CLI13 ENT.—For purposes of this paragraph, the

14 term ‘institutional client’ means any person

15 other than a natural person that has at least

16 $10,000,000 invested in securities in the aggre17 gate in its portfolio.’’.

18 SEC. 103. CREATION OF NATIONAL SECURITIES MARKETS.

19 (a) SECURITIES ACT OF 1933.—Section 18 of the Se20 curities Act of 1933 (15 U.S.C. 77r) is amended to read

21 as follows:

22 ‘‘SEC. 18. EXEMPTION FROM STATE CONTROL OF SECURI23 TIES OFFERINGS.

24 ‘‘(a) EXEMPTION FROM STATE LAW FOR REG25 ISTERED SECURITIES.—No law of any State or Territory
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1 of the United States, or the District of Columbia, or any

2 political subdivision thereof—

3 ‘‘(1) requiring, or with respect to, registration

4 or qualification of securities or securities trans5 actions shall apply to any securities that are offered

6 or sold using any means or instruments of transpor7 tation or communication in interstate commerce or

8 of the mails pursuant to—

9 ‘‘(A) a registration statement filed pursu10 ant to this title, with the exception of a reg11 istration statement filed by an issuer which is

12 a blank check company as defined in section

13 7(b) of this title;

14 ‘‘(B) an exemption from registration set

15 forth in section 3(a) of this title, with the ex16 ception of section 3(a)(11) or any rule or regu17 lation promulgated thereunder; or

18 ‘‘(C) any other exemption from section 5 of

19 this title;

20 ‘‘(2) shall prohibit, limit, or impose conditions

21 upon the use of any prospectus contained in a reg22 istration statement that has been filed with the

23 Commission, or any sales literature used in connec24 tion therewith; or
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1 ‘‘(3) shall prohibit, limit, or impose conditions

2 upon the offer or sale of any security registered with

3 the Commission under this title based upon the mer4 its of such offering or the issuer thereof;

5 except where the Commission may, by rule or regulation,

6 exclude such securities from the provisions of this section

7 upon a finding that the public interest and the protection

8 of investors would be served by State regulation.

9 ‘‘(b) PRESERVATION OF FILING REQUIREMENTS.—

10 Nothing contained in this title shall prohibit the securities

11 commission (or any agency or office performing like func12 tions) of any State or Territory of the United States, or

13 the District of Columbia, from requiring the filing of any

14 documents filed with the Commission pursuant to this

15 title, or from requiring some other form of filing, solely

16 for notice purposes, along with a consent to service of

17 process and requisite fee; except that no such filing, con18 sent, or fee may be required with respect to securities, or

19 transactions relating to securities, that are of the same

20 class as securities, or are senior to such a class, listed on

21 a national securities exchange or designated for trading

22 in the National Market System of the National Associa23 tion of Securities Dealers Automated Quotation System,

24 or securities that will be so listed or designated for trading

25 upon completion of the transaction.
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1 ‘‘(c) EXCEPTIONS.—Nothing in this title shall affect

2 the jurisdiction of the securities commission (or any agen3 cy or office performing like functions) of any State or Ter4 ritory of the United States, or the District of Columbia,

5 over—

6 ‘‘(1) any securities or transactions in securities

7 excluded, by statute, rule, or regulation, from the

8 operation of subsection (a) of this section, or

9 ‘‘(2) any person who, in the offer or sale of any

10 securities subject to subsection (a) of this section,

11 directly or indirectly, engages in conduct that vio12 lates section 17(a) of this title, regardless of whether

13 the jurisdictional means specified therein are satis14 fied.’’.

15 (2) TECHNICAL AMENDMENT.—Section

16 19(c)(3)(C) is amended by striking the last sentence.

17 (3) EFFECTIVE DATE.—The amendments made

18 by this subsection shall be effective 180 days after

19 the date of the enactment of this Act.

20 (b) SECURITIES EXCHANGE ACT OF 1934.—

21 (1) AMENDMENT.—Section 15 of the Securities

22 Exchange Act of 1934 (15 U.S.C. 78o) is amended

23 by adding at the end the following new subsection:

24 ‘‘(h) EXEMPTION FROM STATE LAW FOR REG25 ISTERED PERSONS.—
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1 ‘‘(1) EXEMPTION.—No law of any State or po2 litical subdivision thereof requiring the registration,

3 licensing, qualification, or inspection of a broker,

4 dealer, or person acting in a similar capacity in con5 nection with the purchase or sale of any security,

6 shall apply to—

7 ‘‘(A) any person who is registered with the

8 Commission as a broker or dealer, municipal se9 curities dealer, or government securities broker

10 or dealer under this title, or who the Commis11 sion by rule or order has exempted from reg12 istration, or any issuer;

13 ‘‘(B) any member of a national securities

14 exchange; or

15 ‘‘(C) any person associated with a broker

16 or dealer, member of a national securities ex17 change, municipal securities dealer, government

18 securities broker or dealer, or any issuer, in19 cluded within the coverage of subparagraph (A)

20 or (B).

21 ‘‘(2) PERMITTED STATE ACTIVITIES.—Nothing

22 contained in this subsection shall prohibit a State

23 from requiring registration, licensing, qualification,

24 or inspection of any person, other than an issuer,
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1 who is within the coverage of paragraph (1) of this

2 subsection—

3 ‘‘(A) in the case of paragraphs (1) (A) and

4 (B), the State performs its registration, licens5 ing, qualification, or inspection procedures

6 through a central registration depository system

7 operated by a national securities association

8 registered under section 15A of this title, and

9 the State’s requirements are substantially simi10 lar to the Commission’s registration require11 ments and do not include any provisions that

12 are inconsistent with, or in addition to, the

13 Commission’s registration requirements; or

14 ‘‘(B) in the case of paragraph (1)(C), the

15 State performs its registration, licensing, quali16 fication, or inspection procedures through a

17 central registration depository system operated

18 by a national securities association registered

19 under section 15A of this title and the State’s

20 requirements are substantially similar to, and

21 not inconsistent with, the registration require22 ments of such association or the Commission.

23 ‘‘(3) PROHIBITED REQUIREMENTS.—No law of

24 any State or political subdivision thereof shall estab25 lish broker or dealer capital, books, and records, or
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1 financial reporting requirements regarding persons

2 registered, licensed, qualified, or inspected pursuant

3 to paragraph (1) of this subsection that differ from

4 requirements established in these areas by the Com5 mission.

6 ‘‘(4) EXEMPTIONS.—The Commission may by

7 rule, regulation, or order exempt State requirements

8 from the provisions of paragraphs (1), (2), and (3)

9 of this subsection, in whole or in part, conditionally

10 or unconditionally, upon a finding that the public in11 terest, the protection of investors, and the mainte12 nance of fair and orderly markets would be served

13 by such State regulation.

14 ‘‘(5) FEES PERMITTED.—Nothing in this sub15 section shall prohibit any State or political subdivi16 sion thereof from charging requisite fees in connec17 tion with the registration, licensing, or qualification

18 of persons within the coverage of this subsection.

