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[Congressional Bills 104th Congress]
[From the U.S. Government Publishing Office]
[H.R. 3005 Introduced in House (IH)]

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.

    Be it enacted by the Senate and House of Representatives of the 
United States of America in Congress assembled,

SECTION 1. SHORT TITLE; TABLE OF CONTENTS.

    (a) Short Title.--This Act may be cited as the ``Securities 
Amendments of 1996''.
    (b) Table of Contents.--The table of contents of 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.

        TITLE I--CAPITAL MARKETS DEREGULATION AND LIBERALIZATION

SEC. 101. SHORT TITLE.

    This title may be cited as the ``Capital Markets Deregulation and 
Liberalization Act of 1996''.

SEC. 102. INVESTMENT RECOMMENDATIONS TO INSTITUTIONAL CLIENTS.

    (a) Rules of National Securities Exchanges Pertaining to Investment 
Recommendations to Institutional Clients.--Section 6(b) of the 
Securities Exchange Act of 1934 (15 U.S.C. 78f(b)) is amended by 
inserting after paragraph (9) the following new paragraph:
            ``(10) Investment recommendations to institutional 
        clients.--
                    ``(A) In general.--The rules of the exchange do not 
                provide that a member has an obligation to form a 
                belief as to the suitability of an investment 
                recommendation made by a member to an institutional 
                client, except that the rules of the association may 
                contain a provision in accordance with subparagraph 
                (B).
                    ``(B) Provision for written agreements.--The rules 
                of the exchange may provide that a broker or dealer has 
                an obligation to form a reasonable belief as to the 
                suitability of an investment recommendation made by the 
                broker or dealer client if the following conditions are 
                met:
                            ``(i) the broker or dealer and the 
                        institutional client expressly agree in 
                        writing, prior to or contemporaneously with the 
                        recommendation, that the recommendation will be 
                        made by the broker or dealer on a reasonable 
                        belief that the recommendation is suitable for 
such institutional client, based upon facts disclosed by such 
institutional client as to its other security holdings and as to its 
financial situation and needs; and
                            ``(ii) such other conditions as the 
                        exchange may establish in accordance with the 
                        requirements of this section.
                    ``(C) Definition of institutional client.--For 
                purposes of this paragraph, the term `institutional 
                client' means any person other than a natural person 
                that has at least $10,000,000 invested in securities in 
                the aggregate in its portfolio.''.
    (b) Presumption in Actions Pertaining to Recommendations to 
Institutional Clients.--Section 15 of the Securities Exchange Act of 
1934 (15 U.S.C. 78o) is amended by inserting after subsection (g) the 
following new subsection:
    ``(h) Investment Recommendations to Institutional Clients.--
            ``(1) Presumption.--In any action brought against a broker 
        or dealer or a person associated with a broker or dealer under 
        this title or under any rule or regulation thereunder 
        pertaining to an investment recommendation to an institutional 
        client, the broker or dealer or associated person shall be 
        entitled to a presumption that it is not liable for the 
        investment decisions of an institutional client.
            ``(2) Standard for rebutting presumption.--The presumption 
        set out in paragraph (1) may only be rebutted by proof that the 
        broker or dealer or associated person and the institutional 
        client expressly agreed in writing, prior to or 
        contemporaneously with the recommendation, that the 
        recommendation would be made by the broker or dealer or 
        associated person on a reasonable belief that the 
        recommendation would be suitable for such institutional client, 
        based upon facts disclosed by such institutional client as to 
        its other security holdings and as to its financial situation 
        and needs.
            ``(3) Definition of institutional client.--For purposes of 
        this subsection, the term `institutional client' means any 
        person other than a natural person that has at least 
        $10,000,000 invested in securities in the aggregate in its 
        portfolio.
            ``(4) Limitation.--This subsection shall not be deemed to 
        create or affirm any private right of action against a broker 
        or dealer or associated person for any investment 
        recommendation to an institutional client.''.
    (c) Rules of Securities Associations.--Section 15A(b) of the 
Securities Exchange Act of 1934 (15 U.S.C. 78o-3(b)) is amended by 
inserting after paragraph (13) the following new paragraph:
            ``(14) Investment recommendations to institutional 
        clients.--
                    ``(A) In general.--The rules of the association do 
                not provide that a member has an obligation to form a 
                belief as to the suitability of an investment 
                recommendation made by a member to an institutional 
                client, except that the rules of the association may 
                contain a provision in accordance with subparagraph 
                (B).
                    ``(B) Provision for written agreements.--The rules 
                of the association may provide that a broker or dealer 
                has an obligation to form a reasonable belief as to the 
                suitability of an investment recommendation made by the 
                broker or dealer client if the following conditions are 
                met:
                            ``(i) the broker or dealer and the 
                        institutional client expressly agree in 
                        writing, prior to or contemporaneously with 
the recommendation, that the recommendation will be made by the broker 
or dealer on a reasonable belief that the recommendation is suitable 
for such institutional client, based upon facts disclosed by such 
institutional client as to its other security holdings and as to its 
financial situation and needs; and
                            ``(ii) such other conditions as the 
                        association may establish in accordance with 
                        the requirements of this section.
                    ``(C) Definition of institutional client.--For 
                purposes of this paragraph, the term `institutional 
                client' means any person other than a natural person 
                that has at least $10,000,000 invested in securities in 
                the aggregate in its portfolio.''.

SEC. 103. CREATION OF NATIONAL SECURITIES MARKETS.

    (a) Securities Act of 1933.--Section 18 of the Securities Act of 
1933 (15 U.S.C. 77r) is amended to read as follows:

``SEC. 18. EXEMPTION FROM STATE CONTROL OF SECURITIES OFFERINGS.

