Union Calendar No. 310

104TH CONGRESS

2D SESSION H. R. 3005

[Report No. 104–622]

A BILL

To amend the Federal securities laws in order to

regulation.and provide more effective and less burdensomemanagement of mutual funds, protect investors,Company Act of 1940 to promote more efficientfinancial markets, and to amend the Investmentpromote efficiency and capital formation in the

JUNE 17, 1996

Reported with an amendment, committed to the Commitordered to be printed tee of the Whole House on the State of the Union, and
IB

Union Calendar No. 310

104TH CONGRESS

2D SESSION H. R. 3005

[Report No. 104–622]

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

JUNE 17, 1996

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

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

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

[For text of introduced bill, see copy of bill as introduced on March 5, 1996]

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

3 SECTION 1. SHORT TITLE; TABLE OF CONTENTS.

4 (a) SHORT TITLE.—This Act may be cited as the ‘‘Se5 curities Amendments of 1996’’.

6 (b) TABLE OF CONTENTS.—The table of contents of this

7 Act is as follows:

Sec. 1. Short title; table of contents.

TITLE I—CAPITAL MARKETS DEREGULATION AND LIBERALIZATION

Sec. 101. Short title.

Sec. 102. Creation of national securities markets.

Sec. 103. Margin requirements.

Sec. 104. Prospectus delivery.

Sec. 105. Exemptive authority.

Sec. 106. Promotion of efficiency, competition, and capital formation.

Sec. 107. Privatization of EDGAR.

Sec. 108. Coordination of Examining Authorities.

Sec. 109. Foreign press conferences.

Sec. 110. 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. Exceptions from definition of investment company.

8 TITLE I—CAPITAL MARKETS DE9 REGULATION AND LIBERAL10 IZATION

11 SEC. 101. SHORT TITLE.

12 This title may be cited as the ‘‘Capital Markets De13 regulation and Liberalization Act of 1996’’.
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1 SEC. 102. CREATION OF NATIONAL SECURITIES MARKETS.

2 (a) SECURITIES ACT OF 1933.—

3 (1) AMENDMENT.—Section 18 of the Securities

4 Act of 1933 (15 U.S.C. 77r) is amended to read as

5 follows:

6 ‘‘SEC. 18. EXEMPTION FROM STATE REGULATION OF SECU7 RITIES OFFERINGS.

8 ‘‘(a) SCOPE OF EXEMPTION.—Except as otherwise pro9 vided in this section, no law, rule, regulation, or order, or

10 other administrative action of any State or Territory of the

11 United States, or the District of Columbia, or any political

12 subdivision thereof—

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

14 qualification of securities, or registration or qualifica15 tion of securities transactions, shall directly or indi16 rectly apply to a security that—

17 ‘‘(A) is a covered security; or

18 ‘‘(B) will be a covered security upon com19 pletion of the transaction;

20 ‘‘(2) shall directly or indirectly prohibit, limit,

21 or impose conditions upon the use of—

22 ‘‘(A) with respect to a covered security de23 scribed in subsection (b)(1) or (c)(1)—

24 ‘‘(i) any offering document that is pre25 pared by the issuer; or
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1 ‘‘(ii) any offering document that is not

2 prepared by the issuer if such offering docu3 ment is required to be and is filed with the

4 Commission or any national securities or5 ganization registered under section 15A of

6 the Securities Exchange Act of 1934 (15

7 U.S.C. 78o-3);

8 ‘‘(B) with respect to a covered security de9 scribed in paragraph (2), (3), or (4) of sub10 section (b), any offering document; or

11 ‘‘(C) any proxy statement, report to share12 holders, or other disclosure document relating to

13 a covered security or the issuer thereof that is re14 quired to be and is filed with the Commission or

15 any national securities organization registered

16 under section 15A of the Securities Exchange Act

17 of 1934 (15 U.S.C. 78o-3); or

18 ‘‘(3) shall directly or indirectly prohibit, limit,

19 or impose conditions, based on the merits of such of20 fering or issuer, upon the offer or sale of any security

21 described in paragraph (1).

22 ‘‘(b) COVERED SECURITIES.—For purposes of this sec23 tion, the following are covered securities:
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1 ‘‘(1) EXCLUSIVE FEDERAL REGISTRATION OF NA2 TIONALLY TRADED SECURITIES.—A security is a cov3 ered security if such security is—

4 ‘‘(A) listed, or authorized for listing, on the

5 New York Stock Exchange or the American Stock

6 Exchange, or included or qualified for inclusion

7 in the National Market System of the National

8 Association of Securities Dealers Automated

9 Quotation System (or any successor to such enti10 ties);

11 ‘‘(B) listed, or authorized for listing, on a

12 national securities exchange (or tier or segment

13 thereof) that has listing standards that the Com14 mission determines by rule (on its own initiative

15 or on the basis of a petition) are substantially

16 similar to the listing standards applicable to se17 curities described in subparagraph (A); or

18 ‘‘(C) is a security of the same issuer that is

19 equal in seniority or senior to a security de20 scribed in subparagraph (A) or (B).

21 ‘‘(2) EXCLUSIVE FEDERAL REGISTRATION OF IN22 VESTMENT COMPANIES.—A security is a covered secu23 rity if such security is a security issued by an invest24 ment company that is registered under the Investment

25 Company Act of 1940 (15 U.S.C. 80a et seq.).
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1 ‘‘(3) SALES TO QUALIFIED PURCHASERS.—A se2 curity is a covered security with respect to the offer

3 or sale of the security to qualified purchasers, as de4 fined by the Commission by rule. In prescribing such

5 rule, the Commission may define qualified purchaser

6 differently with respect to different categories of secu7 rities, consistent with the public interest and the pro8 tection of investors.

9 ‘‘(4) EXEMPTION IN CONNECTION WITH CERTAIN

10 EXEMPT OFFERINGS.—A security is a covered security

11 if—

12 ‘‘(A) the offer or sale of such security is ex13 empt from registration under this title pursuant

14 to section 4(1) or 4(3), and—

15 ‘‘(i) the issuer of such security files re16 ports with the Commission pursuant to sec17 tion 13 or 15(d) of the Securities Exchange

18 Act of 1934 (15 U.S.C. 78m, 78o(d)); or

19 ‘‘(ii) the issuer is exempt from filing

20 such reports;

21 ‘‘(B) such security is exempt from registra22 tion under this title pursuant to section 4(4);

23 ‘‘(C) the offer or sale of such security is ex24 empt from registration under this title pursuant

25 to section 3(a), other than the offer or sale of a
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1 security that is exempt from such registration

2 pursuant to paragraph (4) or (11) of such sec3 tion, except that a municipal security that is ex4 empt from such registration pursuant to para5 graph (2) of such section is not a covered secu6 rity with respect to the offer or sale of such secu7 rity in the State in which such security is is8 sued; or

9 ‘‘(D) the offer or sale of such security is ex10 empt from registration under this title pursuant

11 to Commission rule or regulation under section

12 4(2) of this title.

13 ‘‘(c) CONDITIONALLY COVERED SECURITIES.—

14 ‘‘(1) FEDERALLY REGISTERED OFFERINGS.—

15 Subject to the limitations contained in paragraphs

16 (2) and (3), a security is a covered security if—

17 ‘‘(A) the issuer of such security has (or will

18 have upon conclusion of the transaction) total

19 assets exceeding $10,000,000;

20 ‘‘(B) such security is the subject of a reg21 istration statement that is filed with the Com22 mission pursuant to this title; and

23 ‘‘(C) the issuer files with such registration

24 statement audited financial statements for each

25 of the two most recent fiscal years of its oper-
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1 ations ending before the filing of the registration

2 statement.