19 ‘‘(6) PRESERVATION OF AUTHORITY.—Nothing

20 contained in this subsection shall affect the jurisdic21 tion of any State or political subdivision thereof to

22 administer or enforce any provision of State law not

23 preempted by this subsection.’’.

24 (2) EFFECTIVE DATE.—The amendments made

25 by this subsection shall be effective upon enactment.
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1 SEC. 104. SECURITIES MARGIN REQUIREMENTS.

2 (a) MARGIN REQUIREMENTS.—Section 7 of the Secu3 rities Exchange Act of 1934 (15 U.S.C. 78g) is amended

4 to read as follows:

5 ‘‘SEC. 7. MARGIN REQUIREMENTS.

6 ‘‘(a) UNLAWFUL CREDIT EXTENSION IN VIOLATION

7 OF RULES AND REGULATIONS; EXCEPTION TO APPLICA8 TION OF RULES, ETC.—

9 ‘‘(1) GENERAL LIMITATIONS.—It shall be un10 lawful for any person to extend or maintain credit

11 on any equity security of a class designated by the

12 Board of Governors of the Federal Reserve System

13 for the purpose of purchasing or carrying any equity

14 security of a class so designated, in contravention of

15 such rules and regulations as the Board of Gov16 ernors of the Federal Reserve System shall prescribe

17 to prevent the excessive use of credit for the pur18 chasing or carrying of equity securities of a class so

19 designated.

20 ‘‘(2) APPLICABILITY.—Such rules and regula21 tions shall designate the classes of equity securities

22 subject to credit restrictions under this subsection

23 and shall apply equally to banks, brokers, dealers,

24 and other lenders. This subsection and the rules and

25 regulations thereunder shall not apply to any credit

26 extended or maintained—
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1 ‘‘(A) by a person not in the ordinary

2 course of business;

3 ‘‘(B) on an exempted security;

4 ‘‘(C) to or for an excluded account; or

5 ‘‘(D) as the Board of Governors of the

6 Federal Reserve System shall, by such rules,

7 regulations, or orders as it may deem necessary

8 or appropriate in the public interest or for the

9 protection of investors, exempt, either uncondi10 tionally or upon specified terms and conditions,

11 or for stated periods, from the operation of this

12 subsection and the rules and regulations there13 under.

14 ‘‘(3) EXEMPTION.—Notwithstanding subpara15 graphs (A), (B), and (C) of paragraph (2), the

16 Board of Governors of the Federal Reserve System

17 may impose such rules and regulations, in whole or

18 in part, on any extension of credit otherwise exempt19 ed by such subparagraphs if the Board of Governors

20 determines that such action is necessary to deal with

21 substantial instability or the imminent threat of sub22 stantial instability in the financial markets.

23 ‘‘(b) UNLAWFUL USE OF FOREIGN CREDIT FACILI24 TIES.—
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1 ‘‘(1) LIMITATIONS.—It shall be unlawful for

2 any United States person, or any foreign person con3 trolled by a United States person or acting on behalf

4 of or in conjunction with such person, to obtain, re5 ceive, or enjoy the beneficial use of any extension of

6 credit from any lender (without regard to whether

7 the lender’s office or place of business is in a State

8 or the transaction occurred in whole or in part with9 in a State) for the purpose of—

10 ‘‘(A) purchasing or carrying United States

11 equity securities of a class designated by the

12 Board of Governors of the Federal Reserve Sys13 tem pursuant to subsection (a); or

14 ‘‘(B) purchasing or carrying within the

15 United States of any other equity securities of

16 a class so designated, if, under this section or

17 rules and regulations prescribed thereunder, the

18 extension of credit is prohibited or would be

19 prohibited if it had been made or the trans20 action had otherwise occurred in a lender’s of21 fice or other place of business in a State.

22 ‘‘(2) DEFINITIONS.—For the purposes of this

23 subsection:

24 ‘‘(A) The term ‘United States person’ in25 cludes a person which is organized or exists
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1 under the laws of any State or, in the case of

2 a natural person, a citizen or resident of the

3 United States; a domestic estate; or a trust in

4 which one or more of the foregoing persons has

5 a cumulative direct or indirect beneficial inter6 est in excess of 50 percent of the value of the

7 trust.

8 ‘‘(B) The term ‘United States equity secu9 rity’ means an equity security (other than an

10 exempted security) issued by a person incor11 porated under the laws of any State, or whose

12 principal place of business is within a State.

13 ‘‘(C) The term ‘foreign person controlled

14 by a United States person’ includes any

15 noncorporate entity in which United States per16 sons directly or indirectly have more than a 50

17 percent beneficial interest, and any corporation

18 in which one or more United States persons, di19 rectly or indirectly, own stock possessing more

20 than 50 percent of the total combined voting

21 power of all classes of stock entitled to vote, or

22 more than 50 percent of the total value of

23 shares of all classes of stock.

24 ‘‘(3) EXEMPTIONS.—The Board of Governors of

25 the Federal Reserve System may, in its discretion
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1 and with due regard for the purposes of this section,

2 by rule, regulation, or order exempt any class of

3 United States persons or foreign persons controlled

4 by a United States person from the application of

5 this subsection.

6 ‘‘(c) INCONSISTENT RULES.—No margin, financial

7 responsibility, or other rule of any national securities ex8 change or of any national securities association shall im9 pose any limitation on the extension or maintenance of

10 credit more restrictive than, or otherwise inconsistent

11 with, those provided for in this section and the rules and

12 regulations of the Board of Governors of the Federal Re13 serve System adopted hereunder.’’.

14 (b) REMOVAL OF RESTRICTIONS ON BORROWING BY

15 BROKER-DEALERS.—Section 8 of the Securities Exchange

16 Act of 1934 (15 U.S.C. 78h) is amended—

17 (1) by striking out ‘‘member of a national secu18 rities exchange, or broker or dealer who transacts

19 business in securities through the medium of any

20 member of a national securities exchange,’’; and

21 (2) by striking out subsection (a) and by redes22 ignating subsections (b) and (c) as subsections (a)

23 and (b), respectively.
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1 (c) TRADING BY MEMBERS OF EXCHANGES, BRO2 KERS AND DEALERS.—Section 11(d) of the Securities Ex3 change Act of 1934 (15 U.S.C. 78k(d)) is amended—

4 (1) by striking out ‘‘a member of a national se5 curities exchange’’ and inserting in lieu thereof ‘‘any

6 person’’;

7 (2) by striking out ‘‘, or for any person who

8 both as a broker and a dealer transacts a business

9 in securities through the medium of a member or

10 otherwise,’’;

11 (3) by striking out ‘‘in the case of a member’’;

12 (4) by inserting ‘‘(other than an excluded ac13 count)’’ after ‘‘customer’’ the first place it appears;

14 (5) by inserting ‘‘equity’’ before ‘‘security’’ the

15 first place it appears;

16 (6) by striking out ‘‘(i)’’ and by striking out ‘‘or

17 (ii) any mortgage related security or any small busi18 ness related security against full payment of the en19 tire purchase price thereof upon such delivery within

20 180 days after such purchase or within such shorter

21 period as the Commission may prescribe by rule or

22 regulation’’; and

23 (7) by adding at the end thereof the following

24 new sentence: ‘‘The Commission may, by such rules,

25 regulations, or orders as it may deem necessary or
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1 appropriate in the public interest or for the protec2 tion of investors, exempt either unconditionally or

3 upon specified terms and conditions, or for stated

4 periods, any security or transaction, or class of secu5 rities or transactions from the operation of this sub6 section and the rules and regulations thereunder.’’.

