I

104TH CONGRESS

1ST SESSION H. R. 1495

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

APRIL 7, 1995

Mr. FIELDS of Texas (for himself and Mr. MARKEY) introduced the following

bill; which was referred to the Committee on Commerce

A BILL

To amend the Investment Company Act of 1940 to promote

more efficient management of mutual funds, protect investors, and provide more effective and less burdensome

regulation.

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

3 SECTION 1. SHORT TITLE.

4 This Act may be cited as the ‘‘Investment Company

5 Act Amendments of 1995’’.
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1 SEC. 2. CORPORATE GOVERNANCE.

2 (a) AFFILIATIONS OF DIRECTORS.—Section 10(a) of

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

4 10(a)) is amended to read as follows:

5 ‘‘SEC. 10. (a) A registered investment company shall

6 have a board of directors at least a majority of the mem7 bers of which are persons who are not interested persons

8 of such registered company. After any public offering of

9 the company’s voting securities, the selection and nomina10 tion of the directors who are not interested persons shall

11 be committed to the discretion of such directors.’’.

12 (b) INVESTMENT ADVISORY AND UNDERWRITING

13 CONTRACTS.—Section 15(a) of the Investment Company

14 Act of 1940 (15 U.S.C. 80a–15(a)) is amended to read

15 as follows:

16 ‘‘SEC. 15. (a) It shall be unlawful for any person to

17 serve or act as investment adviser of a registered invest18 ment company, except pursuant to a written contract,

19 which contract, whether with such registered company or

20 with an investment adviser of such registered company—

21 ‘‘(1) precisely describes all compensation to be

22 paid thereunder;

23 ‘‘(2) shall continue in effect for a period more

24 than two years from the date of its execution, only

25 so long as such continuance is specifically approved

26 at least annually by the board of directors or by vote
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1 of a majority of the outstanding voting securities of

2 such company;

3 ‘‘(3) provides, in substance, that it may be ter4 minated at any time, without the payment of any

5 penalty, by the board of directors of such registered

6 company, by those directors who are not interested

7 persons of such company, or by a vote of a majority

8 of the outstanding voting securities of such company

9 on not more than 60 days written notice to the in10 vestment adviser; and

11 ‘‘(4) provides, in substance, for its automatic

12 termination in the event of its assignment.’’.

13 (c) ACCOUNTANTS AND AUDITORS.—Section 32(a) of

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

15 31(a)) is amended to read as follows:

16 ‘‘SEC. 32. (a) It shall be unlawful for any registered

17 management company or registered face-amount certifi18 cate company to file with the Commission any financial

19 statement signed or certified by an independent public ac20 countant, unless—

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

22 by the vote, cast in person, of a majority of those

23 members of the board of directors who are not inter24 ested persons of such registered company—
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1 ‘‘(A) at a board of directors meeting held

2 within 90 days before or after the beginning of

3 the fiscal year if the company is in a set of in4 vestment companies (as defined by Commission

5 rule, regulation, or order), all of the members

6 of which do not have an identical fiscal year7 end; or

8 ‘‘(B) at a board of directors meeting held

9 within 30 days before or 90 days after the be10 ginning of the fiscal year if the company is not

11 in a set of investment companies or is in a set

12 and each of the members of such set has the

13 same fiscal year-end;

14 ‘‘(2) the employment of such accountant shall

15 have been conditioned upon the right of the company

16 by vote of a majority of the outstanding voting secu17 rities at any meeting called for the purpose to termi18 nate such employment forthwith without any pen19 alty; and

20 ‘‘(3) such certificate or report of such account21 ant shall be addressed both to the board of directors

22 of such registered company and to the security hold23 ers thereof.

24 In the case of a common-law trust of the character de25 scribed in section 16(c), the employment of an accountant
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1 may be terminated and such accountant removed by action

2 of the holders of record of a majority of the outstanding

3 shares of beneficial interest in such trust in the same man4 ner as is provided in section 16(c) in respect of the re5 moval of a trustee, and all the provisions therein contained

6 as to the calling of a meeting shall be applicable. The pro7 visions of paragraph (42) of section 2(a) as to a majority

8 shall be applicable to the vote cast at any meeting of the

9 shareholders of such a trust held pursuant to this sub10 section.’’.

11 (d) CHANGES IN INVESTMENT POLICY.—Section

12 13(a)(1) of the Investment Company Act of 1940 (15

13 U.S.C. 80a–13(a)(1)) is amended by inserting after ‘‘(1)’’

14 the following: ‘‘change its investment objective, or’’.