    ``(a) Exemption From State Law for Registered Securities.--No law 
of any State or Territory of the United States, or the District of 
Columbia, or any political subdivision thereof--
            ``(1) requiring, or with respect to, registration or 
        qualification of securities or securities transactions shall 
        apply to any securities that are offered or sold using any 
        means or instruments of transportation or communication in 
        interstate commerce or of the mails pursuant to--
                    ``(A) a registration statement filed pursuant to 
                this title, with the exception of a registration 
                statement filed by an issuer which is a blank check 
                company as defined in section 7(b) of this title;
                    ``(B) an exemption from registration set forth in 
                section 3(a) of this title, with the exception of 
                section 3(a)(11) or any rule or regulation promulgated 
                thereunder; or
                    ``(C) any other exemption from section 5 of this 
                title;
            ``(2) shall prohibit, limit, or impose conditions upon the 
        use of any prospectus contained in a registration statement 
        that has been filed with the Commission, or any sales 
        literature used in connection therewith; or
            ``(3) shall prohibit, limit, or impose conditions upon the 
        offer or sale of any security registered with the Commission 
        under this title based upon the merits of such offering or the 
        issuer thereof;
except where the Commission may, by rule or regulation, exclude such 
securities from the provisions of this section upon a finding that the 
public interest and the protection of investors would be served by 
State regulation.
    ``(b) Preservation of Filing Requirements.--Nothing contained in 
this title shall prohibit the securities commission (or any agency or 
office performing like functions) of any State or Territory of the 
United States, or the District of Columbia, from requiring the filing 
of any documents filed with the Commission pursuant to this title, or 
from requiring some other form of filing, solely for notice purposes, 
along with a consent to service of process and requisite fee; except 
that no such filing, consent, or fee may be required with respect to 
securities, or transactions relating to securities, that are of the 
same class as securities, or are senior to such a class, listed on a 
national securities exchange or designated for trading in the National 
Market System of the National Association of Securities Dealers 
Automated Quotation System, or securities that will be so listed or 
designated for trading upon completion of the transaction.
    ``(c) Exceptions.--Nothing in this title shall affect the 
jurisdiction of the securities commission (or any agency or office 
performing like functions) of any State or Territory of the United 
States, or the District of Columbia, over--
            ``(1) any securities or transactions in securities 
        excluded, by statute, rule, or regulation, from the operation 
        of subsection (a) of this section, or
            ``(2) any person who, in the offer or sale of any 
        securities subject to subsection (a) of this section, directly 
        or indirectly, engages in conduct that violates section 17(a) 
        of this title, regardless of whether the jurisdictional means 
        specified therein are satisfied.''.
            (2) Technical amendment.--Section 19(c)(3)(C) is amended by 
        striking the last sentence.
            (3) Effective date.--The amendments made by this subsection 
        shall be effective 180 days after the date of the enactment of 
        this Act.
    (b) Securities Exchange Act of 1934.--
            (1) Amendment.--Section 15 of the Securities Exchange Act 
        of 1934 (15 U.S.C. 78o) is amended by adding at the end the 
        following new subsection:
    ``(h) Exemption From State Law for Registered Persons.--
            ``(1) Exemption.--No law of any State or political 
        subdivision thereof requiring the registration, licensing, 
        qualification, or inspection of a broker, dealer, or person 
        acting in a similar capacity in connection with the purchase or 
        sale of any security, shall apply to--
                    ``(A) any person who is registered with the 
                Commission as a broker or dealer, municipal securities 
                dealer, or government securities broker or dealer under 
                this title, or who the Commission by rule or order has 
                exempted from registration, or any issuer;
                    ``(B) any member of a national securities exchange; 
                or
                    ``(C) any person associated with a broker or 
                dealer, member of a national securities exchange, 
                municipal securities dealer, government securities 
                broker or dealer, or any issuer, included within the 
                coverage of subparagraph (A) or (B).
            ``(2) Permitted state activities.--Nothing contained in 
        this subsection shall prohibit a State from requiring 
        registration, licensing, qualification, or inspection of any 
        person, other than an issuer, who is within the coverage of 
        paragraph (1) of this subsection--
                    ``(A) in the case of paragraphs (1) (A) and (B), 
                the State performs its registration, licensing, 
                qualification, or inspection procedures through a 
                central registration depository system operated by a 
                national securities association registered under 
                section 15A of this title, and the State's requirements 
                are substantially similar to the Commission's 
                registration requirements and do not include any 
                provisions that are inconsistent with, or in addition 
                to, the Commission's registration requirements; or
                    ``(B) in the case of paragraph (1)(C), the State 
                performs its registration, licensing, qualification, or 
                inspection procedures through a central registration 
                depository system operated by a national securities 
                association registered under section 15A of this title 
                and the State's requirements are substantially similar 
                to, and not inconsistent with, the registration 
                requirements of such association or the Commission.
            ``(3) Prohibited requirements.--No law of any State or 
        political subdivision thereof shall establish broker or dealer 
        capital, books, and records, or financial reporting 
        requirements regarding persons registered, licensed, qualified, 
        or inspected pursuant to paragraph (1) of this subsection that 
        differ from requirements established in these areas by the 
        Commission.
            ``(4) Exemptions.--The Commission may by rule, regulation, 
        or order exempt State requirements from the provisions of 
        paragraphs (1), (2), and (3) of this subsection, in whole or in 
        part, conditionally or unconditionally, upon a finding that the 
        public interest, the protection of investors, and the 
        maintenance of fair and orderly markets would be served by such 
        State regulation.
            ``(5) Fees permitted.--Nothing in this subsection shall 
        prohibit any State or political subdivision thereof from 
        charging requisite fees in connection with the registration, 
        licensing, or qualification of persons within the coverage of 
        this subsection.
            ``(6) Preservation of authority.--Nothing contained in this 
        subsection shall affect the jurisdiction of any State or 
        political subdivision thereof to administer or enforce any 
        provision of State law not preempted by this subsection.''.
            (2) Effective date.--The amendments made by this subsection 
        shall be effective upon enactment.

SEC. 104. SECURITIES MARGIN REQUIREMENTS.

    (a) Margin Requirements.--Section 7 of the Securities Exchange Act 
of 1934 (15 U.S.C. 78g) is amended to read as follows:

``SEC. 7. MARGIN REQUIREMENTS.