7 (d) DEFINITION.—Section 3(a) of the Securities Ex8 change Act of 1934 (15 U.S.C. 78c(a)) is amended by

9 adding at the end thereof the following new paragraph:

10 ‘‘(54) The term ‘excluded account’ means any

11 person who comes within any of the following cat12 egories:

13 ‘‘(A) A financial institution, trust com14 pany, savings association, or savings and loan

15 association (acting in an individual, fiduciary,

16 or agency capacity).

17 ‘‘(B) A broker or dealer or an investment

18 adviser (acting on its own behalf or on behalf

19 of another).

20 ‘‘(C) A futures commission merchant, floor

21 broker, or floor trader (acting on its own behalf

22 or on behalf of another).

23 ‘‘(D) An insurance company.

24 ‘‘(E) An investment company, small busi25 ness investment company, business development
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1 company, or private business development com2 pany.

3 ‘‘(F) Any governmental entity (including

4 the United States, any State or any foreign

5 government), any political subdivision thereof,

6 any multinational or supranational entity, or

7 any department, agency, or instrumentality of

8 any of the foregoing.

9 ‘‘(G) A corporation, partnership, propri10 etorship, organization, trust, or other entity,

11 not formed for the specific purpose of evading

12 the requirements of any rule or regulation

13 adopted under section 7, with total assets ex14 ceeding $5,000,000 or the obligations of which

15 with respect to any extension of credit are guar16 anteed or otherwise supported by a letter of

17 credit or keepwell, support, or other agreement

18 by any such entity or by an entity referred to

19 in subparagraph (A), (B), (C), (D), (E), or (F)

20 of this paragraph.

21 ‘‘(H) An employee benefit plan with assets

22 exceeding $5,000,000 or whose investment deci23 sions are made by a bank, trust company,

24 broker, dealer, or registered investment adviser.
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1 ‘‘(I) Any entity in which all the equity

2 owners are ‘excluded accounts’.

3 ‘‘(J) Any person, other than a natural per4 son, who is an affiliate of the person extending

5 or maintaining credit.

6 ‘‘(K) Such other persons as the Board of

7 Governors of the Federal Reserve System shall,

8 by rule, regulation, or order, designate as an

9 ‘excluded account’, either unconditionally or

10 upon specified terms and conditions, or for

11 specified periods.’’.

12 (e) EFFECTIVE DATE.—The amendments made by

13 this section shall be effective 270 days after the date of

14 enactment of this Act.

15 SEC. 105. WILLIAMS ACT STUDY.

16 (a) STUDY REQUIRED.—The Securities and Ex17 change Commission shall conduct a study of—

18 (1) the burdens imposed on institutional inves19 tors and other entities by the requirements of sub20 sections (d), (g), and (h) of section 13 of the Securi21 ties Exchange Act of 1934 (15 U.S.C. 78m (d), (g),

22 (h)); and

23 (2) the extent to which the requirements of

24 such section 13(d) redistribute income from active to

25 passive investors.
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1 (b) REPORT.—Within 18 months after the date of en2 actment of this Act, the Commission shall submit to the

3 Congress a report on the results of the study required by

4 subsection (a). Such report shall include such legislative

5 recommendations as the Commission considers appro6 priate to reduce the regulatory burdens associated with

7 subsections (d), (g), and (h) of section 13 of the Securities

8 Exchange Act of 1934.

9 SEC. 106. PROSPECTUS DELIVERY.

10 (a) DEFINITION OF PROSPECTUS.—Section 2(10) of

11 the Securities Act of 1933 (15 U.S.C. 77b(10)) is amend12 ed by striking ‘‘or confirms the sale of any security’’.

13 (b) DELIVERY ON REQUEST.—Section 5(b)(2) of the

14 Securities Act of 1933 (15 U.S.C. 77e(b)(2)) is amended

15 by inserting before the period at the end the following:

16 ‘‘, if the purchaser or prospective purchaser of such secu17 rity has requested a prospectus’’.

18 (c) AUTHORITY TO EXEMPT.—Section 5 of the Secu19 rities Act of 1933 (15 U.S.C. 77(e)) is amended by adding

20 a new subsection (d) after subsection (c) as follows:

21 ‘‘(d) AUTHORITY TO EXEMPT.—The Commission

22 may from time to time by its rules and regulations and

23 subject to such terms and conditions as may be prescribed

24 therein, upon its own motion or by order on application

25 by an interested person, exempt from subsection (b) of
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1 section 5 any person or prospectus, or any class or classes

2 of persons or prospectuses, if and to the extent that such

3 exemption is necessary or appropriate in the public inter4 est and consistent with the protection of investors. The

5 Commission shall by rules and regulations determine the

6 procedures under which an exemption under this sub7 section shall be granted, and may, in its sole discretion,

8 decline to entertain any application for an order of exemp9 tion under this subsection.’’.

10 SEC. 107. EXEMPTIVE AUTHORITY.

11 (a) GENERAL EXEMPTIVE AUTHORITY UNDER THE

12 SECURITIES ACT OF 1933.—Title I of the Securities Act

13 of 1933 (15 U.S.C. 77a et seq.) is amended by adding

14 at the end the following new section:

15 ‘‘SEC. 28. GENERAL EXEMPTIVE AUTHORITY.

16 ‘‘The Commission, by rules and regulations, may con17 ditionally or unconditionally exempt any person, security,

18 or transaction, or any class or classes of persons, securi19 ties, or transactions, from any provision or provisions of

20 this title or of any rule or regulation thereunder, to the

21 extent that such exemption is necessary or appropriate in

22 the public interest, and is consistent with the protection

23 of investors and the promotion of efficiency, competition,

24 and capital formation.’’.
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1 (b) GENERAL EXEMPTIVE AUTHORITY UNDER THE

2 SECURITIES EXCHANGE ACT OF 1934.—Title I of the Se3 curities Exchange Act of 1934 (15 U.S.C. 78a et seq.)

4 is amended by adding at the end the following new section:

5 ‘‘SEC. 36. GENERAL EXEMPTIVE AUTHORITY.

6 ‘‘Notwithstanding any other provision of title, the

7 Commission, by rule, regulation, or order, may condi8 tionally or unconditionally exempt any person, security, or

9 transaction, or any class or classes of persons, securities,

10 or transactions, from any provision or provisions of this

11 title or of any rule or regulation thereunder, to the extent

12 that such exemption is necessary or appropriate in the

13 public interest, and is consistent with the protection of in14 vestors and the promotion of efficiency, competition, and

15 capital formation. The Commission shall by rules and reg16 ulations determine the procedures under which an exemp17 tive order under this section shall be granted.’’.