3 ‘‘(2) LIMITATIONS FOR CERTAIN OFFERINGS.—

4 Notwithstanding paragraph (1), a security is not a

5 covered security if such security is—

6 ‘‘(A) a security of an issuer which is a

7 blank check company (as defined in section 7(b)

8 of this title), a partnership, a limited liability

9 company, or a direct participation investment

10 program;

11 ‘‘(B) a penny stock (as such term is defined

12 in section 3(a)(51) of the Securities Exchange

13 Act of 1934 (15 U.S.C. 78c(a)(51)); or

14 ‘‘(C) a security issued in an offering relat15 ing to a rollup transaction (as such term is de16 fined in paragraphs (4) and (5) of section 14(h)

17 of such Act (15 U.S.C. 78n(h)(4), (5)).

18 ‘‘(3) LIMITATIONS BASED ON MISCONDUCT.—Not19 withstanding paragraph (1), a security is not a cov20 ered security—

21 ‘‘(A) with respect to any State, if the issuer,

22 or a principal officer or principal shareholder

23 thereof—

24 ‘‘(i) is subject to a statutory disquali25 fication, as defined in subparagraph (A),
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1 (B), (C), or (D) of section 3(a)(39) of the

2 Securities Exchange Act of 1934 (15 U.S.C.

3 78c(a)(39));

4 ‘‘(ii) has been convicted within 5 years

5 prior to the offering of any felony under

6 Federal or State law in connection with the

7 offer, purchase, or sale of any security, or

8 any felony under Federal or State law in9 volving fraud or deceit; or

10 ‘‘(iii) is currently named in and sub11 ject to any order, judgment, or decree of any

12 court of competent jurisdiction acting pur13 suant to Federal or State law temporarily

14 or permanently restraining or enjoining

15 such issuer, officer, or shareholder from en16 gaging in or continuing any conduct or

17 practice in connection with a security; or

18 ‘‘(B) with respect to a particular State, if

19 the issuer, or a principal officer or principal

20 shareholder thereof—

21 ‘‘(i) has filed a registration statement

22 which is the subject of a currently effective

23 stop order entered pursuant to that State’s

24 securities laws within 5 years prior to the

25 offering;
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1 ‘‘(ii) is currently named in and subject

2 to any administrative enforcement order or

3 judgment of that State’s securities commis4 sion (or any agency or office performing

5 like functions) entered within 5 years prior

6 to the offering, or is currently named in

7 and subject to any other administrative en8 forcement order or judgment of that State

9 entered within 5 years prior to the offering

10 that finds fraud or deceit; or

11 ‘‘(iii) is currently named in and sub12 ject to any administrative enforcement

13 order or judgment of that State which pro14 hibits or denies registration, or revokes the

15 use of any exemption from registration, in

16 connection with the offer, purchase, or sale

17 of securities.

18 ‘‘(4) EXCEPTIONS TO LIMITATIONS.—

19 ‘‘(A) EXEMPTIONS.—The limitations in

20 paragraph (3)(A) shall not apply if the Commis21 sion has exempted the subject person from the

22 application of such paragraph by rule or order,

23 and the limitations in paragraph (3)(B) shall

24 not apply if the securities commission (or any

25 agency or office performing like functions) of the
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1 affected State has exempted the subject person

2 from the application of such paragraph by rule

3 or order.

4 ‘‘(B) REASONABLE STEPS.—The provisions

5 of paragraph (3) shall not apply if the issuer has

6 taken reasonable steps to ascertain whether any

7 principal officer or principal shareholder is sub8 ject to such paragraph, and such steps do not re9 veal a person who is subject to such paragraph.

10 An issuer shall be considered to have taken rea11 sonable steps if such issuer or its agent has con12 ducted a search of any centralized data bases

13 that the Commission may designate by rule, and

14 has received an affidavit under oath by each

15 such principal officer or principal shareholder

16 stating that such officer or shareholder is not

17 subject to the provisions of paragraph (3).

18 ‘‘(C) EFFECT OF LIMITATIONS ON REM19 EDIES.—Notwithstanding paragraph (3), an is20 suer shall not be subject to a right of rescission

21 under State securities laws solely as a result of

22 the operation of such paragraph.

23 ‘‘(5) NO EFFECT UNDER SUBSECTION (B).—No

24 limitation under this subsection shall affect the treat-
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1 ment of a security that qualifies as a covered security

2 under subsection (b).

3 ‘‘(d) PRESERVATION OF AUTHORITY.—

4 ‘‘(1) FRAUD AUTHORITY.—Consistent with this

5 section, the securities commission (or any agency or

6 office performing like functions) of any State or Ter7 ritory of the United States, or the District of Colum8 bia, shall retain jurisdiction under the laws of such

9 State, Territory, or District to investigate and bring

10 enforcement actions with respect to fraud or deceit in

11 connection with securities or securities transactions.

12 ‘‘(2) PRESERVATION OF FILING REQUIRE13 MENTS.—

14 ‘‘(A) NOTICE FILINGS PERMITTED.—Noth15 ing contained in this section shall prohibit the

16 securities commission (or any agency or office

17 performing like functions) of any State or Terri18 tory of the United States, or the District of Co19 lumbia, from requiring the filing of any docu20 ments filed with the Commission pursuant to

21 this title solely for notice purposes, together with

22 any required fee.

23 ‘‘(B) PRESERVATION OF FEES.—Until oth24 erwise provided by State law enacted after the

25 date of enactment of the Securities Amendments
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1 of 1996, filing or registration fees with respect to

2 securities or securities transactions may continue

3 to be collected in amounts determined pursuant

4 to State law as in effect on the day before such

5 date.

6 ‘‘(C) FEES NOT PERMITTED ON LISTED SE7 CURITIES.—Notwithstanding subparagraphs (A)

8 and (B), no filing or fee may be required with

9 respect to any security that is a covered security

10 pursuant to subsection (b)(1) of this section, or

11 will be such a covered security upon completion

12 of the transaction, or is a security of the same

13 issuer that is equal in seniority or senior to a

14 security that is a covered security pursuant to

15 such subsection.

16 ‘‘(3) ENFORCEMENT OF REQUIREMENTS.—Noth17 ing in this section shall prohibit the securities com18 mission (or any agency or office performing like func19 tions) of any State or Territory of the United States,

20 or the District of Columbia, from suspending the offer

21 or sale of securities within such State, Territory, or

22 District as a result of the failure to submit any filing

23 or fee required under law and permitted under this

24 section.

25 ‘‘(e) DEFINITIONS.—For purposes of this section:
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1 ‘‘(1) PRINCIPAL OFFICER.—The term ‘principal

2 officer’ means a director, chief executive officer, or

3 chief financial officer of an issuer, or any other officer

4 performing like functions.

5 ‘‘(2) PRINCIPAL SHAREHOLDER.—The term

6 ‘principal shareholder’ means any person who is di7 rectly or indirectly the beneficial owner of more than

8 20 percent of any class of equity security of an issuer.

9 When two or more persons act as a partnership, lim10 ited partnership, syndicate, or other group for the

11 purpose of acquiring, holding, or disposing of securi12 ties of an issuer, such syndicate or group shall be

13 deemed a ‘person’ for purposes of this paragraph. In

14 determining, for purposes of this paragraph, any per15 centage of a class of any security, such class shall be

16 deemed to consist of the amount of the outstanding se17 curities of such class, exclusive of any securities of

18 such class held by or for the account of the issuer or

19 a subsidiary of the issuer.