    ``(a) Unlawful Credit Extension in Violation of Rules and 
Regulations; Exception to Application of Rules, Etc.--
            ``(1) General limitations.--It shall be unlawful for any 
        person to extend or maintain credit on any equity security of a 
        class designated by the Board of Governors of the Federal 
        Reserve System for the purpose of purchasing or carrying any 
        equity security of a class so designated, in contravention of 
        such rules and regulations as the Board of Governors of the 
        Federal Reserve System shall prescribe to prevent the excessive 
        use of credit for the purchasing or carrying of equity 
        securities of a class so designated.
            ``(2) Applicability.--Such rules and regulations shall 
        designate the classes of equity securities subject to credit 
        restrictions under this subsection and shall apply equally to 
        banks, brokers, dealers, and other lenders. This subsection and 
        the rules and regulations thereunder shall not apply to any 
        credit extended or maintained--
                    ``(A) by a person not in the ordinary course of 
                business;
                    ``(B) on an exempted security;
                    ``(C) to or for an excluded account; or
                    ``(D) as the Board of Governors of the Federal 
                Reserve System shall, by such rules, regulations, or 
                orders as it may deem necessary or appropriate in the 
                public interest or for the protection of investors, 
                exempt, either unconditionally or upon specified terms 
                and conditions, or for stated periods, from the 
                operation of this subsection and the rules and 
                regulations thereunder.
            ``(3) Exemption.--Notwithstanding subparagraphs (A), (B), 
        and (C) of paragraph (2), the Board of Governors of the Federal 
        Reserve System may impose such rules and regulations, in whole 
        or in part, on any extension of credit otherwise exempted by 
        such subparagraphs if the Board of Governors determines that 
        such action is necessary to deal with substantial instability 
        or the imminent threat of substantial instability in the 
        financial markets.
    ``(b) Unlawful Use of Foreign Credit Facilities.--
            ``(1) Limitations.--It shall be unlawful for any United 
        States person, or any foreign person controlled by a United 
        States person or acting on behalf of or in conjunction with 
        such person, to obtain, receive, or enjoy the beneficial use of 
        any extension of credit from any lender (without regard to 
        whether the lender's office or place of business is in a State 
        or the transaction occurred in whole or in part within a State) 
        for the purpose of--
                    ``(A) purchasing or carrying United States equity 
                securities of a class designated by the Board of 
                Governors of the Federal Reserve System pursuant to 
                subsection (a); or
                    ``(B) purchasing or carrying within the United 
                States of any other equity securities of a class so 
                designated, if, under this section or rules and 
                regulations prescribed thereunder, the extension of 
                credit is prohibited or would be prohibited if it had 
                been made or the transaction had otherwise occurred in 
                a lender's office or other place of business in a 
                State.
            ``(2) Definitions.--For the purposes of this subsection:
                    ``(A) The term `United States person' includes a 
                person which is organized or exists under the laws of 
any State or, in the case of a natural person, a citizen or resident of 
the United States; a domestic estate; or a trust in which one or more 
of the foregoing persons has a cumulative direct or indirect beneficial 
interest in excess of 50 percent of the value of the trust.
                    ``(B) The term `United States equity security' 
                means an equity security (other than an exempted 
                security) issued by a person incorporated under the 
                laws of any State, or whose principal place of business 
                is within a State.
                    ``(C) The term `foreign person controlled by a 
                United States person' includes any noncorporate entity 
                in which United States persons directly or indirectly 
                have more than a 50 percent beneficial interest, and 
                any corporation in which one or more United States 
                persons, directly or indirectly, own stock possessing 
                more than 50 percent of the total combined voting power 
                of all classes of stock entitled to vote, or more than 
                50 percent of the total value of shares of all classes 
                of stock.
            ``(3) Exemptions.--The Board of Governors of the Federal 
        Reserve System may, in its discretion and with due regard for 
        the purposes of this section, by rule, regulation, or order 
        exempt any class of United States persons or foreign persons 
        controlled by a United States person from the application of 
        this subsection.
    ``(c) Inconsistent Rules.--No margin, financial responsibility, or 
other rule of any national securities exchange or of any national 
securities association shall impose any limitation on the extension or 
maintenance of credit more restrictive than, or otherwise inconsistent 
with, those provided for in this section and the rules and regulations 
of the Board of Governors of the Federal Reserve System adopted 
hereunder.''.
    (b) Removal of Restrictions on Borrowing by Broker-Dealers.--
Section 8 of the Securities Exchange Act of 1934 (15 U.S.C. 78h) is 
amended--
            (1) by striking out ``member of a national securities 
        exchange, or broker or dealer who transacts business in 
        securities through the medium of any member of a national 
        securities exchange,''; and
            (2) by striking out subsection (a) and by redesignating 
        subsections (b) and (c) as subsections (a) and (b), 
        respectively.
    (c) Trading by Members of Exchanges, Brokers and Dealers.--Section 
11(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78k(d)) is 
amended--
            (1) by striking out ``a member of a national securities 
        exchange'' and inserting in lieu thereof ``any person'';
            (2) by striking out ``, or for any person who both as a 
        broker and a dealer transacts a business in securities through 
        the medium of a member or otherwise,'';
            (3) by striking out ``in the case of a member'';
            (4) by inserting ``(other than an excluded account)'' after 
        ``customer'' the first place it appears;
            (5) by inserting ``equity'' before ``security'' the first 
        place it appears;
            (6) by striking out ``(i)'' and by striking out ``or (ii) 
        any mortgage related security or any small business related 
        security against full payment of the entire purchase price 
        thereof upon such delivery within 180 days after such purchase 
        or within such shorter period as the Commission may prescribe 
        by rule or regulation''; and
            (7) by adding at the end thereof the following new 
        sentence: ``The Commission may, by such rules, regulations, or 
        orders as it may deem necessary or appropriate in the public 
interest or for the protection of investors, exempt either 
unconditionally or upon specified terms and conditions, or for stated 
periods, any security or transaction, or class of securities or 
transactions from the operation of this subsection and the rules and 
regulations thereunder.''.
    (d) Definition.--Section 3(a) of the Securities Exchange Act of 
1934 (15 U.S.C. 78c(a)) is amended by adding at the end thereof the 
following new paragraph:
            ``(54) The term `excluded account' means any person who 
        comes within any of the following categories:
                    ``(A) A financial institution, trust company, 
                savings association, or savings and loan association 
                (acting in an individual, fiduciary, or agency 
                capacity).
                    ``(B) A broker or dealer or an investment adviser 
                (acting on its own behalf or on behalf of another).
                    ``(C) A futures commission merchant, floor broker, 
                or floor trader (acting on its own behalf or on behalf 
                of another).
                    ``(D) An insurance company.
                    ``(E) An investment company, small business 
                investment company, business development company, or 
                private business development company.
                    ``(F) Any governmental entity (including the United 
                States, any State or any foreign government), any 
                political subdivision thereof, any multinational or 
                supranational entity, or any department, agency, or 
                instrumentality of any of the foregoing.
                    ``(G) A corporation, partnership, proprietorship, 
                organization, trust, or other entity, not formed for 
                the specific purpose of evading the requirements of any 
                rule or regulation adopted under section 7, with total 
                assets exceeding $5,000,000 or the obligations of which 
                with respect to any extension of credit are guaranteed 
                or otherwise supported by a letter of credit or 
                keepwell, support, or other agreement by any such 
                entity or by an entity referred to in subparagraph (A), 
                (B), (C), (D), (E), or (F) of this paragraph.
                    ``(H) An employee benefit plan with assets 
                exceeding $5,000,000 or whose investment decisions are 
                made by a bank, trust company, broker, dealer, or 
                registered investment adviser.
                    ``(I) Any entity in which all the equity owners are 
                `excluded accounts'.
                    ``(J) Any person, other than a natural person, who 
                is an affiliate of the person extending or maintaining 
                credit.
                    ``(K) Such other persons as the Board of Governors 
                of the Federal Reserve System shall, by rule, 
                regulation, or order, designate as an `excluded 
                account', either unconditionally or upon specified 
                terms and conditions, or for specified periods.''.
    (e) Effective Date.--The amendments made by this section shall be 
effective 270 days after the date of enactment of this Act.

SEC. 105. WILLIAMS ACT STUDY.

    (a) Study Required.--The Securities and Exchange Commission shall 
conduct a study of--
            (1) the burdens imposed on institutional investors and 
        other entities by the requirements of subsections (d), (g), and 
        (h) of section 13 of the Securities Exchange Act of 1934 (15 
        U.S.C. 78m (d), (g), (h)); and
            (2) the extent to which the requirements of such section 
        13(d) redistribute income from active to passive investors.
    (b) Report.--Within 18 months after the date of enactment of this 
Act, the Commission shall submit to the Congress a report on the 
results of the study required by subsection (a). Such report shall 
include such legislative recommendations as the Commission considers 
appropriate to reduce the regulatory burdens associated with 
subsections (d), (g), and (h) of section 13 of the Securities Exchange 
Act of 1934.

SEC. 106. PROSPECTUS DELIVERY.