18 SEC. 108. PROMOTION OF EFFICIENCY, COMPETITION, AND

19 CAPITAL FORMATION.

20 (a) SECURITIES ACT OF 1933.—Section 2 of the Se21 curities Act of 1933 (15 U.S.C. 77b) is amended—

22 (1) by inserting ‘‘(a) DEFINITIONS.—’’ after

23 ‘‘SEC. 2.’’; and

24 (2) by adding at the end the following new sub25 section:
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1 ‘‘(b) CONSIDERATION OF PROMOTION OF EFFI2 CIENCY, COMPETITION, AND CAPITAL FORMATION.—

3 Whenever in this title the Commission is required to con4 sider or determine whether an action is consistent with

5 the public interest or the protection of investors (or both),

6 the Commission shall also consider or determine whether

7 the action will promote efficiency, competition, and capital

8 formation. This subsection shall not apply with respect to

9 any investigation or other action taken with respect to a

10 violation of this title.’’.

11 (b) SECURITIES EXCHANGE ACT of 1934.—Section

12 3 of the Securities Exchange Act of 1934 (15 U.S.C. 78c)

13 is amended by adding at the end the following new sub14 section:

15 ‘‘(e) CONSIDERATION OF PROMOTION OF EFFI16 CIENCY, COMPETITION, AND CAPITAL FORMATION.—

17 Whenever in this title the Commission is required to con18 sider or determine whether an action is consistent with

19 the public interest or the protection of investors (or both),

20 the Commission shall also consider or determine whether

21 the action will promote efficiency, competition, and capital

22 formation. This subsection shall not apply with respect to

23 any investigation or other action taken with respect to a

24 violation of this title.’’.
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1 (c) INVESTMENT COMPANY ACT of 1940.—Section 2

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

3 2) is amended by adding at the end the following new sub4 section:

5 ‘‘(c) CONSIDERATION OF PROMOTION OF EFFI6 CIENCY, COMPETITION, AND CAPITAL FORMATION.—

7 Whenever in this title the Commission is required to con8 sider or determine whether an action is consistent with

9 the public interest or the protection of investors (or both),

10 the Commission shall also consider or determine whether

11 the action will promote efficiency, competition, and capital

12 formation. This subsection shall not apply with respect to

13 any investigation or other action taken with respect to a

14 violation of this title.’’.

15 SEC. 109. REDUCTION IN NUMBER OF MEMBERS OF COM16 MISSION.

17 (a) AMENDMENTS.—Section 4(a) of the Securities

18 Exchange Act of 1934 (15 U.S.C. 78d(a)) is amended—

19 (1) by striking ‘‘five commissioners’’ and insert20 ing ‘‘3 commissioners’’; and

21 (2) by striking ‘‘three of such commissioners’’

22 and inserting ‘‘2 of such commissioners’’.

23 (b) EFFECTIVE DATE; IMPLEMENTATION.—The

24 amendments made by subsection (a) shall take effect on

25 the date of enactment of this Act, except that—
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1 (1) the offices the terms of which expired on

2 June 5, 1994, and June 5, 1995, shall be abolished;

3 and

4 (2) notwithstanding section 4(a) of the Securi5 ties Exchange Act of 1934—

6 (A) upon the expiration of the term of of7 fice prescribed by law to occur on June 5,

8 1996, any person appointed to serve as a com9 missioner of the Securities and Exchange Com10 mission to fill such office for the following term

11 shall be eligible to serve until June 5, 1999;

12 (B) upon the expiration of the term of of13 fice prescribed by law to occur on June 5,

14 1997, any person appointed to serve as a com15 missioner of the Securities and Exchange Com16 mission to fill such office for the following term

17 shall be eligible to serve until June 5, 2001;

18 and

19 (C) upon the expiration of the term of of20 fice prescribed by law to occur on June 5,

21 1998, any person appointed to serve as a com22 missioner of the Securities and Exchange Com23 mission to fill such office for the following term

24 shall be eligible to serve until June 5, 2003.
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1 SEC. 110. PRIVATIZATION OF EDGAR.

2 (a) REQUEST FOR PROPOSALS.—The Securities and

3 Exchange Commission shall, by public notice, request pro4 posals for the privatization of the EDGAR system. Such

5 notice shall specify the methods by which the Commission

6 will evaluate such proposal, which shall include the follow7 ing objectives:

8 (1) return to the Government on its investment

9 in the establishment of such system; and

10 (2) promote the automation and rapid dissemi11 nation of information required to be disclosed.

12 (b) REVIEW AND REPORT.—Within 180 days after

13 the date of enactment of this Act, the Commission shall

14 review the proposal received pursuant to subsection (a)

15 and submit to the Congress a report thereon. Such report

16 shall include such recommendations for such legislative ac17 tion as may be necessary to implement the proposal that

18 the Commission determines most effectively achieves the

19 objections described in subsection (a).

20 SEC. 111. DESIGNATION OF PRIMARY SRO AND EXAMINING

21 AUTHORITY.

22 (a) AMENDMENTS.—Section 17(d) of the Securities

23 Exchange Act of 1934 (15 U.S.C. 78q(d)) is amended to

24 read as follows:

25 ‘‘(d) DESIGNATION OF EXAMINING AUTHORITIES.—
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1 ‘‘(1) DESIGNATION.—After notice and com2 ment, the Commission shall designate for each reg3 istered broker or dealer a self-regulatory organiza4 tion of which the broker or dealer is a member

5 (other than a registered clearing agency) as its ex6 amining authority. In no event shall the Commission

7 designate more than one examining authority for

8 any broker or dealer, except with the consent of such

9 broker or dealer. In making any such designation,

10 the Commission shall take into consideration the

11 regulatory capabilities and procedures of the self12 regulatory organizations, availability of staff, con13 venience of location, unnecessary regulatory duplica14 tion, and such other factors as the Commission may

15 consider germane to the protection of investors, the

16 promotion of efficiency, competition, and capital for17 mation, cooperation and coordination among self18 regulatory organizations, and the development of a

19 national market system and a national system for

20 the clearance and settlement of securities trans21 actions.

22 ‘‘(2) ROUTINE EXAMINATIONS AND ENFORCE23 MENT OF RULES.—(A) Subject to paragraph (5), an

24 examining authority shall have exclusive authority to

25 conduct routine examinations and inspections of the
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1 financial operations or sales practices of any broker

2 or dealer for which it has been designated as the ex3 amining authority, and to issue a report of examina4 tion relating to each such examination or inspection

5 noting any deficiencies found.

6 ‘‘(B) An examining authority shall enforce its

7 own rules with respect to such broker or dealer, and

8 the Federal securities laws and rules and regulations

9 thereunder.

10 ‘‘(C) An examining authority shall furnish cop11 ies of any report of examination of any broker or

12 dealer to the Commission and to any self-regulatory

13 organization of which such person is a member or in

14 which such person is a participant. Any self-regu15 latory organization receiving a copy of the report

16 shall enforce its own rules with respect to such

17 broker or dealer, and the Federal securities laws and

18 rules and regulations thereunder.

19 ‘‘(3) CHANGES IN DESIGNATION.—On its own

20 motion or pursuant to a request by a broker or deal21 er for which the Commission previously has des22 ignated an examining authority, the Commission

23 shall consider changing the designation of an exam24 ining authority. After notice and comment, the Com25 mission shall change such designation by order if it
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1 is consistent with the factors set forth in paragraph

2 (1) of this subsection. The issuance of such an order

3 shall not alter or extinguish any pending disciplinary

4 proceeding that the originally designated examining

5 authority has brought against the broker or dealer

6 or any person associated with a broker or dealer.