20 ‘‘(3) OFFERING DOCUMENT.—The term ‘offering

21 document’ has the meaning given the term ‘prospec22 tus’ by section 2(10), but without regard to the provi23 sions of clauses (a) and (b) of such section, except

24 that, with respect to a security described in subsection

25 (b)(2) of this section, such term also includes a com-
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1 munication that is not deemed to offer such a security

2 pursuant to a rule of the Commission.

3 ‘‘(4) PREPARED BY THE ISSUER.—Within 6

4 months after the date of enactment of the Securities

5 Amendments of 1996, the Commission shall, by rule,

6 define the term ‘prepared by the issuer’ for purposes

7 of this section.’’.

8 (2) STUDY OF UNIFORMITY.—The Securities Ex9 change Commission shall conduct a study after con10 sultation with States, issuers, brokers, and dealers on

11 the extent to which uniformity of State regulatory re12 quirements for securities or securities transactions has

13 been achieved for securities that are not covered secu14 rities (within the meaning of section 18 of the Securi15 ties Act of 1933 as amended by paragraph (1) of this

16 subsection). Such study shall specifically focus on the

17 impact of such uniformity or lack thereof on the cost

18 of capital, innovation and technological development

19 in securities markets, and duplicative regulation with

20 respect to securities issuers (including small business),

21 brokers, and dealers and the effect on investor protec22 tion. The Commission shall submit to the Congress a

23 report on the results of such study within one year

24 after the date of enactment of this Act.

25 (b) BROKER/DEALER REGULATION.—
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1 (1) AMENDMENT.—Section 15 of the Securities

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

3 adding at the end the following new subsection:

4 ‘‘(h) LIMITATIONS ON STATE LAW.—

5 ‘‘(1) CAPITAL, MARGIN, BOOKS AND RECORDS,

6 BONDING, AND REPORTS.—No law, rule, regulation, or

7 order, or other administrative action of any State or

8 political subdivision thereof shall establish capital,

9 custody, margin, financial responsibility, making and

10 keeping records, bonding, or financial or operational

11 reporting requirements for brokers, dealers, municipal

12 securities dealers, government securities brokers, or

13 government securities dealers that differ from, or are

14 in addition to, the requirements in those areas estab15 lished under this title. The Commission shall consult

16 periodically the securities commissions (or any agen17 cy or office performing like functions) of the States

18 concerning the adequacy of such requirements as es19 tablished under this title.

20 ‘‘(2) EXEMPTION TO PERMIT SERVICE TO CUS21 TOMERS.—No law, rule, regulation, or order, or other

22 administrative action of any State or political sub23 division thereof shall prohibit an associated person

24 from effecting a transaction described in paragraph

25 (3) for a customer in such State if—
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1 ‘‘(A) such associated person is not ineligible

2 to register with such State for any reason other

3 than such a transaction;

4 ‘‘(B) such associated person is registered

5 with a registered securities association and at

6 least one State; and

7 ‘‘(C) the broker or dealer with which such

8 person is associated is registered with such State.

9 ‘‘(3) DESCRIBED TRANSACTIONS.—A transaction

10 is described in this paragraph if—

11 ‘‘(A) such transaction is effected—

12 ‘‘(i) on behalf of a customer that, for

13 30 days prior to the day of the transaction,

14 maintains an account with the broker or

15 dealer; and

16 ‘‘(ii) by an associated person (I) to

17 which the customer was assigned for 14

18 days prior to the day of the transaction,

19 and (II) who is registered with a State in

20 which the customer was a resident or was

21 present for at least 30 consecutive days dur22 ing the one-year period prior to the trans23 action;

24 except that, if the customer is present in another

25 State for 30 or more consecutive days or has per-
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1 manently changed his or her residence to another

2 State, such transaction is not described in this

3 subparagraph unless the associated person files

4 with such State an application for registration

5 within 10 business days of the later of the date

6 of the transaction or the date of the discovery of

7 the presence of the customer in the State for 30

8 or more consecutive days or the change in the

9 customer’s residence;

10 ‘‘(B) the transaction is effected—

11 ‘‘(i) on behalf of a customer that, for

12 30 days prior to the day of the transaction,

13 maintains an account with the broker or

14 dealer; and

15 ‘‘(ii) within the period beginning on

16 the date on which such associated person

17 files with the State in which the transaction

18 is effected an application for registration

19 and ending on the earlier of (I) 60 days

20 after the date the application is filed, or

21 (II) the time at which such State notifies

22 the associated person that it has denied the

23 application for registration or has stayed

24 the pendency of the application for cause; or
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1 ‘‘(C) the transaction is one of 10 or fewer

2 transactions in a calendar year (excluding any

3 transactions described in subparagraph (A) or

4 (B)) which the associated person effects in the

5 States in which the associated person is not reg6 istered.

7 ‘‘(4) ALTERNATE ASSOCIATED PERSONS.—For

8 purposes of paragraph (3)(A)(ii), each of up to 3 as9 sociated persons who are designated to effect trans10 actions during the absence or unavailability of the

11 principal associated person for a customer may be

12 treated as an associated person to which such cus13 tomer is assigned for purposes of such paragraph.’’.

14 (2) STUDY.—Within 6 months after the date of

15 enactment of this Act, the Commission, after consulta16 tion with registered securities associations, national

17 securities exchanges, and States, shall conduct a study

18 of—

19 (A) the impact of disparate State licensing

20 requirements on associated persons of registered

21 brokers or dealers; and

22 (B) methods for States to attain uniform li23 censing requirements for such persons.

24 (3) REPORT.—Within one year after the date of

25 enactment of this Act, the Commission shall submit to
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1 the Congress a report on the study conducted under

2 paragraph (2). Such report shall include rec3 ommendations concerning appropriate methods de4 scribed in paragraph (2)(B), including any necessary

5 legislative changes to implement such recommenda6 tions.

7 (4) TECHNICAL AMENDMENT.—Section 28(a) of

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

9 78bb(a)) is amended by striking ‘‘Nothing’’ and in10 serting ‘‘Except as otherwise specifically provided

11 elsewhere in this title, nothing’’.

12 SEC. 103. MARGIN REQUIREMENTS.

13 (a) MARGIN REQUIREMENTS.—

14 (1) EXTENSIONS OF CREDIT BY BROKER-DEAL15 ERS.—Section 7(c) of the Securities Exchange Act of

16 1934 (15 U.S.C. 78g(c)) is amended to read as fol17 lows:

18 ‘‘(c) UNLAWFUL CREDIT EXTENSION TO CUS19 TOMERS.—

20 ‘‘(1) PROHIBITION.—It shall be unlawful for any

21 member of a national securities exchange or any

22 broker or dealer, directly or indirectly, to extend or

23 maintain credit or arrange for the extension or main24 tenance of credit to or for any customer—
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1 ‘‘(A) on any security (other than an ex2 empted security), in contravention of the rules

3 and regulations which the Board of Governors of

4 the Federal Reserve System shall prescribe under

5 subsections (a) and (b) of this section;

6 ‘‘(B) without collateral or on any collateral

7 other than securities, except in accordance with

8 such rules and regulations as the Board of Gov9 ernors of the Federal Reserve System may pre10 scribe—