    (a) Definition of Prospectus.--Section 2(10) of the Securities Act 
of 1933 (15 U.S.C. 77b(10)) is amended by striking ``or confirms the 
sale of any security''.
    (b) Delivery on Request.--Section 5(b)(2) of the Securities Act of 
1933 (15 U.S.C. 77e(b)(2)) is amended by inserting before the period at 
the end the following: ``, if the purchaser or prospective purchaser of 
such security has requested a prospectus''.
    (c) Authority To Exempt.--Section 5 of the Securities Act of 1933 
(15 U.S.C. 77(e)) is amended by adding a new subsection (d) after 
subsection (c) as follows:
    ``(d) Authority To Exempt.--The Commission may from time to time by 
its rules and regulations and subject to such terms and conditions as 
may be prescribed therein, upon its own motion or by order on 
application by an interested person, exempt from subsection (b) of 
section 5 any person or prospectus, or any class or classes of persons 
or prospectuses, if and to the extent that such exemption is necessary 
or appropriate in the public interest and consistent with the 
protection of investors. The Commission shall by rules and regulations 
determine the procedures under which an exemption under this subsection 
shall be granted, and may, in its sole discretion, decline to entertain 
any application for an order of exemption under this subsection.''.

SEC. 107. EXEMPTIVE AUTHORITY.

    (a) General Exemptive Authority Under the Securities Act of 1933.--
Title I of the Securities Act of 1933 (15 U.S.C. 77a et seq.) is 
amended by adding at the end the following new section:

``SEC. 28. GENERAL EXEMPTIVE AUTHORITY.

    ``The Commission, by rules and regulations, may conditionally or 
unconditionally exempt any person, security, or transaction, or any 
class or classes of persons, securities, or transactions, from any 
provision or provisions of this title or of any rule or regulation 
thereunder, to the extent that such exemption is necessary or 
appropriate in the public interest, and is consistent with the 
protection of investors and the promotion of efficiency, competition, 
and capital formation.''.
    (b) General Exemptive Authority Under the Securities Exchange Act 
of 1934.--Title I of the Securities Exchange Act of 1934 (15 U.S.C. 78a 
et seq.) is amended by adding at the end the following new section:

``SEC. 36. GENERAL EXEMPTIVE AUTHORITY.

    ``Notwithstanding any other provision of title, the Commission, by 
rule, regulation, or order, may conditionally or unconditionally exempt 
any person, security, or transaction, or any class or classes of 
persons, securities, or transactions, from any provision or provisions 
of this title or of any rule or regulation thereunder, to the extent 
that such exemption is necessary or appropriate in the public interest, 
and is consistent with the protection of investors and the promotion of 
efficiency, competition, and capital formation. The Commission shall by 
rules and regulations determine the procedures under which an exemptive 
order under this section shall be granted.''.

SEC. 108. PROMOTION OF EFFICIENCY, COMPETITION, AND CAPITAL FORMATION.

    (a) Securities Act of 1933.--Section 2 of the Securities Act of 
1933 (15 U.S.C. 77b) is amended--
            (1) by inserting ``(a) Definitions.--'' after ``Sec. 2.''; 
        and
            (2) by adding at the end the following new subsection:
    ``(b) Consideration of Promotion of Efficiency, Competition, and 
Capital Formation.--Whenever in this title the Commission is required 
to consider or determine whether an action is consistent with the 
public interest or the protection of investors (or both), the 
Commission shall also consider or determine whether the action will 
promote efficiency, competition, and capital formation. This subsection 
shall not apply with respect to any investigation or other action taken 
with respect to a violation of this title.''.
    (b) Securities Exchange Act of 1934.--Section 3 of the Securities 
Exchange Act of 1934 (15 U.S.C. 78c) is amended by adding at the end 
the following new subsection:
    ``(e) Consideration of Promotion of Efficiency, Competition, and 
Capital Formation.--Whenever in this title the Commission is required 
to consider or determine whether an action is consistent with the 
public interest or the protection of investors (or both), the 
Commission shall also consider or determine whether the action will 
promote efficiency, competition, and capital formation. This subsection 
shall not apply with respect to any investigation or other action taken 
with respect to a violation of this title.''.
    (c) Investment Company Act of 1940.--Section 2 of the Investment 
Company Act of 1940 (15 U.S.C. 80a-2) is amended by adding at the end 
the following new subsection:
    ``(c) Consideration of Promotion of Efficiency, Competition, and 
Capital Formation.--Whenever in this title the Commission is required 
to consider or determine whether an action is consistent with the 
public interest or the protection of investors (or both), the 
Commission shall also consider or determine whether the action will 
promote efficiency, competition, and capital formation. This subsection 
shall not apply with respect to any investigation or other action taken 
with respect to a violation of this title.''.

SEC. 109. REDUCTION IN NUMBER OF MEMBERS OF COMMISSION.

    (a) Amendments.--Section 4(a) of the Securities Exchange Act of 
1934 (15 U.S.C. 78d(a)) is amended--
            (1) by striking ``five commissioners'' and inserting ``3 
        commissioners''; and
            (2) by striking ``three of such commissioners'' and 
        inserting ``2 of such commissioners''.
    (b) Effective Date; Implementation.--The amendments made by 
subsection (a) shall take effect on the date of enactment of this Act, 
except that--
            (1) the offices the terms of which expired on June 5, 1994, 
        and June 5, 1995, shall be abolished; and
            (2) notwithstanding section 4(a) of the Securities Exchange 
        Act of 1934--
                    (A) upon the expiration of the term of office 
                prescribed by law to occur on June 5, 1996, any person 
                appointed to serve as a commissioner of the Securities 
                and Exchange Commission to fill such office for the 
                following term shall be eligible to serve until June 5, 
                1999;
                    (B) upon the expiration of the term of office 
                prescribed by law to occur on June 5, 1997, any person 
                appointed to serve as a commissioner of the Securities 
                and Exchange Commission to fill such office for the 
                following term shall be eligible to serve until June 5, 
                2001; and
                    (C) upon the expiration of the term of office 
                prescribed by law to occur on June 5, 1998, any person 
                appointed to serve as a commissioner of the Securities 
                and Exchange Commission to fill such office for the 
                following term shall be eligible to serve until June 5, 
                2003.

SEC. 110. PRIVATIZATION OF EDGAR.

    (a) Request for Proposals.--The Securities and Exchange Commission 
shall, by public notice, request proposals for the privatization of the 
EDGAR system. Such notice shall specify the methods by which the 
Commission will evaluate such proposal, which shall include the 
following objectives:
            (1) return to the Government on its investment in the 
        establishment of such system; and
            (2) promote the automation and rapid dissemination of 
        information required to be disclosed.
    (b) Review and Report.--Within 180 days after the date of enactment 
of this Act, the Commission shall review the proposal received pursuant 
to subsection (a) and submit to the Congress a report thereon. Such 
report shall include such recommendations for such legislative action 
as may be necessary to implement the proposal that the Commission 
determines most effectively achieves the objections described in 
subsection (a).