7 ‘‘(4) COMMISSION RULES.—The Commission

8 may adopt rules for the designation of an examining

9 authority for a broker or dealer, and for changing

10 such designation. Such rules shall be designed to

11 minimize the costs and burdens on the registered

12 broker or dealer, consistent with the protection of in13 vestors and the public interest.

14 ‘‘(5) PRESERVATION OF EXISTING AUTHOR15 ITY.—Nothing in this subsection shall be construed

16 to alter, impair, or limit—

17 ‘‘(A) the Commission’s authority (i) to

18 conduct examinations and inspections of a

19 broker or dealer, or (ii) to bring any action

20 under this title against any broker or dealer, or

21 against any person associated with a broker or

22 dealer; or

23 ‘‘(B) the authority of any self-regulatory

24 organization to discipline any member or any

25 person associated with a member.’’.
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1 (b) DEFINITION.—Section 3(a) of the Securities Ex2 change Act of 1934 (15 U.S.C. 78e) is amended by adding

3 the following paragraph:

4 ‘‘(53) The term ‘examining authority’ means a

5 self-regulatory organization (other than a registered

6 clearing agency), as designated by the Commission,

7 with exclusive authority to examine, inspect, and

8 otherwise oversee the activities of a registered broker

9 or dealer.’’.

10 (c) CONFORMING AMENDMENTS.—

11 (1) Section 19(g) of the Securities Exchange

12 Act of 1934 (15 U.S.C. 78s(g))—

13 (A) by striking subparagraph (A);

14 (B) by inserting ‘‘a national securities ex15 change and’’ after ‘‘in the case of’’ in subpara16 graph (B); and

17 (C) by redesignating subparagraphs (B)

18 and (C) as subparagraphs (A) and (B), respec19 tively.

20 (2) Section 19(h) of such Act is amended in

21 each of paragraphs (1), (2), and (4)—

22 (A) by striking subparagraph (A) of each

23 such paragraph;
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1 (B) by inserting ‘‘a national securities ex2 change and’’ after ‘‘in the case of’’ in subpara3 graph (B) of each such paragraph; and

4 (C) by redesignating subparagraphs (B)

5 and (C) of each such paragraph as subpara6 graphs (A) and (B) of each such paragraph, re7 spectively.

8 (2) Section 19(h)(3) of such Act is amended by

9 striking ‘‘transaction—’’ and all that follows through

10 ‘‘(B) in the case of’’ and ‘‘transaction, in the case

11 of a national securities exchange and’’.

12 (d) INITIAL DESIGNATION.—The Commission shall

13 complete the initial designations of examining authorities

14 for brokers and dealers required by section 17(d) of the

15 Security Exchange Act of 1934 no later than one year

16 after the date of enactment of this Act.

17 SEC. 112. TREATMENT OF PRESS CONFERENCES.

18 (a) DEFINITION OF OFFER.—Section 2(3) of the Se19 curities Act of 1933 (15 U.S.C. 77b(3)) is amended—

20 (1) in the third sentence—

21 (A) by inserting ‘‘(A)’’ after ‘‘shall not in22 clude’’; and

23 (B) by inserting before the period at the

24 end thereof the following: ‘‘or (B) solely for

25 purposes of section 5, offshore press con-
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1 ferences, meetings with issuer representatives

2 conducted offshore, or press releases or other

3 material issued or released offshore in which an

4 offshore offering is discussed, irrespective of

5 whether journalists from the United States or

6 journalists for publications (including on-line

7 services) with circulation in the United States

8 attend such press conferences or meetings or

9 receive such press releases or material’’; and

10 (2) by inserting after such third sentence the

11 following: ‘‘Solely for purposes of section 5, no activ12 ity described in clause (B) of this paragraph shall be

13 considered in determining whether any other activity

14 or communication is included within the terms de15 fined in this paragraph and the term ‘offer to buy’

16 as used in subsection (c) of section 5 of this Act.’’.

17 (b) DEFINITION OF PROSPECTUS.—Section 2(10) of

18 the Securities Act of 1933 (15 U.S.C. 77b(10)) is amend19 ed—

20 (1) by redesignating clauses (a) and (b) as

21 clauses (A) and (B), respectively; and

22 (2) by striking the period at the end and insert23 ing the following: ‘‘, and (C) solely for purposes of

24 section 5, any press release or other material issued

25 or released offshore in which an offshore offering is
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1 discussed shall not be deemed a prospectus if such

2 press release or material states that it is not an

3 offer of securities. For purposes of clause (C) of this

4 paragraph, the Commission, as it deems necessary

5 or appropriate in the public interest or for the pro6 tection of investors, may adopt rules or regulations

7 requiring such press releases or material to contain

8 additional information.’’.

9 SEC. 113. REPORT ON TRUST INDENTURE ACT OF 1939.

10 Within 6 months after the date of enactment of this

11 Act, the Securities and Exchange Commission shall sub12 mit to the Congress a report on the continuing need for,

13 and options for the modification or elimination of, the

14 Trust Indenture Act of 1939 (15 U.S.C. 77aaa et seq.).

15 TITLE II—INVESTMENT

16 COMPANY ACT AMENDMENTS

17 SEC. 201. SHORT TITLE.

18 This title may be cited as the ‘‘Investment Company

19 Act Amendments of 1996’’.

20 SEC. 202. FUNDS OF FUNDS.

21 Section 12(d)(1) of the Investment Company Act of

22 1940 (15 U.S.C. 80a–12(d)(1)) is amended—

23 (1) in subparagraph (E)—
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1 (A) by striking ‘‘in the event such invest2 ment company is not a registered investment

3 company’’; and

4 (B) by inserting ‘‘in the event such invest5 ment company is not a registered investment

6 company’’ after ‘‘(bb)’’;

7 (2) by redesignating existing subparagraphs (G)

8 and (H) as subparagraphs (H) and (I), respectively;

9 (3) by inserting after subparagraph (F) the fol10 lowing new subparagraph:

11 ‘‘(G) The provisions of this paragraph (1) shall not

12 apply to securities of a registered open-end investment

13 company (the ‘acquired company’) purchased or otherwise

14 acquired by a registered open-end investment company

15 (the ‘acquiring company’) if—

16 ‘‘(i) the acquired company and the acquiring

17 company are part of the same group of investment

18 companies;

19 ‘‘(ii) the securities of the acquired company, se20 curities of other registered open-end investment

21 companies that are part of the same group of invest22 ment companies, Government securities, and short23 term paper are the only investments held by the ac24 quiring company;
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1 ‘‘(iii)(I) the acquiring company does not pay

2 and is not assessed any charges or fees for distribu3 tion-related activities with respect to securities of the

4 acquired company unless the acquiring company

5 does not charge a sales load or other fees or charges

6 for distribution-related activities; or

7 ‘‘(II) any sales loads and other distribution-re8 lated fees charged with respect to securities of the

9 acquiring company, when aggregated with any sales

10 load and distribution-related fees paid by the acquir11 ing company with respect to securities of the ac12 quired fund, are not excessive under rules adopted

13 pursuant to either section 22(b) or section 22(c) of

14 this title by a securities association registered under

15 section 15A of the Securities Exchange Act of 1934

16 or the Commission;

17 ‘‘(iv) the acquired company shall have a fun18 damental policy that prohibits it from acquiring any

19 securities of registered open-end investment compa20 nies in reliance on this subparagraph or subpara21 graph (F) of this subsection; and

22 ‘‘(v) such acquisition is not in contravention of

23 such rules and regulations as the Commission may

24 from time to time prescribe with respect to acquisi25 tions in accordance with this subparagraph as nec-
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1 essary and appropriate for the protection of inves2 tors.