11 ‘‘(i) to permit under specified condi12 tions and for a limited period any such

13 member, broker, or dealer to maintain a

14 credit initially extended in conformity with

15 the rules and regulations of the Board of

16 governors of the Federal Reserve System;

17 and

18 ‘‘(ii) to permit the extension or main19 tenance of credit in cases where the exten20 sion or maintenance of credit is not for the

21 purpose of purchasing or carrying securities

22 or of evading or circumventing the provi23 sions of subparagraph (A) of this para24 graph.
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1 ‘‘(2) EXCEPTION.—This subsection and the rules

2 and regulations thereunder shall not apply to any

3 credit extended, maintained, or arranged by a mem4 ber of a national securities exchange or a broker or

5 dealer to or for a member of a national securities ex6 change or a registered broker or dealer—

7 ‘‘(A) a substantial portion of whose business

8 consists of transactions with persons other than

9 brokers or dealers; or

10 ‘‘(B) to finance its activities as a market

11 maker or an underwriter;

12 except that the Board of Governors of the Federal Re13 serve System may impose such rules and regulations,

14 in whole or in part, on any credit otherwise exempted

15 by this paragraph if it determines that such action is

16 necessary or appropriate in the public interest or for

17 the protection of investors.’’.

18 (2) EXTENSIONS OF CREDIT BY OTHER LEND19 ERS.—Section 7(d) of the Securities Exchange Act of

20 1934 (78 U.S.C. 78g(d)) is amended to read as fol21 lows:

22 ‘‘(d) UNLAWFUL CREDIT EXTENSION IN VIOLATION OF

23 RULES AND REGULATIONS; EXCEPTION TO APPLICATION OF

24 RULES, ETC.—
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1 ‘‘(1) PROHIBITION.—It shall be unlawful for any

2 person not subject to subsection (c) of this section to

3 extend or maintain credit or to arrange for the exten4 sion or maintenance of credit for the purpose of pur5 chasing or carrying any security, in contravention of

6 such rules and regulations as the Board of Governors

7 of the Federal Reserve System shall prescribe to pre8 vent the excessive use of credit for the purchasing or

9 carrying of or trading in securities in circumvention

10 of the other provisions of this section. Such rules and

11 regulations may impose upon all loans made for the

12 purpose of purchasing or carrying securities limita13 tions similar to those imposed upon members, brokers,

14 or dealers by subsection (c) of this section and the

15 rules and regulations thereunder.

16 ‘‘(2) EXCEPTIONS.—This subsection and the

17 rules and regulations thereunder shall not apply to

18 any credit extended, maintained, or arranged—

19 ‘‘(A) by a person not in the ordinary course

20 of business;

21 ‘‘(B) on an exempted security;

22 ‘‘(C) to or for a member of a national secu23 rities exchange or a registered broker or dealer—
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1 ‘‘(i) a substantial portion of whose

2 business consists of transactions with per3 sons other than brokers or dealers; or

4 ‘‘(ii) to finance its activities as a mar5 ket maker or an underwriter;

6 ‘‘(D) by a bank on a security other than an

7 equity security; or

8 ‘‘(E) as the Board of Governors of the Fed9 eral Reserve System shall, by such rules, regula10 tions, or orders as it may deem necessary or ap11 propriate in the public interest or for the protec12 tion of investors, exempt, either unconditionally

13 or upon specified terms and conditions or for

14 stated periods, from the operation of this sub15 section and the rules and regulations thereunder;

16 except that the Board of Governors of the Federal Re17 serve System may impose such rules and regulations,

18 in whole or in part, on any credit otherwise exempted

19 by subparagraph (C) of this paragraph if it deter20 mines that such action is necessary or appropriate in

21 the public interest or for the protection of investors.’’.

22 (b) BORROWING BY MEMBERS, BROKERS, AND DEAL23 ERS.—Section 8 of the Securities Exchange Act of 1934 (15

24 U.S.C. 78h) is amended—

25 (1) by striking subsection (a), and
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1 (2) by redesignating subsections (b) and (c) as

2 subsections (a) and (b), respectively.

3 SEC. 104. PROSPECTUS DELIVERY.

4 (a) REPORT ON ELECTRONIC DELIVERY.—Within six

5 months after the date of enactment of this Act, the Commis6 sion shall report to Congress on the steps the Commission

7 has taken, or anticipates taking, to facilitate the electronic

8 delivery of prospectuses to institutional and other investors.

9 (b) REPORT ON ADVISORY COMMITTEE RECOMMENDA10 TIONS.—Within one year after the date of enactment of this

11 Act, the Commission shall report to Congress on the Com12 mission’s views on the recommendations of the Advisory

13 Committee on Capital Formation, including any actions

14 taken to implement the recommendations of the Advisory

15 Committee.

16 SEC. 105. EXEMPTIVE AUTHORITY.

17 (a) GENERAL EXEMPTIVE AUTHORITY UNDER THE

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

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

20 the end the following new section:

21 ‘‘SEC. 28. GENERAL EXEMPTIVE AUTHORITY.

22 ‘‘The Commission, by rules and regulations, may con23 ditionally or unconditionally exempt any person, security,

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

25 or transactions, from any provision or provisions of this
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1 title or of any rule or regulation thereunder, to the extent

2 that such exemption is necessary or appropriate in the pub3 lic interest, and is consistent with the protection of inves4 tors.’’.

5 (b) GENERAL EXEMPTIVE AUTHORITY UNDER THE

6 SECURITIES EXCHANGE ACT OF 1934.—Title I of the Secu7 rities Exchange Act of 1934 (15 U.S.C. 78a et seq.) is

8 amended by adding at the end the following new section:

9 ‘‘SEC. 36. GENERAL EXEMPTIVE AUTHORITY.

10 ‘‘Notwithstanding any other provision of this title, the

11 Commission, by rule, regulation, or order, 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 provision or provisions of this

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

16 that such exemption is necessary or appropriate in the pub17 lic interest, and is consistent with the protection of inves18 tors. The Commission shall by rules and regulations deter19 mine the procedures under which an exemptive order under

20 this section shall be granted and may, in its sole discretion,

21 decline to entertain any application for an order of exemp22 tion under this section.’’.
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1 SEC. 106. PROMOTION OF EFFICIENCY, COMPETITION, AND

2 CAPITAL FORMATION.

3 (a) SECURITIES ACT OF 1933.—Section 2 of the Secu4 rities Act of 1933 (15 U.S.C. 77b) is amended—

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

6 ‘‘SEC. 2.’’; and

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

9 ‘‘(b) CONSIDERATION OF PROMOTION OF EFFICIENCY,

10 COMPETITION, AND CAPITAL FORMATION.—Whenever pur11 suant to this title the Commission is engaged in rulemaking

12 and is required to consider or determine whether an action

13 is necessary or appropriate in the public interest, the Com14 mission shall also consider, in addition to the protection

15 of investors, whether the action will promote efficiency, com16 petition, and capital formation.’’.

17 (b) SECURITIES EXCHANGE ACT of 1934.—Section 3

18 of the Securities Exchange Act of 1934 (15 U.S.C. 78c) is

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

20 ‘‘(f) CONSIDERATION OF PROMOTION OF EFFICIENCY,

21 COMPETITION, AND CAPITAL FORMATION.—Whenever pur22 suant to this title the Commission is engaged in rule23 making, or in the review of a rule of a self-regulatory orga24 nization, and is required to consider or determine whether

25 an action is necessary or appropriate in the public interest,

26 the Commission shall also consider, in addition to the pro-
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1 tection of investors, whether the action will promote effi2 ciency, competition, and capital formation.’’.