15 (e) FILING INFORMATION.—Section 8(b)(1) of the

16 Investment Company Act of 1940 (15 U.S.C. 80a–8(b))

17 is amended—

18 (1) by inserting after ‘‘(1)’’ the following: ‘‘a re19 cital of the investment objective of the registrant

20 and’’; and

21 (2) by inserting ‘‘of policy’’ after ‘‘activities,

22 such recital’’.

23 (f) VOTING PROCEDURES.—Section 12(d)(1)(E)(iii)

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

25 12(d)(1)(E)(iii)) is amended—
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1 (1) by striking ‘‘in the event such investment

2 company is not a registered investment company,’’;

3 and

4 (2) by inserting ‘‘in the event such investment

5 company is a unit investment trust,’’ after ‘‘(bb)’’.

6 (g) DEFINITION OF MAJORITY VOTE.—Section

7 2(a)(42) of the Investment Company Act of 1940 (15

8 U.S.C. 80a–2(a)) is amended by striking the last sentence

9 and inserting the following: ‘‘The vote of a majority of

10 the outstanding voting securities of a company on any

11 matter means the affirmative vote of a majority of the

12 shares represented at a meeting at which a quorum is

13 present and voting on such matter. For these purposes,

14 the presence in person or by proxy of holders of a majority

15 of the outstanding voting securities of such company con16 stitutes a quorum.’’.

17 SEC. 3. INVESTMENT COMPANY ADVERTISING PROSPEC18 TUS.

19 Section 24 of the Investment Company Act of 1940

20 (15 U.S.C. 80a–24) is amended by adding at the end the

21 following new subsection:

22 ‘‘(g) In addition to the prospectuses permitted or re23 quired in section 10(a) of the Securities Act of 1933, the

24 Commission shall 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 permit the use of a prospectus for the

2 purposes of section 5(b)(1) of such Act which makes an

3 offer in the form of an advertisement for securities issued

4 by a registered investment company. Such a prospectus

5 shall be deemed to be permitted by section 10(b) of the

6 Securities Act of 1933.’’.

7 SEC. 4. BOOKS, RECORDS AND INSPECTIONS.

8 Section 31 of the Investment Company Act of 1940

9 (15 U.S.C. 80a–30) is amended—

10 (1) by striking subsections (a) and (b) and in11 serting the following:

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

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

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

15 maintain and preserve such records (as defined in section

16 3(a)(37) of the Securities Exchange Act of 1934) for such

17 period or periods as the Commission, by rules and regula18 tions, may prescribe as necessary or appropriate in the

19 public interest or for the protection of investors. Every in20 vestment adviser not a majority-owned subsidiary of, and

21 every depositor of any registered investment company, and

22 every principal underwriter for any registered investment

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

24 and preserve for such period or periods as the Commission

25 shall prescribe by rules and regulations, such records as
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1 are necessary or appropriate to record such person’s trans2 actions with such registered company.

3 ‘‘(b) All records required to be maintained and pre4 served in accordance with subsection (a) of this section

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

6 reasonable periodic, special, and other examinations by the

7 Commission, or any member or representative thereof, as

8 the Commission may prescribe. For purposes of such ex9 aminations, such persons shall make available to the Com10 mission or its representatives any copies or extracts from

11 such records as may be prepared without undue effort, ex12 pense, or delay as the Commission or its representatives

13 may reasonably request.’’;

14 (2) by redesignating existing subsections (c)

15 and (d) as subsections (d) and (e), respectively; and

16 (3) by inserting after subsection (b) the follow17 ing new subsection:

18 ‘‘(c) The Commission shall have the authority to pre19 scribe rules specifying the format and manner in which

20 the records required to be maintained and preserved by

21 any person pursuant to subsection (a) are transmitted to

22 the Commission or its representatives. In using such au23 thority, the Commission shall minimize the burden that

24 any requirement that such records be maintained, pre-
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1 served, or transmitted in machine readable format may

2 place on small entities that are subject to subsection (a).’’.

3 SEC. 5. REPORTS TO THE COMMISSION AND SHAREHOLD4 ERS.

5 Section 30 of the Investment Company Act of 1940

6 (15 U.S.C. 80a–29) is amended—

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

8 and inserting the following:

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

10 in such format and for such period or periods, as the

11 Commission may require to keep reasonably current

12 the information and documents contained in the reg13 istration statement of such company filed under this

14 title, or as the Commission by rules and regulations

15 may prescribe as necessary or appropriate in the

16 public interest or for the protection of investors;’’;

17 (2) by inserting after the last sentence of sub18 section (b) the following new sentence: ‘‘The Com19 mission shall have the authority to prescribe rules

20 specifying the format and manner in which the in21 formation, documents, or reports required to be filed

22 pursuant to paragraph (1) are transmitted to the

23 Commission or its representatives.’’; and

24 (3) in subsection (d)—
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1 (A) by striking ‘‘and’’ at the end of para2 graph (5);

3 (B) by striking the colon at the end of

4 paragraph (6) and inserting ‘‘; and’’; and

5 (C) by inserting after paragraph (6) the

6 following new paragraph:

7 ‘‘(7) such other information as the Commission

8 may by rule require as being necessary or appro9 priate in the public interest or for the protection of

10 investors:’’.