3 For purposes of this subparagraph, a ‘group of investment

4 companies’ shall mean any two or more registered invest5 ment companies that hold themselves out to investors as

6 related companies for purposes of investment and investor

7 services.’’; and

8 (4) adding at the end the following new sub9 paragraph:

10 ‘‘(J) The Commission, by rules and regulations upon

11 its own motion or by order upon application, may condi12 tionally or unconditionally exempt any person, security or

13 transaction, or any class or classes of persons, securities

14 or transactions from any provisions of this subsection, if

15 and to the extent such exemption is consistent with the

16 public interest and the protection of investors.’’.

17 SEC. 203. REGISTRATION OF SECURITIES.

18 (a) AMENDMENTS TO REGISTRATION STATE19 MENTS.—Section 24(e) of the Investment Company Act

20 of 1940 (15 U.S.C. 80a–24(e)) is amended—

21 (1) by striking paragraphs (1) and (2);

22 (2) by redesignating paragraph (3) as sub23 section (e); and

24 (3) in subsection (e) (as so redesignated) by

25 striking ‘‘pursuant to this subsection or otherwise’’.
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1 (b) REGISTRATION OF INDEFINITE AMOUNT OF SE2 CURITIES.—Section 24(f) of the Investment Company Act

3 of 1940 (15 U.S.C. 80a–24(f)) is amended to read as fol4 lows:

5 ‘‘(f) REGISTRATION OF INDEFINITE AMOUNT OF SE6 CURITIES.—

7 ‘‘(1) INDEFINITE REGISTRATION OF SECURI8 TIES.—Upon the effectiveness of its registration

9 statement under the Securities Act of 1933, a face10 amount certificate company, open-end management

11 company, or unit investment trust, shall be deemed

12 to have registered an indefinite amount of securities.

13 ‘‘(2) PAYMENT OF REGISTRATION FEES.—With14 in 90 days after the end of the company’s fiscal

15 year, the company shall pay a registration fee to the

16 Commission, calculated in the manner specified in

17 section 6(b) of the Securities Act of 1933, based on

18 the aggregate sales price for which its securities (in19 cluding, for this purpose, all securities issued pursu20 ant to a dividend reinvestment plan) were sold dur21 ing the company’s previous fiscal year reduced by—

22 ‘‘(A) the aggregate redemption or repur23 chase price of the securities of the company

24 during that year, and
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1 ‘‘(B) the aggregate redemption or repur2 chase price of the securities of the company

3 during any prior year that were not used pre4 viously by the company to reduce fees payable

5 under this section.

6 ‘‘(3) INTEREST DUE ON LATE PAYMENT.—A

7 company paying the fee or any portion thereof more

8 than 90 days after the end of the company’s fiscal

9 year shall pay to the Commission interest on unpaid

10 amounts, compounded daily, at the underpayment

11 rate established by the Secretary of the Treasury

12 pursuant to section 3717 of title 31, United States

13 Code. The payment of interest pursuant to the re14 quirement of this paragraph shall not preclude the

15 Commission from bringing an action to enforce the

16 requirements of paragraph (2) of this subsection.

17 ‘‘(4) RULEMAKING AUTHORITY.—The Commis18 sion may adopt rules and regulations to implement

19 the provisions of this subsection.’’.

20 SEC. 204. INVESTMENT COMPANY ADVERTISING PROSPEC21 TUS.

22 Section 24 of the Investment Company Act of 1940

23 (15 U.S.C. 80a–24) is amended by adding at the end the

24 following new subsection:
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1 ‘‘(g) In addition to the prospectuses permitted or re2 quired in section 10(a) of the Securities Act of 1933, the

3 Commission shall permit, by rules or regulations deemed

4 necessary or appropriate in the public interest or for the

5 protection of investors, the use of a prospectus for the pur6 poses of section 5(b)(1) of such Act with respect to securi7 ties issued by a registered investment company. Such a

8 prospectus, which may include information the substance

9 of which is not included in the prospectus specified in sec10 tion 10(a) of the Securities Act of 1933, shall be deemed

11 to be permitted by section 10(b) of such Act.’’.

12 SEC. 205. VARIABLE INSURANCE CONTRACTS.

13 (a) UNIT INVESTMENT TRUST TREATMENT.—Sec14 tion 26 of the Investment Company Act (15 U.S.C. 80a–

15 26) is amended by adding at the end the following new

16 subsection:

17 ‘‘(e)(1) Subsection (a) shall not apply to any reg18 istered separate account funding variable insurance con19 tracts, or to the sponsoring insurance company and prin20 cipal underwriter of such account.

21 ‘‘(2) It shall be unlawful for any registered separate

22 account funding variable insurance contracts, or for the

23 sponsoring insurance company of such account, to sell any

24 such contract, unless—
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1 ‘‘(A) the fees and charges deducted under the

2 contract in the aggregate are reasonable in relation

3 to the services rendered, the expenses expected to be

4 incurred, and the risks assumed by the insurance

5 company, and the insurance company so represents

6 in the registration statement for the contract; and

7 ‘‘(B) the insurance company (i) complies with

8 all other applicable provisions of section 26 as if it

9 were a trustee or custodian of the registered sepa10 rate account; (ii) files with the insurance regulatory

11 authority of a State or territory of the United States

12 or of the District of Columbia an annual statement

13 of its financial condition, which most recent state14 ment indicates that it has a combined capital and

15 surplus, if a stock company, or an unassigned sur16 plus, if a mutual company, of not less than

17 $1,000,000, or such other amount as the Commis18 sion may from time to time prescribe by rule as nec19 essary or appropriate in the public interest or for

20 the protection of investors; and (iii) together with its

21 registered separate accounts, is supervised and ex22 amined periodically by the insurance authority of

23 such State, territory, or the District of Columbia.

24 ‘‘(3) The Commission may adopt such rules and regu25 lations under paragraph (2)(A) as it determines are nec-
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1 essary or appropriate in the public interest or for the pro2 tection of investors. For the purposes of such paragraph,

3 the fees and charges deducted under the contract shall in4 clude all fees and charges imposed for any purpose and

5 in any manner.’’.

6 (b) PERIODIC PAYMENT PLAN TREATMENT.—Sec7 tion 27 of such Act (15 U.S.C. 80a–27) is amended by

8 adding at the end the following new subsection:

9 ‘‘(i)(1) This section shall not apply to any registered

10 separate account funding variable insurance contracts, or

11 to the sponsoring insurance company and principal under12 writer of such account, except as provided in paragraph

13 (2).