SEC. 111. DESIGNATION OF PRIMARY SRO AND EXAMINING AUTHORITY.

    (a) Amendments.--Section 17(d) of the Securities Exchange Act of 
1934 (15 U.S.C. 78q(d)) is amended to read as follows:
    ``(d) Designation of Examining Authorities.--
            ``(1) Designation.--After notice and comment, the 
        Commission shall designate for each registered broker or dealer 
        a self-regulatory organization of which the broker or dealer is 
        a member (other than a registered clearing agency) as its 
        examining authority. In no event shall the Commission designate 
        more than one examining authority for any broker or dealer, 
        except with the consent of such broker or dealer. In making any 
        such designation, the Commission shall take into consideration 
        the regulatory capabilities and procedures of the self-
        regulatory organizations, availability of staff, convenience of 
        location, unnecessary regulatory duplication, and such other 
        factors as the Commission may consider germane to the 
        protection of investors, the promotion of efficiency, 
        competition, and capital formation, cooperation and 
        coordination among self-regulatory organizations, and the 
        development of a national market system and a national system 
        for the clearance and settlement of securities transactions.
            ``(2) Routine examinations and enforcement of rules.--(A) 
        Subject to paragraph (5), an examining authority shall have 
        exclusive authority to conduct routine examinations and 
        inspections of the financial operations or sales practices of 
        any broker or dealer for which it has been designated as the 
        examining authority, and to issue a report of examination 
        relating to each such examination or inspection noting any 
        deficiencies found.
            ``(B) An examining authority shall enforce its own rules 
        with respect to such broker or dealer, and the Federal 
        securities laws and rules and regulations thereunder.
            ``(C) An examining authority shall furnish copies of any 
        report of examination of any broker or dealer to the Commission 
        and to any self-regulatory organization of which such person is 
        a member or in which such person is a participant. Any self-
        regulatory organization receiving a copy of the report shall 
        enforce its own rules with respect to such broker or dealer, 
        and the Federal securities laws and rules and regulations 
        thereunder.
            ``(3) Changes in designation.--On its own motion or 
        pursuant to a request by a broker or dealer for which the 
        Commission previously has designated an examining authority, 
        the Commission shall consider changing the designation of an 
        examining authority. After notice and comment, the Commission 
        shall change such designation by order if it is consistent with 
        the factors set forth in paragraph (1) of this subsection. The 
        issuance of such an order shall not alter or extinguish any 
        pending disciplinary proceeding that the originally designated 
        examining authority has brought against the broker or dealer or 
        any person associated with a broker or dealer.
            ``(4) Commission rules.--The Commission may adopt rules for 
        the designation of an examining authority for a broker or 
        dealer, and for changing such designation. Such rules shall be 
        designed to minimize the costs and burdens on the registered 
        broker or dealer, consistent with the protection of investors 
        and the public interest.
            ``(5) Preservation of existing authority.--Nothing in this 
        subsection shall be construed to alter, impair, or limit--
                    ``(A) the Commission's authority (i) to conduct 
                examinations and inspections of a broker or dealer, or 
                (ii) to bring any action under this title against any 
                broker or dealer, or against any person associated with 
                a broker or dealer; or
                    ``(B) the authority of any self-regulatory 
                organization to discipline any member or any person 
                associated with a member.''.
    (b) Definition.--Section 3(a) of the Securities Exchange Act of 
1934 (15 U.S.C. 78e) is amended by adding the following paragraph:
            ``(53) The term `examining authority' means a self-
        regulatory organization (other than a registered clearing 
        agency), as designated by the Commission, with exclusive 
        authority to examine, inspect, and otherwise oversee the 
        activities of a registered broker or dealer.''.
    (c) Conforming Amendments.--
            (1) Section 19(g) of the Securities Exchange Act of 1934 
        (15 U.S.C. 78s(g))--
                    (A) by striking subparagraph (A);
                    (B) by inserting ``a national securities exchange 
                and'' after ``in the case of'' in subparagraph (B); and
                    (C) by redesignating subparagraphs (B) and (C) as 
                subparagraphs (A) and (B), respectively.
            (2) Section 19(h) of such Act is amended in each of 
        paragraphs (1), (2), and (4)--
                    (A) by striking subparagraph (A) of each such 
                paragraph;
                    (B) by inserting ``a national securities exchange 
                and'' after ``in the case of'' in subparagraph (B) of 
                each such paragraph; and
                    (C) by redesignating subparagraphs (B) and (C) of 
                each such paragraph as subparagraphs (A) and (B) of 
                each such paragraph, respectively.
            (2) Section 19(h)(3) of such Act is amended by striking 
        ``transaction--'' and all that follows through ``(B) in the 
        case of'' and ``transaction, in the case of a national 
        securities exchange and''.
    (d) Initial Designation.--The Commission shall complete the initial 
designations of examining authorities for brokers and dealers required 
by section 17(d) of the Security Exchange Act of 1934 no later than one 
year after the date of enactment of this Act.

SEC. 112. TREATMENT OF PRESS CONFERENCES.

    (a) Definition of Offer.--Section 2(3) of the Securities Act of 
1933 (15 U.S.C. 77b(3)) is amended--
            (1) in the third sentence--
                    (A) by inserting ``(A)'' after ``shall not 
                include''; and
                    (B) by inserting before the period at the end 
                thereof the following: ``or (B) solely for purposes of 
                section 5, offshore press conferences, meetings with 
                issuer representatives conducted offshore, or press 
                releases or other material issued or released offshore 
                in which an offshore offering is discussed, 
                irrespective of whether journalists from the United 
                States or journalists for publications (including on-
                line services) with circulation in the United States 
                attend such press conferences or meetings or receive 
                such press releases or material''; and
            (2) by inserting after such third sentence the following: 
        ``Solely for purposes of section 5, no activity described in 
        clause (B) of this paragraph shall be considered in determining 
        whether any other activity or communication is included within 
        the terms defined in this paragraph and the term `offer to buy' 
        as used in subsection (c) of section 5 of this Act.''.
    (b) Definition of Prospectus.--Section 2(10) of the Securities Act 
of 1933 (15 U.S.C. 77b(10)) is amended--
            (1) by redesignating clauses (a) and (b) as clauses (A) and 
        (B), respectively; and
            (2) by striking the period at the end and inserting the 
        following: ``, and (C) solely for purposes of section 5, any 
        press release or other material issued or released offshore in 
        which an offshore offering is discussed shall not be deemed a 
        prospectus if such press release or material states that it is 
        not an offer of securities. For purposes of clause (C) of this 
        paragraph, the Commission, as it deems necessary or appropriate 
        in the public interest or for the protection of investors, may 
        adopt rules or regulations requiring such press releases or 
        material to contain additional information.''.

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

    Within 6 months after the date of enactment of this Act, the 
Securities and Exchange Commission shall submit to the Congress a 
report on the continuing need for, and options for the modification or 
elimination of, the Trust Indenture Act of 1939 (15 U.S.C. 77aaa et 
seq.).