3 (c) INVESTMENT COMPANY ACT of 1940.—Section 2 of

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

5 is amended by adding at the end the following new sub6 section:

7 ‘‘(c) CONSIDERATION OF PROMOTION OF EFFICIENCY,

8 COMPETITION, AND CAPITAL FORMATION.—Whenever pur9 suant to this title the Commission is engaged in rulemaking

10 and is required to consider or determine whether an action

11 is consistent with the public interest, the Commission shall

12 also consider, in addition to the protection of investors,

13 whether the action will promote efficiency, competition, and

14 capital formation.’’.

15 SEC. 107. PRIVATIZATION OF EDGAR.

16 (a) EXAMINATION.—The Securities and Exchange

17 Commission shall examine proposals for the privatization

18 of the EDGAR system. Such examination shall promote

19 competition in the automation and rapid collection and

20 dissemination of information required to be disclosed. Such

21 examination shall include proposals that maintain free

22 public access to data filings in the EDGAR system.

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

24 date of enactment of this Act, the Commission shall submit

25 to the Congress a report on the examination under sub-
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1 section (a). Such report shall include such recommendations

2 for such legislative action as may be necessary to implement

3 the proposal that the Commission determines most effec4 tively achieves the objectives described in subsection (a).

5 SEC. 108. COORDINATION OF EXAMINING AUTHORITIES.

6 (a) AMENDMENTS.—Section 17 of the Securities Ex7 change Act of 1934 (15 U.S.C. 78q) is amended by adding

8 at the end the following new subsection:

9 ‘‘(i) COORDINATION OF EXAMINING AUTHORITIES.—

10 ‘‘(1) ELIMINATION OF DUPLICATION.—The Com11 mission and the examining authorities, through co12 operation and coordination of examination and over13 sight as required by this subsection, shall eliminate

14 any unnecessary and burdensome duplication in the

15 examination process.

16 ‘‘(2) PLANNING CONFERENCES.—

17 ‘‘(A) The Commission and the examining

18 authorities shall meet at least annually for a na19 tional general planning conference to discuss co20 ordination of examination schedules and prior21 ities and other areas of interest relevant to exam22 ination coordination and cooperation.

23 ‘‘(B) Within each geographic region des24 ignated by the Commission, the Commission and

25 the relevant examining authorities shall meet at
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1 least annually for a regional planning conference

2 to discuss examination schedules and priorities

3 and other areas of related interest, and to en4 courage information-sharing and to avoid unnec5 essary duplication of examinations.

6 ‘‘(3) COORDINATION TRACKING SYSTEM FOR

7 BROKER-DEALER EXAMINATIONS.—

8 ‘‘(A) The Commission and the examining

9 authorities shall prepare, on a periodic basis in

10 a uniform computerized format, information on

11 registered broker and dealer examinations and

12 shall submit such information to the Commis13 sion.

14 ‘‘(B) The Commission shall maintain a

15 computerized database of consolidated examina16 tion information to be used for examination

17 planning and scheduling and for monitoring co18 ordination of registered broker and dealer exami19 nations under this section.

20 ‘‘(4) COORDINATION OF EXAMINATIONS.—

21 ‘‘(A) The examining authorities shall share

22 among themselves such information, including

23 reports of examinations, customer complaint in24 formation, and other non-public regulatory in25 formation, as appropriate to foster a coordinated
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1 approach to regulatory oversight of registered

2 brokers and dealers subject to examination by

3 more than one examining authority.

4 ‘‘(B) To the extent practicable, the examin5 ing authorities shall assure that each registered

6 broker and dealer subject to examination by

7 more than one examining authority that requests

8 a coordinated examination shall have all re9 quested aspects of the examination conducted si10 multaneously and without duplication of the

11 areas covered. The examining authorities shall

12 also prepare an advance schedule of all such co13 ordinated examinations.

14 ‘‘(5) PROHIBITED NON-COORDINATED EXAMINA15 TIONS.—Any examining authority that does not par16 ticipate in a coordinated examination pursuant to

17 paragraph (4) of this subsection shall not conduct a

18 routine examination other than a coordinated exam19 ination of that broker or dealer within 9 months of

20 the conclusion of a scheduled coordinated examina21 tion.

22 ‘‘(6) EXAMINATIONS FOR CAUSE.—At any time,

23 any examining authority may conduct an examina24 tion for cause of any broker or dealer subject to its

25 jurisdiction.
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1 ‘‘(7) BROKER-DEALER EXAMINATION EVALUATION

2 PANEL.—The Commission shall establish an examina3 tion evaluation panel composed of representatives of

4 registered brokers and dealers that are members of

5 more than one self-regulatory organization that con6 ducts routine examinations. Prior to each national

7 general planning conference required by paragraph

8 (2)(A) of this subsection, the Commission shall con9 vene the examination evaluation panel to review con10 solidated and statistical information on the coordina11 tion of examinations and information on examina12 tions that are not coordinated, including the findings

13 of Commission examiners on the effectiveness of the

14 examining authorities in achieving coordinated ex15 aminations. The Commission shall present any find16 ings and recommendations of the examination evalua17 tion panel to the next meeting of the national general

18 planning conference, and shall report back to the ex19 amination evaluation panel on the actions taken by

20 the examining authorities regarding those findings

21 and recommendations. The examination evaluation

22 panel shall not be subject to the Federal Advisory

23 Committee Act (5 U.S.C. App.).

24 ‘‘(8) REPORT TO CONGRESS.—Within one year

25 after the date of enactment of this Act, the Commis-
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1 sion shall report to the Congress on the progress it

2 and the examining authorities have made in reducing

3 duplication and improving coordination in registered

4 broker and dealer examinations, and on the activities

5 of the examination evaluation panel. Such report

6 shall also indicate whether the Commission has iden7 tified additional redundancies that have failed to be

8 addressed in the coordination of examining authori9 ties, or any recommendations of the examination

10 evaluation panel established under paragraph (7) of

11 this subsection that have not been addressed by the ex12 amining authorities or the Commission.’’.

13 (b) DEFINITION.—Section 3(a) of the Securities Ex14 change Act of 1934 (15 U.S.C. 78e) is amended by adding

15 at the end the following paragraph:

16 ‘‘(54) The term ‘examining authority’ means any

17 self-regulatory organization registered with the Com18 mission under this title (other than registered clearing

19 agencies) with the authority to examine, inspect, and

20 otherwise oversee the activities of a registered broker

21 or dealer.’’.

22 SEC. 109. FOREIGN PRESS CONFERENCES.

23 No later than one year after the date of enactment of

24 this Act, the Commission shall adopt rules under the Securi25 ties Act of 1933 concerning the status under the registration
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1 provisions of the Securities Act of 1933 of foreign press con2 ferences and foreign press releases by persons engaged in

3 the offer and sale of securities.

4 SEC. 110. REPORT ON TRUST INDENTURE ACT OF 1939.

5 Within 6 months after the date of enactment of this

6 Act, the Securities and Exchange Commission shall submit

7 to the Congress a report on the benefits of, the continuing

8 need for, and, if necessary, options for the modification or

9 elimination of, the Trust Indenture Act of 1939 (15 U.S.C.

10 77aaa et seq.).