11 SEC. 6. UNIFIED FEE INVESTMENT COMPANY.

12 The Investment Company Act of 1940 (15 U.S.C.

13 80a) is amended by inserting the following new section

14 after section 65 (15 U.S.C. 80a–64):

15 ‘‘UNIFIED FEE INVESTMENT COMPANY

16 ‘‘SEC. 66. (a) Subject to the requirements of this sec17 tion, the Commission may by rule or order exempt, in

18 whole or in part, a registered open-end investment com19 pany from sections 12(b), 15, 22(b), and 36(b) of this

20 title, and such other provisions as may be necessary or

21 appropriate to further the purposes of this section and

22 consistent with the protection of investors. For purposes

23 of this section, any such company is referred to as an ‘ex24 empted company’.

25 ‘‘(b) Notwithstanding section 10(a), the exempted

26 company shall have a board of directors at least two-thirds
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1 of the members of which are persons who are not inter2 ested persons of the company. After any public offering

3 of the exempted company’s voting securities, the selection

4 and nomination of those directors who are not interested

5 persons of the exempted company shall be committed to

6 the discretion of such directors.

7 ‘‘(c) The exempted company shall have engaged an

8 investment manager pursuant to a written management

9 contract which shall require the investment manager to

10 perform, or make provision for, all services necessary to

11 the exempted company’s operations and the distribution

12 of its securities in return for a single fee covering all serv13 ices and expenses of the exempted company, except taxes,

14 interest, brokerage commissions, fees paid to those direc15 tors who are not interested persons of the exempted com16 pany for their services as members of the exempted com17 pany’s board of directors and fees paid to legal counsel

18 or any expert acting solely on behalf of such directors, and

19 any extraordinary expenses. The fee payable under the

20 management contract—

21 ‘‘(1) may not change more frequently than an22 nually and only upon adequate notice to the exempt23 ed company’s shareholders, which notice shall be

24 deemed to be a solicitation of a proxy within the

25 meaning of section 20 of this title; and
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1 ‘‘(2) shall be prominently disclosed on the cover

2 page of the exempted company’s prospectus and in

3 all advertising and sales literature concerning the ex4 empted company or its securities.

5 ‘‘(d) The board of directors of the exempted company

6 and those directors who are not interested persons of the

7 exempted company by majority vote shall approve—

8 ‘‘(1) prior to effectiveness the management con9 tract and any other contract entered into by the in10 vestment manager for the provision of services or

11 the payment of expenses necessary to the exempted

12 company’s operations or distribution of its securities

13 (‘fund contract’);

14 ‘‘(2) at least annually a management contract

15 and any fund contract that continues in effect for a

16 period of more than 2 years; and

17 ‘‘(3) any amendment of the management con18 tract or any material amendment of any fund con19 tract.

20 Notwithstanding section 15(c), the directors of the ex21 empted company shall have a duty to request and evalu22 ate, and the contracting party shall have a duty to furnish,

23 such information as may reasonably be necessary to evalu24 ate the adequacy of the services provided under the man25 agement contract and any fund contract. In evaluating the
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1 management contract, the directors also shall have a duty

2 to determine that the compensation payable under the

3 contract is not unconscionable or grossly excessive.

4 ‘‘(e) Notwithstanding section 22(a), the exempted

5 company’s securities shall be sold and redeemed at the

6 current net asset value of such securities. Except for the

7 fee paid to the investment manager and the expenses enu8 merated in subsection (c), no expenses shall be deducted

9 from the exempted company’s assets or charged to all

10 shareholder accounts.’’.

11 SEC. 7. INVESTMENT COMPANY NAMES.

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

13 1940 (15 U.S.C. 80a–34) is amended to read as follows:

14 ‘‘(d) It shall be unlawful for any registered invest15 ment company to adopt as a part of the name or title of

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

17 any word or words that are materially deceptive or mis18 leading. The Commission is authorized, by rules, regula19 tions or order, to define such names or titles as are decep20 tive or misleading.’’.