              TITLE II--INVESTMENT COMPANY ACT AMENDMENTS

SEC. 201. SHORT TITLE.

    This title may be cited as the ``Investment Company Act Amendments 
of 1996''.

SEC. 202. FUNDS OF FUNDS.

    Section 12(d)(1) of the Investment Company Act of 1940 (15 U.S.C. 
80a-12(d)(1)) is amended--
            (1) in subparagraph (E)--
                    (A) by striking ``in the event such investment 
                company is not a registered investment company''; and
                    (B) by inserting ``in the event such investment 
                company is not a registered investment company'' after 
                ``(bb)'';
            (2) by redesignating existing subparagraphs (G) and (H) as 
        subparagraphs (H) and (I), respectively;
            (3) by inserting after subparagraph (F) the following new 
        subparagraph:
    ``(G) The provisions of this paragraph (1) shall not apply to 
securities of a registered open-end investment company (the `acquired 
company') purchased or otherwise acquired by a registered open-end 
investment company (the `acquiring company') if--
            ``(i) the acquired company and the acquiring company are 
        part of the same group of investment companies;
            ``(ii) the securities of the acquired company, securities 
        of other registered open-end investment companies that are part 
        of the same group of investment companies, Government 
        securities, and short-term paper are the only investments held 
        by the acquiring company;
            ``(iii)(I) the acquiring company does not pay and is not 
        assessed any charges or fees for distribution-related 
        activities with respect to securities of the acquired company 
        unless the acquiring company does not charge a sales load or 
        other fees or charges for distribution-related activities; or
            ``(II) any sales loads and other distribution-related fees 
        charged with respect to securities of the acquiring company, 
        when aggregated with any sales load and distribution-related 
        fees paid by the acquiring company with respect to securities 
        of the acquired fund, are not excessive under rules adopted 
        pursuant to either section 22(b) or section 22(c) of this title 
        by a securities association registered under section 15A of the 
        Securities Exchange Act of 1934 or the Commission;
            ``(iv) the acquired company shall have a fundamental policy 
        that prohibits it from acquiring any securities of registered 
        open-end investment companies in reliance on this subparagraph 
        or subparagraph (F) of this subsection; and
            ``(v) such acquisition is not in contravention of such 
        rules and regulations as the Commission may from time to time 
        prescribe with respect to acquisitions in accordance with this 
        subparagraph as necessary and appropriate for the protection of 
        investors.
For purposes of this subparagraph, a `group of investment companies' 
shall mean any two or more registered investment companies that hold 
themselves out to investors as related companies for purposes of 
investment and investor services.''; and
            (4) adding at the end the following new subparagraph:
    ``(J) The Commission, by rules and regulations upon its own motion 
or by order upon application, may conditionally or unconditionally 
exempt any person, security or transaction, or any class or classes of 
persons, securities or transactions from any provisions of this 
subsection, if and to the extent such exemption is consistent with the 
public interest and the protection of investors.''.

SEC. 203. REGISTRATION OF SECURITIES.

    (a) Amendments to Registration Statements.--Section 24(e) of the 
Investment Company Act of 1940 (15 U.S.C. 80a-24(e)) is amended--
            (1) by striking paragraphs (1) and (2);
            (2) by redesignating paragraph (3) as subsection (e); and
            (3) in subsection (e) (as so redesignated) by striking 
        ``pursuant to this subsection or otherwise''.
    (b) Registration of Indefinite Amount of Securities.--Section 24(f) 
of the Investment Company Act of 1940 (15 U.S.C. 80a-24(f)) is amended 
to read as follows:
    ``(f) Registration of Indefinite Amount of Securities.--
            ``(1) Indefinite registration of securities.--Upon the 
        effectiveness of its registration statement under the 
        Securities Act of 1933, a face-amount certificate company, 
        open-end management company, or unit investment trust, shall be 
        deemed to have registered an indefinite amount of securities.
            ``(2) Payment of registration fees.--Within 90 days after 
        the end of the company's fiscal year, the company shall pay a 
        registration fee to the Commission, calculated in the manner 
        specified in section 6(b) of the Securities Act of 1933, based 
        on the aggregate sales price for which its securities 
        (including, for this purpose, all securities issued pursuant to 
        a dividend reinvestment plan) were sold during the company's 
        previous fiscal year reduced by--
                    ``(A) the aggregate redemption or repurchase price 
                of the securities of the company during that year, and
                    ``(B) the aggregate redemption or repurchase price 
                of the securities of the company during any prior year 
                that were not used previously by the company to reduce 
                fees payable under this section.
            ``(3) Interest due on late payment.--A company paying the 
        fee or any portion thereof more than 90 days after the end of 
        the company's fiscal year shall pay to the Commission interest 
        on unpaid amounts, compounded daily, at the underpayment rate 
        established by the Secretary of the Treasury pursuant to 
        section 3717 of title 31, United States Code. The payment of 
        interest pursuant to the requirement of this paragraph shall 
        not preclude the Commission from bringing an action to enforce 
        the requirements of paragraph (2) of this subsection.
            ``(4) Rulemaking authority.--The Commission may adopt rules 
        and regulations to implement the provisions of this 
        subsection.''.

SEC. 204. INVESTMENT COMPANY ADVERTISING PROSPECTUS.

    Section 24 of the Investment Company Act of 1940 (15 U.S.C. 80a-24) 
is amended by adding at the end the following new subsection:
    ``(g) In addition to the prospectuses permitted or required in 
section 10(a) of the Securities Act of 1933, the Commission shall 
permit, by rules or regulations deemed necessary or appropriate in the 
public interest or for the protection of investors, the use of a 
prospectus for the purposes of section 5(b)(1) of such Act with respect 
to securities issued by a registered investment company. Such a 
prospectus, which may include information the substance of which is not 
included in the prospectus specified in section 10(a) of the Securities 
Act of 1933, shall be deemed to be permitted by section 10(b) of such 
Act.''.

SEC. 205. VARIABLE INSURANCE CONTRACTS.