11 TITLE II—INVESTMENT

12 COMPANY ACT AMENDMENTS

13 SEC. 201. SHORT TITLE.

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

15 Act Amendments of 1996’’.

16 SEC. 202. FUNDS OF FUNDS.

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

18 1940 (15 U.S.C. 80a–12(d)(1)) is amended—

19 (1) in subparagraph (E)(iii)—

20 (A) by striking ‘‘in the event such invest21 ment company is not a registered investment

22 company,’’; and

23 (B) by inserting ‘‘in the event such invest24 ment company is not a registered investment

25 company’’ after ‘‘(bb)’’;
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1 (2) by redesignating existing subparagraphs (G)

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

3 (3) by inserting after subparagraph (F) the fol4 lowing new subparagraph:

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

6 apply to securities of a registered open-end company (the

7 ‘acquired company’) purchased or otherwise acquired by a

8 registered open-end company (the ‘acquiring company’)

9 if—

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

11 company are part of the same group of investment

12 companies;

13 ‘‘(ii) the securities of the acquired company, se14 curities of other registered open-end companies that

15 are part of the same group of investment companies,

16 Government securities, and short-term paper are the

17 only investments held by the acquiring company;

18 ‘‘(iii)(I) the acquiring company does not pay

19 and is not assessed any charges or fees for distribu20 tion-related activities with respect to securities of the

21 acquired company unless the acquiring company does

22 not charge a sales load or other fees or charges for dis23 tribution-related activities; or

24 ‘‘(II) any sales loads and other distribution-re25 lated fees charged with respect to securities of the ac-
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1 quiring company, when aggregated with any sales

2 load and distribution-related fees paid by the acquir3 ing company with respect to securities of the acquired

4 company, are not excessive under rules adopted pur5 suant to either section 22(b) or section 22(c) of this

6 title by a securities association registered under sec7 tion 15A of the Securities Exchange Act of 1934 or

8 the Commission;

9 ‘‘(iv) the acquired company shall have a fun10 damental policy that prohibits it from acquiring any

11 securities of registered open-end companies in reliance

12 on this subparagraph or subparagraph (F) of this

13 subsection; and

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

15 such rules and regulations as the Commission may

16 from time to time prescribe with respect to acquisi17 tions in accordance with this subparagraph as nec18 essary and appropriate for the protection of investors.

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

20 companies’ shall mean any two or more registered invest21 ment companies that hold themselves out to investors as re22 lated companies for purposes of investment and investor

23 services.’’; and

24 (4) adding at the end the following new subpara25 graph:
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1 ‘‘(J) The Commission, by rules and regulations upon

2 its own motion or by order upon application, may condi3 tionally or unconditionally exempt any person, security, or

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

5 or transactions from any provisions of this subsection, if

6 and to the extent such exemption is consistent with the pub7 lic interest and the protection of investors.’’.

8 SEC. 203. REGISTRATION OF SECURITIES.

9 (a) AMENDMENTS TO REGISTRATION STATEMENTS.—

10 Section 24(e) of the Investment Company Act of 1940 (15

11 U.S.C. 80a–24(e)) is amended—

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

13 (2) by redesignating paragraph (3) as subsection

14 (e); and

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

16 striking ‘‘pursuant to this subsection or otherwise’’.

17 (b) REGISTRATION OF INDEFINITE AMOUNT OF SECU18 RITIES.—Section 24(f) of the Investment Company Act of

19 1940 (15 U.S.C. 80a–24(f)) is amended to read as follows:

20 ‘‘(f) REGISTRATION OF INDEFINITE AMOUNT OF SECU21 RITIES.—

22 ‘‘(1) INDEFINITE REGISTRATION OF SECURI23 TIES.—Upon the effectiveness of its registration state24 ment under the Securities Act of 1933, a face-amount

25 certificate company, open-end management company,
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1 or unit investment trust shall be deemed to have reg2 istered an indefinite amount of securities.

3 ‘‘(2) PAYMENT OF REGISTRATION FEES.—Within

4 90 days after the end of the company’s fiscal year, the

5 company shall pay a registration fee to the Commis6 sion, calculated in the manner specified in section

7 6(b) of the Securities Act of 1933, based on the aggre8 gate sales price for which its securities (including, for

9 this purpose, all securities issued pursuant to a divi10 dend reinvestment plan) were sold pursuant to a reg11 istration of an indefinite amount of securities under

12 this subsection during the company’s previous fiscal

13 year reduced by—

14 ‘‘(A) the aggregate redemption or repur15 chase price of the securities of the company dur16 ing that year, and

17 ‘‘(B) the aggregate redemption or repur18 chase price of the securities of the company dur19 ing any prior fiscal year ending not more than

20 1 year before the date of enactment of the Invest21 ment Company Act Amendments of 1996 that

22 were not used previously by the company to re23 duce fees payable under this section.

24 ‘‘(3) INTEREST DUE ON LATE PAYMENT.—A com25 pany paying the fee or any portion thereof more than
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1 90 days after the end of the company’s fiscal year

2 shall pay to the Commission interest on unpaid

3 amounts, compounded daily, at the underpayment

4 rate established by the Secretary of the Treasury pur5 suant to section 3717(a) of title 31, United States

6 Code. The payment of interest pursuant to the re7 quirement of this paragraph shall not preclude the

8 Commission from bringing an action to enforce the

9 requirements of paragraph (2) of this subsection.

10 ‘‘(4) RULEMAKING AUTHORITY.—The Commis11 sion may adopt rules and regulations to implement

12 the provisions of this subsection.’’.

13 (c) EFFECTIVE DATE.—The amendments made by this

14 section shall be effective 6 months after the date of enact15 ment of this Act or on such earlier date as the Commission

16 may specify by rule.

17 SEC. 204. INVESTMENT COMPANY ADVERTISING PROSPEC18 TUS.

19 Section 24 of the Investment Company Act of 1940 (15

20 U.S.C. 80a–24) is amended by adding at the end the follow21 ing new subsection:

22 ‘‘(g) In addition to the prospectuses permitted or re23 quired in section 10 of the Securities Act of 1933, the Com24 mission shall permit, by rules or regulations deemed nec25 essary or appropriate in the public interest or for the pro-
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1 tection of investors, the use of a prospectus for the purposes

2 of section 5(b)(1) of such Act with respect to securities is3 sued by a registered investment company. Such a prospec4 tus, which may include information the substance of which

5 is not included in the prospectus specified in section 10(a)

6 of the Securities Act of 1933, shall be deemed to be permitted

7 by section 10(b) of such Act.’’.

8 SEC. 205. VARIABLE INSURANCE CONTRACTS.

9 (a) UNIT INVESTMENT TRUST TREATMENT.—Section

10 26 of the Investment Company Act of 1940 (15 U.S.C. 80a–

11 26) is amended by adding at the end the following new sub12 section:

13 ‘‘(e)(1) Subsection (a) shall not apply to any registered

14 separate account funding variable insurance contracts, or

15 to the sponsoring insurance company and principal under16 writer of such account.

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

18 account funding variable insurance contracts, or for the

19 sponsoring insurance company of such account, to sell any

20 such contract, unless—

21 ‘‘(A) the fees and charges deducted under the con22 tract in the aggregate are reasonable in relation to the

23 services rendered, the expenses expected to be incurred,

24 and the risks assumed by the insurance company, and
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1 the insurance company so represents in the registra2 tion statement for the contract; and

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

4 all other applicable provisions of this section as if it

5 were a trustee or custodian of the registered separate

6 account; (ii) files with the insurance regulatory au7 thority of a State an annual statement of its finan8 cial condition, which most recent statement indicates

9 that it has a combined capital and surplus, if a stock

10 company, or an unassigned surplus, if a mutual com11 pany, of not less than $1,000,000, or such other

12 amount as the Commission may from time to time

13 prescribe by rule as necessary or appropriate in the

14 public interest or for the protection of investors; and

15 (iii) together with its registered separate accounts, is

16 supervised and examined periodically by the insur17 ance authority of such State.