14 ‘‘(2) It shall be unlawful for any registered separate

15 account funding variable insurance contracts, or for the

16 sponsoring insurance company of such account, to sell any

17 such contract unless (A) such contract is a redeemable se18 curity, and (B) the insurance company complies with sec19 tion 26(e) and any rules or regulations adopted by the

20 Commission thereunder.

21 SEC. 206. REPORTS TO THE COMMISSION AND SHAREHOLD22 ERS.

23 Section 30 of the Investment Company Act of 1940

24 (15 U.S.C. 80a–29) is amended—
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1 (1) by striking paragraph (1) of subsection (b)

2 and inserting the following:

3 ‘‘(1) such information, documents, and reports

4 (other than financial statements), as the Commis5 sion may require to keep reasonably current the in6 formation and documents contained in the registra7 tion statement of such company filed under this

8 title;’’; and

9 (2) by redesignating subsections (c), (d), (e),

10 and (f) as subsections (d), (e), (g), and (h), respec11 tively;

12 (3) by inserting after subsection (b) the follow13 ing new subsection:

14 ‘‘(c) In exercising its authority under subsection

15 (b)(1) to require the filing of information, documents, and

16 reports on a basis more frequently than semi-annually, the

17 Commission shall take such steps as it deems necessary

18 or appropriate, consistent with the public interest and the

19 protection of investors, to avoid unnecessary reporting by,

20 and minimize the compliance burdens on, registered in21 vestment companies and their affiliated persons. Such

22 steps shall include considering and requesting public com23 ment on—
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1 ‘‘(1) feasible alternatives that minimize the re2 porting burdens on registered investment companies;

3 and

4 ‘‘(2) the utility of such information, documents,

5 and reports to the Commission in relation to the

6 costs to registered investment companies and their

7 affiliated persons of providing such information, doc8 uments, and reports.’’;

9 (4) by inserting after subsection (e) (as redesig10 nated by paragraph (2) of this section) the following

11 new subsection:

12 ‘‘(f) The Commission may by rule require that semi13 annual reports containing the information set forth in sub14 section (e) include such other information as the Commis15 sion deems necessary or appropriate in the public interest

16 or for the protection of investors. In exercising its author17 ity under this subsection, the Commission shall take such

18 steps as it deems necessary or appropriate, consistent with

19 the public interest and the protection of investors, to avoid

20 unnecessary reporting by, and minimize the compliance

21 burdens on, registered investment companies and their af22 filiated persons. Such steps shall include considering and

23 requesting public comment on—
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1 ‘‘(1) feasible alternatives that minimize the re2 porting burdens on registered investment companies;

3 and

4 ‘‘(2) the utility of such information to share5 holders in relation to the costs to registered invest6 ment companies and their affiliated persons of pro7 viding such information to shareholders.’’; and

8 (5) in subsection (g) (as so redesignated) by

9 striking ‘‘subsections (a) and (d)’’ and inserting

10 ‘‘subsections (a) and (e)’’.

11 SEC. 207. BOOKS, RECORDS AND INSPECTIONS.

12 Section 31 of the Investment Company Act of 1940

13 (15 U.S.C. 80a–30) is amended—

14 (1) by striking subsections (a) and (b) and in15 serting the following:

16 ‘‘(a) Every registered investment company, and every

17 underwriter, broker, dealer, or investment adviser that is

18 a majority-owned subsidiary of such a company, shall

19 maintain and preserve such records (as defined in section

20 3(a)(37) of the Securities Exchange Act of 1934) for such

21 period or periods as the Commission, by rules and regula22 tions, may prescribe as necessary or appropriate in the

23 public interest or for the protection of investors. Every in24 vestment adviser not a majority-owned subsidiary of, and

25 every depositor of any registered investment company, and
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1 every principal underwriter for any registered investment

2 company other than a closed-end company, shall maintain

3 and preserve for such period or periods as the Commission

4 shall prescribe by rules and regulations, such records as

5 are necessary or appropriate to record such person’s trans6 actions with such registered company. In exercising its au7 thority under this subsection, the Commission shall take

8 such steps as it deems necessary or appropriate, consistent

9 with the public interest and for the protection of investors,

10 to avoid unnecessary recordkeeping by, and minimize the

11 compliance burden on, persons required to maintain

12 records under this subsection (hereinafter in this section

13 referred to as ‘subject persons’). Such steps shall include

14 considering, and requesting public comment on—

15 ‘‘(1) feasible alternatives that minimize the rec16 ordkeeping burdens on subject persons;

17 ‘‘(2) the necessity of such records in view of the

18 public benefits derived from the independent scru19 tiny of such records through Commission examina20 tion;

21 ‘‘(3) the costs associated with maintaining the

22 information that would be required to be reflected in

23 such records; and
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1 ‘‘(4) the effects that a proposed recordkeeping

2 requirement would have on internal compliance poli3 cies and procedures.

4 ‘‘(b) All records required to be maintained and pre5 served in accordance with subsection (a) of this section

6 shall be subject at any time and from time to time to such

7 reasonable periodic, special, and other examinations by the

8 Commission, or any member or representative thereof, as

9 the Commission may prescribe. For purposes of such ex10 aminations, any subject person shall make available to the

11 Commission or its representatives any copies or extracts

12 from such records as may be prepared without undue ef13 fort, expense, or delay as the Commission or its represent14 atives may reasonably request. The Commission shall exer15 cise its authority under this subsection with due regard

16 for the benefits of internal compliance policies and proce17 dures and the effective implementation and operation

18 thereof.’’;

19 (2) by redesignating existing subsections (c)

20 and (d) as subsections (e) and (f), respectively; and

21 (3) by inserting after subsection (b) the follow22 ing new subsections:

23 ‘‘(c) Notwithstanding any other provision of law, the

24 Commission shall not be compelled to disclose any internal

25 compliance or audit records, or information contained
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1 therein, provided to the Commission under this section.

2 Nothing in this subsection shall authorize the Commission

3 to withhold information from Congress or prevent the

4 Commission from complying with a request for informa5 tion from any other Federal department or agency re6 questing the information for purposes within the scope of

7 its jurisdiction, or complying with an order of a court of

8 the United States in an action brought by the United

9 States or the Commission. For purposes of section 552

10 of title 5, United States Code, this section shall be consid11 ered a statute described in subsection (b)(3)(B) of such

12 section 552.

13 ‘‘(d) For purposes of this section:

14 ‘‘(1) ‘internal compliance policies and proce15 dures’ shall mean policies and procedures designed

16 by subject persons to promote compliance with the

17 Federal securities laws; and

18 ‘‘(2) ‘internal compliance and audit record’

19 shall mean any record prepared by a subject person

20 in accordance with internal compliance policies and

21 procedures.’’.

22 SEC. 208. INVESTMENT COMPANY NAMES.

23 Section 35(d) of the Investment Company Act of

24 1940 (15 U.S.C. 80a–34) is amended to read as follows:
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1 ‘‘(d) It shall be unlawful for any registered invest2 ment company to adopt as a part of the name or title of

3 such company, or of any securities of which it is the issuer,

4 any word or words that are materially deceptive or mis5 leading. The Commission is authorized, by rule, regula6 tion, or order, to define such names or titles as are materi7 ally deceptive or misleading.’’.