    (a) Unit Investment Trust Treatment.--Section 26 of the Investment 
Company Act (15 U.S.C. 80a-26) is amended by adding at the end the 
following new subsection:
    ``(e)(1) Subsection (a) shall not apply to any registered separate 
account funding variable insurance contracts, or to the sponsoring 
insurance company and principal underwriter of such account.
    ``(2) It shall be unlawful for any registered separate account 
funding variable insurance contracts, or for the sponsoring insurance 
company of such account, to sell any such contract, unless--
            ``(A) the fees and charges deducted under the contract in 
        the aggregate are reasonable in relation to the services 
        rendered, the expenses expected to be incurred, and the risks 
        assumed by the insurance company, and the insurance company so 
        represents in the registration statement for the contract; and
            ``(B) the insurance company (i) complies with all other 
        applicable provisions of section 26 as if it were a trustee or 
        custodian of the registered separate account; (ii) files with 
        the insurance regulatory authority of a State or territory of 
        the United States or of the District of Columbia an annual 
        statement of its financial condition, which most recent 
        statement indicates that it has a combined capital and surplus, 
        if a stock company, or an unassigned surplus, if a mutual 
        company, of not less than $1,000,000, or such other amount as 
        the Commission may from time to time prescribe by rule as 
        necessary or appropriate in the public interest or for the 
        protection of investors; and (iii) together with its registered 
        separate accounts, is supervised and examined periodically by 
        the insurance authority of such State, territory, or the 
        District of Columbia.
    ``(3) The Commission may adopt such rules and regulations under 
paragraph (2)(A) as it determines are necessary or appropriate in the 
public interest or for the protection of investors. For the purposes of 
such paragraph, the fees and charges deducted under the contract shall 
include all fees and charges imposed for any purpose and in any 
manner.''.
    (b) Periodic Payment Plan Treatment.--Section 27 of such Act (15 
U.S.C. 80a-27) is amended by adding at the end the following new 
subsection:
    ``(i)(1) This section shall not apply to any registered separate 
account funding variable insurance contracts, or to the sponsoring 
insurance company and principal underwriter of such account, except as 
provided in paragraph (2).
    ``(2) It shall be unlawful for any registered separate account 
funding variable insurance contracts, or for the sponsoring insurance 
company of such account, to sell any such contract unless (A) such 
contract is a redeemable security, and (B) the insurance company 
complies with section 26(e) and any rules or regulations adopted by the 
Commission thereunder.

SEC. 206. REPORTS TO THE COMMISSION AND SHAREHOLDERS.

    Section 30 of the Investment Company Act of 1940 (15 U.S.C. 80a-29) 
is amended--
            (1) by striking paragraph (1) of subsection (b) and 
        inserting the following:
            ``(1) such information, documents, and reports (other than 
        financial statements), as the Commission may require to keep 
        reasonably current the information and documents contained in 
        the registration statement of such company filed under this 
        title;''; and
            (2) by redesignating subsections (c), (d), (e), and (f) as 
        subsections (d), (e), (g), and (h), respectively;
            (3) by inserting after subsection (b) the following new 
        subsection:
    ``(c) In exercising its authority under subsection (b)(1) to 
require the filing of information, documents, and reports on a basis 
more frequently than semi-annually, the Commission shall take such 
steps as it deems necessary or appropriate, consistent with the public 
interest and the protection of investors, to avoid unnecessary 
reporting by, and minimize the compliance burdens on, registered 
investment companies and their affiliated persons. Such steps shall 
include considering and requesting public comment on--
            ``(1) feasible alternatives that minimize the reporting 
        burdens on registered investment companies; and
            ``(2) the utility of such information, documents, and 
        reports to the Commission in relation to the costs to 
        registered investment companies and their affiliated persons of 
        providing such information, documents, and reports.'';
            (4) by inserting after subsection (e) (as redesignated by 
        paragraph (2) of this section) the following new subsection:
    ``(f) The Commission may by rule require that semi-annual reports 
containing the information set forth in subsection (e) include such 
other information as the Commission deems necessary or appropriate in 
the public interest or for the protection of investors. In exercising 
its authority under this subsection, the Commission shall take such 
steps as it deems necessary or appropriate, consistent with the public 
interest and the protection of investors, to avoid unnecessary 
reporting by, and minimize the compliance burdens on, registered 
investment companies and their affiliated persons. Such steps shall 
include considering and requesting public comment on--
            ``(1) feasible alternatives that minimize the reporting 
        burdens on registered investment companies; and
            ``(2) the utility of such information to shareholders in 
        relation to the costs to registered investment companies and 
        their affiliated persons of providing such information to 
        shareholders.''; and
            (5) in subsection (g) (as so redesignated) by striking 
        ``subsections (a) and (d)'' and inserting ``subsections (a) and 
        (e)''.

SEC. 207. BOOKS, RECORDS AND INSPECTIONS.

    Section 31 of the Investment Company Act of 1940 (15 U.S.C. 80a-30) 
is amended--
            (1) by striking subsections (a) and (b) and inserting the 
        following:
    ``(a) Every registered investment company, and every underwriter, 
broker, dealer, or investment adviser that is a majority-owned 
subsidiary of such a company, shall maintain and preserve such records 
(as defined in section 3(a)(37) of the Securities Exchange Act of 1934) 
for such period or periods as the Commission, by rules and regulations, 
may prescribe as necessary or appropriate in the public interest or for 
the protection of investors. Every investment adviser not a majority-
owned subsidiary of, and every depositor of any registered investment 
company, and every principal underwriter for any registered investment 
company other than a closed-end company, shall maintain and preserve 
for such period or periods as the Commission shall prescribe by rules 
and regulations, such records as are necessary or appropriate to record 
such person's transactions with such registered company. In exercising 
its authority under this subsection, the Commission shall take such 
steps as it deems necessary or appropriate, consistent with the public 
interest and for the protection of investors, to avoid unnecessary 
recordkeeping by, and minimize the compliance burden on, persons 
required to maintain records under this subsection (hereinafter in this 
section referred to as `subject persons'). Such steps shall include 
considering, and requesting public comment on--
            ``(1) feasible alternatives that minimize the recordkeeping 
        burdens on subject persons;
            ``(2) the necessity of such records in view of the public 
        benefits derived from the independent scrutiny of such records 
        through Commission examination;
            ``(3) the costs associated with maintaining the information 
        that would be required to be reflected in such records; and
            ``(4) the effects that a proposed recordkeeping requirement 
        would have on internal compliance policies and procedures.
    ``(b) All records required to be maintained and preserved in 
accordance with subsection (a) of this section shall be subject at any 
time and from time to time to such reasonable periodic, special, and 
other examinations by the Commission, or any member or representative 
thereof, as the Commission may prescribe. For purposes of such 
examinations, any subject person shall make available to the Commission 
or its representatives any copies or extracts from such records as may 
be prepared without undue effort, expense, or delay as the Commission 
or its representatives may reasonably request. The Commission shall 
exercise its authority under this subsection with due regard for the 
benefits of internal compliance policies and procedures and the 
effective implementation and operation thereof.'';
            (2) by redesignating existing subsections (c) and (d) as 
        subsections (e) and (f), respectively; and
            (3) by inserting after subsection (b) the following new 
        subsections:
    ``(c) Notwithstanding any other provision of law, the Commission 
shall not be compelled to disclose any internal compliance or audit 
records, or information contained therein, provided to the Commission 
under this section. Nothing in this subsection shall authorize the 
Commission to withhold information from Congress or prevent the 
Commission from complying with a request for information from any other 
Federal department or agency requesting the information for purposes 
within the scope of its jurisdiction, or complying with an order of a 
court of the United States in an action brought by the United States or 
the Commission. For purposes of section 552 of title 5, United States 
Code, this section shall be considered a statute described in 
subsection (b)(3)(B) of such section 552.
    ``(d) For purposes of this section:
            ``(1) `internal compliance policies and procedures' shall 
        mean policies and procedures designed by subject persons to 
        promote compliance with the Federal securities laws; and
            ``(2) `internal compliance and audit record' shall mean any 
        record prepared by a subject person in accordance with internal 
        compliance policies and procedures.''.