18 ‘‘(3) The Commission may adopt such rules and regu19 lations under paragraph (2)(A) as it determines are nec20 essary or appropriate in the public interest or for the pro21 tection of investors. For the purposes of such paragraph,

22 the fees and charges deducted under the contract shall in23 clude all fees and charges imposed for any purpose and in

24 any manner.’’.
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1 (b) PERIODIC PAYMENT PLAN TREATMENT.—Section

2 27 of such Act (15 U.S.C. 80a–27) is amended by adding

3 at the end the following new subsection:

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

5 separate account funding variable insurance contracts, or

6 to the sponsoring insurance company and principal under7 writer of such account, except as provided in paragraph

8 (2).

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

10 account funding variable insurance contracts, or for the

11 sponsoring insurance company of such account, to sell any

12 such contract unless (A) such contract is a redeemable secu13 rity, and (B) the insurance company complies with section

14 26(e) and any rules or regulations adopted by the Commis15 sion thereunder.’’.

16 SEC. 206. REPORTS TO THE COMMISSION AND SHAREHOLD17 ERS.

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

19 U.S.C. 80a–29) is amended—

20 (1) by striking paragraph (1) of subsection (b)

21 and inserting the following:

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

23 (other than financial statements), as the Commission

24 may require to keep reasonably current the informa25 tion and documents contained in the registration
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1 statement of such company filed under this title;

2 and’’;

3 (2) by redesignating subsections (c), (d), (e), and

4 (f) as subsections (d), (e), (g), and (h), respectively;

5 (3) by inserting after subsection (b) the following

6 new subsection:

7 ‘‘(c) In exercising its authority under subsection (b)(1)

8 to require the filing of information, documents, and reports

9 on a basis more frequently than semi-annually, the Com10 mission shall take such steps as it deems necessary or ap11 propriate, consistent with the public interest and the protec12 tion of investors, to avoid unnecessary reporting by, and

13 minimize the compliance burdens on, registered investment

14 companies and their affiliated persons. Such steps shall in15 clude considering and requesting public comment on—

16 ‘‘(1) feasible alternatives that minimize the re17 porting burdens on registered investment companies;

18 and

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

20 and reports to the Commission in relation to the costs

21 to registered investment companies and their affili22 ated persons of providing such information, docu23 ments, and reports.’’;
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1 (4) by inserting after subsection (e) (as redesig2 nated by paragraph (2) of this section) the following

3 new subsection:

4 ‘‘(f) The Commission may by rule require that semi5 annual reports containing the information set forth in sub6 section (e) include such other information as the Commis7 sion deems necessary or appropriate in the public interest

8 or for the protection of investors. In exercising its authority

9 under this subsection, the Commission shall take such steps

10 as it deems necessary or appropriate, consistent with the

11 public interest and the protection of investors, to avoid un12 necessary reporting by, and minimize the compliance bur13 dens on, registered investment companies and their affili14 ated persons. Such steps shall include considering and re15 questing public comment on—

16 ‘‘(1) feasible alternatives that minimize the re17 porting burdens on registered investment companies;

18 and

19 ‘‘(2) the utility of such information to sharehold20 ers in relation to the costs to registered investment

21 companies and their affiliated persons of providing

22 such information to shareholders.’’; and

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

24 striking ‘‘subsections (a) and (d)’’ and inserting ‘‘sub25 sections (a) and (e)’’.
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1 SEC. 207. BOOKS, RECORDS AND INSPECTIONS.

2 Section 31 of the Investment Company Act of 1940 (15

3 U.S.C. 80a–30) is amended—

4 (1) by striking subsections (a) and (b) and in5 serting the following:

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

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

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

9 maintain and preserve such records (as defined in section

10 3(a)(37) of the Securities Exchange Act of 1934) for such

11 period or periods as the Commission, by rules and regula12 tions, may prescribe as necessary or appropriate in the

13 public interest or for the protection of investors. Every in14 vestment adviser not a majority-owned subsidiary of, and

15 every depositor of any registered investment company, and

16 every principal underwriter for any registered investment

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

18 and preserve for such period or periods as the Commission

19 shall prescribe by rules and regulations, such records as are

20 necessary or appropriate to record such person’s trans21 actions with such registered company. In exercising its au22 thority under this subsection, the Commission shall take

23 such steps as it deems necessary or appropriate, consistent

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

25 to avoid unnecessary recordkeeping by, and minimize the

26 compliance burden on, persons required to maintain records
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1 under this subsection (hereinafter in this section referred

2 to as ‘subject persons’). Such steps shall include considering,

3 and requesting public comment on—

4 ‘‘(1) feasible alternatives that minimize the rec5 ordkeeping burdens on subject persons;

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

7 public benefits derived from the independent scrutiny

8 of such records through Commission examination;

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

10 information that would be required to be reflected in

11 such records; and

12 ‘‘(4) the effects that a proposed recordkeeping re13 quirement would have on internal compliance policies

14 and procedures.

15 ‘‘(b) All records required to be maintained and pre16 served in accordance with subsection (a) of this section shall

17 be subject at any time and from time to time to such reason18 able periodic, special, and other examinations by the Com19 mission, or any member or representative thereof, as the

20 Commission may prescribe. For purposes of such examina21 tions, any subject person shall make available to the Com22 mission or its representatives any copies or extracts from

23 such records as may be prepared without undue effort, ex24 pense, or delay as the Commission or its representatives

25 may reasonably request. The Commission shall exercise its
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1 authority under this subsection with due regard for the ben2 efits of internal compliance policies and procedures and the

3 effective implementation and operation thereof.’’;

4 (2) by redesignating existing subsections (c) and

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

6 (3) by inserting after subsection (b) the following

7 new subsections:

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

9 Commission shall not be compelled to disclose any internal

10 compliance or audit records, or information contained

11 therein, provided to the Commission under this section.

12 Nothing in this subsection shall authorize the Commission

13 to withhold information from Congress or prevent the Com14 mission from complying with a request for information

15 from any other Federal department or agency requesting

16 the information for purposes within the scope of its jurisdic17 tion, or complying with an order of a court of the United

18 States in an action brought by the United States or the

19 Commission. For purposes of section 552 of title 5, United

20 States Code, this section shall be considered a statute de21 scribed in subsection (b)(3)(B) of such section 552.

22 ‘‘(d) For purposes of this section—

23 ‘‘(1) ‘internal compliance policies and proce24 dures’ means policies and procedures designed by sub-
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1 ject persons to promote compliance with the Federal

2 securities laws; and

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

4 means any record prepared by a subject person in ac5 cordance with internal compliance policies and proce6 dures.’’.

7 SEC. 208. INVESTMENT COMPANY NAMES.

8 Section 35(d) of the Investment Company Act of 1940

9 (15 U.S.C. 80a–34(d)) is amended to read as follows:

10 ‘‘(d) It shall be unlawful for any registered investment

11 company to adopt as a part of the name or title of such

12 company, or of any securities of which it is the issuer, any

13 word or words that the Commission finds are materially

14 deceptive or misleading. The Commission is authorized, by

15 rule, regulation, or order, to define such names or titles as

16 are materially deceptive or misleading.’’.