8 SEC. 209. EXCEPTED INVESTMENT COMPANIES.

9 (a) AMENDMENTS.—Section 3(c) of the Investment

10 Company Act of 1940 (15 U.S.C. 80a–3(c)) is amended—

11 (1) in paragraph (1), by inserting after the first

12 sentence the following new sentence: ‘‘Such issuer

13 nonetheless is deemed to be an investment company

14 for purposes of the limitations set forth in section

15 12(d)(1) (A)(i) and (B)(i) governing the purchase or

16 other acquisition by such issuer of any security is17 sued by any registered investment company and the

18 sale of any security issued by any registered open19 end investment company to any such issuer.’’;

20 (2) in subparagraph (A) of paragraph (1)—

21 (A) by inserting after ‘‘issuer,’’ the first

22 place it appears the following: ‘‘and is or, but

23 for the exception in this paragraph or para24 graph (7), would be an investment company,’’;

25 and
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1 (B) by striking all that follows the words

2 ‘‘(other than short-term paper)’’ and inserting a

3 period; and

4 (3) by striking paragraph (7) and inserting the

5 following:

6 ‘‘(7)(A) Any issuer (i) whose outstanding secu7 rities are owned exclusively by persons who, at the

8 time of acquisition of such securities, are qualified

9 purchasers, and (ii) who is not making and does not

10 presently propose to make a public offering of such

11 securities. Securities that are owned by persons who

12 received the securities from a qualified purchaser as

13 a gift or bequest, or where the transfer was caused

14 by legal separation, divorce, death, or other involun15 tary event, shall be deemed to be owned by a quali16 fied purchaser, subject to such rules, regulations,

17 and orders as the Commission may prescribe as nec18 essary or appropriate in the public interest or for

19 the protection of investors.

20 ‘‘(B) Notwithstanding subparagraph (A), an is21 suer is within the exception provided by this para22 graph if—

23 ‘‘(i) in addition to qualified purchasers, its

24 outstanding securities are beneficially owned by

25 not more than 100 persons who are not quali-
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1 fied purchasers if (I) such persons acquired

2 such securities on or before December 31,

3 1995, and (II) at the time such securities were

4 acquired by such persons, the issuer was ex5 cepted by paragraph (1) of this subsection; and

6 ‘‘(ii) prior to availing itself of the exception

7 provided by this paragraph—

8 ‘‘(I) such issuer has disclosed to such

9 persons that future investors will be lim10 ited to qualified purchasers, and that own11 ership in such issuer is no longer limited to

12 not more than 100 persons, and

13 ‘‘(II) concurrently with or after such

14 disclosure, such issuer has provided such

15 persons with a reasonable opportunity to

16 redeem any part or all of their interests in

17 the issuer for their proportionate share of

18 the issuer’s current net assets, or the cash

19 equivalent thereof.

20 ‘‘(C) An issuer that is excepted under this para21 graph shall nonetheless be deemed to be an invest22 ment company for purposes of the limitations set

23 forth in section 12(d)(1) (A)(i) and (B)(i) governing

24 the purchase or other acquisition by such issuer of

25 any security issued by any registered investment
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1 company and the sale of any security issued by any

2 registered open-end investment company to any such

3 issuer.

4 ‘‘(D) For purposes of determining compliance

5 with this paragraph and paragraph (1) of this sub6 section, an issuer that is otherwise excepted under

7 this paragraph and an issuer that is otherwise ex8 cepted under paragraph (1) shall not be treated by

9 the Commission as being a single issuer for purposes

10 of determining whether the outstanding securities of

11 the issuer excepted under paragraph (1) are bene12 ficially owned by not more than 100 persons or

13 whether the outstanding securities of the issuer ex14 cepted under this paragraph are owned by persons

15 that are not qualified purchasers. Nothing in this

16 provision shall be deemed to establish that a person

17 is a bona fide qualified purchaser for purposes of

18 this paragraph or a bona fide beneficial owner for

19 purposes of paragraph (1) of this subsection.’’.

20 (b) DEFINITION OF QUALIFIED PURCHASER.—Sec21 tion 2(a) of the Investment Company Act of 1940 (15

22 U.S.C. 80a–2(a)) is amended by inserting after paragraph

23 (50) the following new paragraph:

24 ‘‘(51) ‘Qualified purchaser’ means—
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1 ‘‘(A) any natural person who owns at least

2 $10,000,000 in securities of issuers that are not

3 controlled by such person, except that securities

4 of such a controlled issuer may be counted to5 ward such amount if such issuer is, or but for

6 the exception in paragraph (1) or (7) of section

7 3(c) would be, an investment company;

8 ‘‘(B) any trust not formed for the specific

9 purpose of acquiring the securities offered, as

10 to which the trustee or other person authorized

11 to make decisions with respect to the trust, and

12 each settlor or other person who has contrib13 uted assets to the trust, is a person described

14 in subparagraph (A) or (C); or

15 ‘‘(C) any person, acting for its own ac16 count or the accounts of other qualified pur17 chasers, who in the aggregate owns and invests

18 on a discretionary basis, not less than

19 $100,000,000 in securities of issuers that are

20 not affiliated persons (as defined in section

21 2(a)(3)(C)) of such person, except that securi22 ties of such an affiliated person issuer may be

23 counted toward such amount if such issuer is,

24 or but for the exception in paragraph (1) or (7)
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1 of section 3(c) would be, an investment com2 pany.

3 The Commission may adopt such rules and regula4 tions governing the persons and trusts specified in

5 subparagraphs (A), (B), and (C) as it determines

6 are necessary or appropriate in the public interest

7 and for the protection of investors.’’.

8 (c) CONFORMING AMENDMENT.—The last sentence

9 of section 3(a) of the Investment Company Act of 1940

10 (15 U.S.C. 80a–3(a)) is amended—

11 (1) by inserting ‘‘(i)’’ after ‘‘of the owner’’; and

12 (2) by inserting before the period the following:

13 ‘‘, and (ii) which are not relying on the exception

14 from the definition of investment company in sub15 section (c)(1) or (c)(7) of this section’’.

16 (d) RULEMAKING REQUIRED.—

17 (1) IMPLEMENTATION OF SECTION 3(C)(1)(B).—

18 Within one year after the date of enactment of this

19 Act, the Commission shall prescribe rules to imple20 ment the requirements of section 3(c)(1)(B) of the

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

22 3(c)(1)(B)).

23 (2) EMPLOYEE EXCEPTION.—Within one year

24 after the date of enactment of this Act, the Commis25 sion shall prescribe rules pursuant to its authority
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1 under section 6 of the Investment Company Act of

2 1940 (15 U.S.C. 80a–6) to permit the ownership by

3 knowledgeable employees of an issuer of the securi4 ties of that issuer without loss of the issuer’s excep5 tion under section 3(c)(1) or 3(c)(7) of such Act

6 from treatment as an investment company under

7 that Act.

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