21 SEC. 8. PRIVATE INVESTMENT COMPANIES.

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

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

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

25 sentence the following new sentence: ‘‘Such issuer
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1 nonetheless is deemed to be an investment company

2 for purposes of the limitations set forth in section

3 12(d)(1)(A)(i) and (B)(i) governing the purchase or

4 other acquisition by such issuer of any security is5 sued by any registered investment company and the

6 sale of any security issued by any registered open7 end investment company to any such issuer.’’;

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

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

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

11 for the exception in this paragraph or para12 graph (7), would be an investment company,’’;

13 and

14 (B) by striking all that follows the words

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

16 period; and

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

18 following:

19 ‘‘(7) Any issuer whose outstanding securities

20 are owned exclusively by persons who, at the time of

21 acquisition of such securities, are qualified pur22 chasers. Such issuer nonetheless is deemed to be an

23 investment company for purposes of the limitations

24 set forth in section 12(d)(1)(A)(i) and (B)(i) govern25 ing the purchase or other acquisition by such issuer
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1 of any security issued by any registered investment

2 company and the sale of any security issued by any

3 registered open-end investment company to any such

4 issuer.’’.

5 (b) DEFINITION OF QUALIFIED PURCHASER.—Sec6 tion 2(a) of the Investment Company Act of 1940 (15

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

8 (50) the 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, each of

12 which is not an affiliated person, as defined in

13 section 2(a)(3)(C), of such person; or

14 ‘‘(B) any person, acting for its own ac15 count or the accounts of other qualified pur16 chasers, who in the aggregate owns and invests

17 on a discretionary basis, not less than

18 $100,000,000 in securities of issuers, each of

19 which is not an affiliated person, as defined in

20 section 2(a)(3)(C), of such person.

21 The Commission also may adopt such rules and reg22 ulations governing the persons specified in subpara23 graphs (A) and (B) as it determines are necessary

24 or appropriate in the public interest and for the pro25 tection of investors.’’.
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1 (c) CONFORMING AMENDMENT.—The last sentence

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

3 (15 U.S.C. 80a–3(a)) is amended by inserting before the

4 period the following: ‘‘or relying on the exclusion from the

5 definition of investment company in subsection (c)(1) or

6 (c)(7) of this section’’.

7 SEC. 9. FUNDS OF FUNDS.

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

9 1940 (15 U.S.C. 80a–12(d)(1)) is amended by—

10 (1) redesignating existing subparagraphs (G)

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

12 (2) inserting after subparagraph (F) the follow13 ing new subparagraph:

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

15 apply to securities of a registered open-end investment

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

17 acquired by a registered open-end investment company

18 (the ‘acquiring company’) if—

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

20 company are part of the same group of investment

21 companies;

22 ‘‘(ii) the securities of the acquired company, se23 curities of other registered open-end investment

24 companies that are part of the same group of invest-
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1 ment companies, and short-term paper are the only

2 investment securities held by the acquiring company;

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

4 and is not assessed any charges or fees for distribu5 tion-related activities with respect to securities of the

6 acquired company unless the acquiring company

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

8 for distribution-related activities; or

9 ‘‘(II) any sales loads and other distribution-re10 lated fees charged with respect to securities of the

11 acquiring company, when aggregated with any sales

12 load and distribution-related fees paid by the acquir13 ing company with respect to securities of the ac14 quired fund, are not excessive under rules adopted

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

16 this title by a securities association registered under

17 section 15A of the Securities Exchange Act of 1934

18 or the Commission;

19 ‘‘(iv) the acquired company shall have a fun20 damental policy that prohibits it from acquiring any

21 securities of registered open-end investment compa22 nies in reliance on this subparagraph or subpara23 graph (F) of this subsection;

24 ‘‘(v) the acquiring company shall exercise voting

25 rights by proxy or otherwise with respect to the se-
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1 curities of the acquired company purchased or ac2 quired in the manner prescribed by subparagraph

3 (E) of this subsection; and

4 ‘‘(vi) such acquisition is not in contravention of

5 such rules and regulations as the Commission may

6 have prescribed with respect to acquisitions in ac7 cordance with this subparagraph as necessary and

8 appropriate for the protection of investors.

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

10 companies’ shall mean any two or more registered invest11 ment companies that hold themselves out to investors as

12 related companies for purposes of investment and investor

13 services.’’; and

14 (3) adding at the end the following new sub15 paragraph:

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

17 its own motion or by order upon application, may condi18 tionally or unconditionally exempt any person, security or

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

20 or transactions from any provisions of this subsection, if

21 and to the extent such exemption is consistent with the

22 protection of investors.’’.

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