SEC. 208. INVESTMENT COMPANY NAMES.

    Section 35(d) of the Investment Company Act of 1940 (15 U.S.C. 80a-
34) is amended to read as follows:
    ``(d) It shall be unlawful for any registered investment company to 
adopt as a part of the name or title of such company, or of any 
securities of which it is the issuer, any word or words that are 
materially deceptive or misleading. The Commission is authorized, by 
rule, regulation, or order, to define such names or titles as are 
materially deceptive or misleading.''.

SEC. 209. EXCEPTED INVESTMENT COMPANIES.

    (a) Amendments.--Section 3(c) of the Investment Company Act of 1940 
(15 U.S.C. 80a-3(c)) is amended--
            (1) in paragraph (1), by inserting after the first sentence 
        the following new sentence: ``Such issuer nonetheless is deemed 
        to be an investment company for purposes of the limitations set 
        forth in section 12(d)(1) (A)(i) and (B)(i) governing the 
        purchase or other acquisition by such issuer of any security 
        issued by any registered investment company and the sale of any 
        security issued by any registered open-end investment company 
        to any such issuer.'';
            (2) in subparagraph (A) of paragraph (1)--
                    (A) by inserting after ``issuer,'' the first place 
                it appears the following: ``and is or, but for the 
                exception in this paragraph or paragraph (7), would be 
                an investment company,''; and
                    (B) by striking all that follows the words ``(other 
                than short-term paper)'' and inserting a period; and
            (3) by striking paragraph (7) and inserting the following:
            ``(7)(A) Any issuer (i) whose outstanding securities are 
        owned exclusively by persons who, at the time of acquisition of 
        such securities, are qualified purchasers, and (ii) who is not 
        making and does not presently propose to make a public offering 
        of such securities. Securities that are owned by persons who 
        received the securities from a qualified purchaser as a gift or 
        bequest, or where the transfer was caused by legal separation, 
        divorce, death, or other involuntary event, shall be deemed to 
        be owned by a qualified purchaser, subject to such rules, 
        regulations, and orders as the Commission may prescribe as 
        necessary or appropriate in the public interest or for the 
        protection of investors.
            ``(B) Notwithstanding subparagraph (A), an issuer is within 
        the exception provided by this paragraph if--
                    ``(i) in addition to qualified purchasers, its 
                outstanding securities are beneficially owned by not 
                more than 100 persons who are not qualified purchasers 
                if (I) such persons acquired such securities on or 
                before December 31, 1995, and (II) at the time such 
                securities were acquired by such persons, the issuer 
                was excepted by paragraph (1) of this subsection; and
                    ``(ii) prior to availing itself of the exception 
                provided by this paragraph--
                            ``(I) such issuer has disclosed to such 
                        persons that future investors will be limited 
                        to qualified purchasers, and that ownership in 
                        such issuer is no longer limited to not more 
                        than 100 persons, and
                            ``(II) concurrently with or after such 
                        disclosure, such issuer has provided such 
                        persons with a reasonable opportunity to redeem 
                        any part or all of their interests in the 
                        issuer for their proportionate share of the 
                        issuer's current net assets, or the cash 
                        equivalent thereof.
            ``(C) An issuer that is excepted under this paragraph shall 
        nonetheless be deemed to be an investment company for purposes 
        of the limitations set forth in section 12(d)(1) (A)(i) and 
        (B)(i) governing the purchase or other acquisition by such 
        issuer of any security issued by any registered investment 
        company and the sale of any security issued by any registered 
        open-end investment company to any such issuer.
            ``(D) For purposes of determining compliance with this 
        paragraph and paragraph (1) of this subsection, an issuer that 
        is otherwise excepted under this paragraph and an issuer that 
        is otherwise excepted under paragraph (1) shall not be treated 
        by the Commission as being a single issuer for purposes of 
        determining whether the outstanding securities of the issuer 
        excepted under paragraph (1) are beneficially owned by not more 
        than 100 persons or whether the outstanding securities of the 
        issuer excepted under this paragraph are owned by persons that 
        are not qualified purchasers. Nothing in this provision shall 
        be deemed to establish that a person is a bona fide qualified 
        purchaser for purposes of this paragraph or a bona fide 
        beneficial owner for purposes of paragraph (1) of this 
        subsection.''.
    (b) Definition of Qualified Purchaser.--Section 2(a) of the 
Investment Company Act of 1940 (15 U.S.C. 80a-2(a)) is amended by 
inserting after paragraph (50) the following new paragraph:
            ``(51) `Qualified purchaser' means--
                    ``(A) any natural person who owns at least 
                $10,000,000 in securities of issuers that are not 
                controlled by such person, except that securities of 
                such a controlled issuer may be counted toward such 
                amount if such issuer is, or but for the exception in 
                paragraph (1) or (7) of section 3(c) would be, an 
                investment company;
                    ``(B) any trust not formed for the specific purpose 
                of acquiring the securities offered, as to which the 
                trustee or other person authorized to make decisions 
                with respect to the trust, and each settlor or other 
                person who has contributed assets to the trust, is a 
                person described in subparagraph (A) or (C); or
                    ``(C) any person, acting for its own account or the 
                accounts of other qualified purchasers, who in the 
                aggregate owns and invests on a discretionary basis, 
                not less than $100,000,000 in securities of issuers 
                that are not affiliated persons (as defined in section 
                2(a)(3)(C)) of such person, except that securities of 
                such an affiliated person issuer may be counted toward 
                such amount if such issuer is, or but for the exception 
                in paragraph (1) or (7) of section 3(c) would be, an 
                investment company.
        The Commission may adopt such rules and regulations governing 
        the persons and trusts specified in subparagraphs (A), (B), and 
        (C) as it determines are necessary or appropriate in the public 
        interest and for the protection of investors.''.
    (c) Conforming Amendment.--The last sentence of section 3(a) of the 
Investment Company Act of 1940 (15 U.S.C. 80a-3(a)) is amended--
            (1) by inserting ``(i)'' after ``of the owner''; and
            (2) by inserting before the period the following: ``, and 
        (ii) which are not relying on the exception from the definition 
        of investment company in subsection (c)(1) or (c)(7) of this 
        section''.
    (d) Rulemaking Required.--
            (1) Implementation of section 3(c)(1)(b).--Within one year 
        after the date of enactment of this Act, the Commission shall 
        prescribe rules to implement the requirements of section 
        3(c)(1)(B) of the Investment Company Act of 1940 (15 U.S.C. 
        80a-3(c)(1)(B)).
            (2) Employee exception.--Within one year after the date of 
        enactment of this Act, the Commission shall prescribe rules 
        pursuant to its authority under section 6 of the Investment 
        Company Act of 1940 (15 U.S.C. 80a-6) to permit the ownership 
        by knowledgeable employees of an issuer of the securities of 
        that issuer without loss of the issuer's exception under 
        section 3(c)(1) or 3(c)(7) of such Act from treatment as an 
        investment company under that Act.
                                 <all>
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