17 SEC. 209. EXCEPTIONS FROM DEFINITION OF INVESTMENT

18 COMPANY.

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

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

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

22 sentence the following new sentence: ‘‘Such issuer

23 nonetheless is deemed to be an investment company

24 for purposes of the limitations set forth in section

25 12(d)(1)(A)(i) and (B)(i) governing the purchase or
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1 other acquisition by such issuer of any security issued

2 by any registered investment company and the sale of

3 any security issued by any registered open-end com4 pany to any such issuer.’’;

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

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

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

8 the exception in this paragraph or paragraph

9 (7), would be an investment company,’’; and

10 (B) by striking all that follows ‘‘(other than

11 short-term paper)’’ and inserting a period;

12 (3) in paragraph (2)—

13 (A) by striking ‘‘and acting as broker,’’ and

14 inserting ‘‘acting as broker, and acting as mar15 ket intermediary,’’; and

16 (B) by adding at the end of such paragraph

17 the following new sentences: ‘‘For the purposes of

18 this paragraph, the term ‘market intermediary’

19 means any person that regularly holds itself out

20 as being willing contemporaneously to engage in,

21 and is regularly engaged in the business of enter22 ing into, transactions on both sides of the market

23 for a financial contract or one or more such fi24 nancial contracts. For purposes of the preceding

25 sentence, the term ‘financial contract’ means any
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1 arrangement that (A) takes the form of an indi2 vidually negotiated contract, agreement, or op3 tion to buy, sell, lend, swap, or repurchase, or

4 other similar individually negotiated transaction

5 commonly entered into by participants in the fi6 nancial markets; (B) is in respect of securities,

7 commodities, currencies, interest or other rates,

8 other measures of value, or any other financial

9 or economic interest similar in purpose or func10 tion to any of the foregoing; and (C) is entered

11 into in response to a request from a counterparty

12 for a quotation or is otherwise entered into and

13 structured to accommodate the objectives of the

14 counterparty to such arrangement.’’; and

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

16 following:

17 ‘‘(7)(A) Any issuer (i) whose outstanding securi18 ties are owned exclusively by persons who, at the time

19 of acquisition of such securities, are qualified pur20 chasers, and (ii) who is not making and does not

21 presently propose to make a public offering of such se22 curities. Securities that are owned by persons who re23 ceived the securities from a qualified purchaser as a

24 gift or bequest, or where the transfer was caused by

25 legal separation, divorce, death, or other involuntary
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1 event, shall be deemed to be owned by a qualified pur2 chaser, subject to such rules, regulations, and orders

3 as the Commission may prescribe as necessary or ap4 propriate in the public interest or for the protection

5 of investors.

6 ‘‘(B) Notwithstanding subparagraph (A), an is7 suer is within the exception provided by this para8 graph if—

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

10 outstanding securities are beneficially owned by

11 not more than 100 persons who are not qualified

12 purchasers if (I) such persons acquired such se13 curities on or before December 31, 1995, and (II)

14 at the time such securities were acquired by such

15 persons, the issuer was excepted by paragraph

16 (1) of this subsection; and

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

18 provided by this paragraph—

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

20 persons that future investors will be limited

21 to qualified purchasers, and that ownership

22 in such issuer is no longer limited to not

23 more than 100 persons, and

24 ‘‘(II) concurrently with or after such

25 disclosure, such issuer has provided such
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1 persons with a reasonable opportunity to re2 deem any part or all of their interests in

3 the issuer for their proportionate share of

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

5 equivalent thereof.

6 ‘‘(C) An issuer that is excepted under this para7 graph shall nonetheless be deemed to be an investment

8 company for purposes of the limitations set forth in

9 section 12(d)(1)(A)(i) and (B)(i) governing the pur10 chase or other acquisition by such issuer of any secu11 rity issued by any registered investment company

12 and the sale of any security issued by any registered

13 open-end company to any such issuer.

14 ‘‘(D) For purposes of determining compliance

15 with this paragraph and paragraph (1) of this sub16 section, an issuer that is otherwise excepted under this

17 paragraph and an issuer that is otherwise excepted

18 under paragraph (1) shall not be treated by the Com19 mission as being a single issuer for purposes of deter20 mining whether the outstanding securities of the is21 suer excepted under paragraph (1) are beneficially

22 owned by not more than 100 persons or whether the

23 outstanding securities of the issuer excepted under

24 this paragraph are owned by persons that are not

25 qualified purchasers. Nothing in this provision shall
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1 be deemed to establish that a person is a bona fide

2 qualified purchaser for purposes of this paragraph or

3 a bona fide beneficial owner for purposes of para4 graph (1) of this subsection.’’.

5 (b) DEFINITION OF QUALIFIED PURCHASER.—Section

6 2(a) of the Investment Company Act of 1940 (15 U.S.C.

7 80a–2(a)) is amended by inserting after paragraph (50) the

8 following new paragraph:

9 ‘‘(51) ‘Qualified purchaser’ means—

10 ‘‘(A) any natural person who owns at least

11 $10,000,000 in securities of issuers that are not

12 controlled by such person, except that securities

13 of such a controlled issuer may be counted to14 ward such amount if such issuer is, or but for

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

16 3(c) would be, an investment company;

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

18 purpose of acquiring the securities offered, as to

19 which the trustee or other person authorized to

20 make decisions with respect to the trust, and

21 each settlor or other person who has contributed

22 assets to the trust, is a person described in sub23 paragraph (A) or (C); or

24 ‘‘(C) any person, acting for its own account

25 or the accounts of other qualified purchasers,
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1 who in the aggregate owns and invests on a dis2 cretionary basis, not less than $100,000,000 in

3 securities of issuers that are not affiliated per4 sons (as defined in paragraph (3)(C) of this sub5 section) of such person, except that securities of

6 such an affiliated person issuer may be counted

7 toward such amount if such issuer is, or but for

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

9 3(c) would be, an investment company.

10 The Commission may adopt such rules and regula11 tions governing the persons and trusts specified in

12 subparagraphs (A), (B), and (C) of this paragraph as

13 it determines are necessary or appropriate in the

14 public interest and for the protection of investors.’’.

15 (c) CONFORMING AMENDMENT.—The last sentence of

16 section 3(a) of the Investment Company Act of 1940 (15

17 U.S.C. 80a–3(a)) is amended—

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

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

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

21 from the definition of investment company in sub22 section (c)(1) or (c)(7) of this section’’.

23 (d) RULEMAKING REQUIRED.—

24 (1) IMPLEMENTATION OF SECTION 3(c)(1)(B).—

25 Within one year after the date of enactment of this
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1 Act, the Commission shall prescribe rules to imple2 ment the requirements of section 3(c)(1)(B) of the In3 vestment Company Act of 1940 (15 U.S.C. 80a–

4 3(c)(1)(B)).

5 (2) EMPLOYEE EXCEPTION.—Within one year

6 after the date of enactment of this Act, the Commis7 sion shall prescribe rules pursuant to its authority

8 under section 6 of the Investment Company Act of

9 1940 (15 U.S.C. 80a–6) to permit the ownership by

10 knowledgeable employees of an issuer or an affiliated

11 person of the issuer of the securities of that issuer or

12 affiliated person without loss of the issuer’s exception

13 under section 3(c)(1) or 3(c)(7) of such Act from

14 treatment as an investment company under such Act.