II 

108TH CONGRESS 

1ST SESSION S. 1971

To improve transparency relating to the fees and costs that mutual fund 

investors incur and to improve corporate governance of mutual funds. 

IN THE SENATE OF THE UNITED STATES 

NOVEMBER 25, 2003

Mr. CORZINE (for himself, Mr. DODD, and Mr. LIEBERMAN) introduced the 

following bill; which was read twice and referred to the Committee on 

Banking, Housing, and Urban Affairs 

A BILL

To improve transparency relating to the fees and costs that 

mutual fund investors incur and to improve corporate 

governance of mutual funds.

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

3 SECTION 1. SHORT TITLE; TABLE OF CONTENTS. 

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

5 ‘‘Mutual Fund Investor Confidence Restoration Act of 

6 2003’’. 

7 (b) TABLE OF CONTENTS.—The table of contents for 

8 this Act is as follows:

Sec. 1. Short title; table of contents. 
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TITLE I—ENHANCING COST, FEE, AND OTHER DISCLOSURES TO 

SHAREHOLDERS 

Sec. 101. Improved transparency of mutual fund costs. 

Sec. 102. Obligations regarding certain distribution and soft dollar arrangements. 

Sec. 103. Definition of no-load mutual fund. 

Sec. 104. Disclosure of incentive compensation and mutual fund sales. 

TITLE II—MUTUAL FUND GOVERNANCE 

Sec. 201. Independent mutual fund boards. 

Sec. 202. Audit committee requirements for investment companies. 

Sec. 203. Informing directors of significant deficiencies. 

Sec. 204. Certification by chairman and chief compliance officer. 

TITLE III—PREVENTING ABUSIVE MUTUAL FUND PRACTICES 

Sec. 301. Prevention of fraud; internal compliance and control procedures. 

Sec. 302. Ban on joint management of mutual funds and hedge funds. 

Sec. 303. Restrictions on short term trading and mandatory redemption fees. 

Sec. 304. Elimination of stale prices. 

Sec. 305. Formal policies and procedures related to market timing. 

Sec. 306. Prevention of late trades. 

Sec. 307. Disclosure of insider transactions. 

TITLE IV—STRENGTHENING MUTUAL FUND INDUSTRY 

OVERSIGHT 

Sec. 401. Study of Mutual Fund Oversight Board. 

Sec. 402. Study of coordination of enforcement efforts. 

Sec. 403. Review of Commission resources. 

Sec. 404. Commission study and report regulating soft dollar arrangements. 

Sec. 405. Report on adequacy of regulatory response to late trading and market 

timing. 

Sec. 406. Study of arbitration claims. 

TITLE V—PROMOTING SHAREHOLDER LITERACY 

Sec. 501. Financial literacy among mutual fund investors study.

1 TITLE I—ENHANCING COST, FEE, 

2 AND OTHER DISCLOSURES TO 

3 SHAREHOLDERS 

4 SEC. 101. IMPROVED TRANSPARENCY OF MUTUAL FUND 

5 COSTS. 

6 (a) REGULATION REVISION REQUIRED.—

7 (1) IN GENERAL.—Not later than 180 days 

8 after the date of enactment of this Act, the Securi-
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1 ties and Exchange Commission shall revise regula2 tions under the Securities Act of 1933, the Securi3 ties Exchange Act of 1934, or the Investment Com4 pany Act of 1940, or any combination thereof, to re5 quire, consistent with the protection of investors and 

6 the public interest, improved disclosure with respect 

7 to an open-end management investment company, in 

8 the quarterly statement or other periodic report to 

9 shareholders or other appropriate disclosure docu10 ment, of—

11 (A) the actual dollar amount, borne by 

12 each shareholder, of the expenses of the com13 pany; 

14 (B) the structure of, method used to deter15 mine, and the total amount of the compensation 

16 of individuals employed by the investment ad17 viser of the company to manage the portfolio of 

18 the company, and the ownership interest of 

19 such individuals in the securities of the com20 pany, including when such individuals have no 

21 ownership interest in the company; 

22 (C) whether the chairman of the board of 

23 directors of the open-end management invest24 ment company or any directors of the invest25 ment adviser of such company employed to 
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1 manage the portfolio of the company do not 

2 own any securities of the company; 

3 (D) the estimated total annual dollar 

4 amount of fees, costs, expenses, taxes, and any 

5 other payments made by the company for any 

6 purpose, excluding only pro rata distributions to 

7 shareholders, and set forth in a manner that fa8 cilitates comparison among different companies; 

9 (E) information concerning the company’s 

10 policies and practices with respect to the pay11 ment of commissions for effecting securities 

12 transactions to a member of an exchange, 

13 broker, or dealer who—

14 (i) furnishes advice, either directly or 

15 through publications or writings, as to the 

16 value of securities, the advisability of in17 vesting in, purchasing, or selling securities, 

18 and the availability of securities or pur19 chasers or sellers of securities; 

20 (ii) furnishes analyses and reports 

21 concerning issuers, industries, securities, 

22 economic factors and trends, portfolio 

23 strategy, and the performance of accounts; 

24 or
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1 (iii) facilitates the sale and distribu2 tion of the company’s shares; 

3 (F) information concerning payments by 

4 any person other than the company that are in5 tended to facilitate the sale and distribution of 

6 the company’s shares; and 

7 (G) information concerning discounts on 

8 front-end sales loads for which investors may be 

9 eligible, including the minimum purchase 

10 amounts required for such discounts. 

11 (2) RULES AND REGULATIONS.—

12 (A) OTHER MANAGEMENT AND SERVICE13 RELATED COST.—Not later than 180 days after 

14 the date of enactment of this Act, the Securities 

15 and Exchange Commission shall issue rules or 

16 regulations defining ‘‘fees, costs, expenses, 

17 taxes, and any other payments made by the 

18 company’’ for purposes of paragraph (1)(D). 

19 Such definition shall include any management 

20 fees, transfer agency expenses, custodial fees, 

21 shareholder servicing fees, portfolio transaction 

22 costs (including commissions, market impact, 

23 spread, and opportunity costs, fees charged 

24 under a plan adopted pursuant to rule 12b–1 of 

25 the rules of the Securities and Exchange Com-
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1 mission (17 C.F.R. 270.12b–1), and other dis2 tribution expenses, directors’ fees, and registra3 tion fees. 

4 (B) MANNER THAT FACILITATES COMPARI5 SON AMONG INVESTMENT COMPANIES.—

6 (i) IN GENERAL.—Not later than 180 

7 days after the date of enactment of this 

8 Act, the Securities and Exchange Commis9 sion shall issue rules or regulations defin10 ing ‘‘manner that facilitates comparison 

11 amount investment companies’’ for pur12 poses of paragraph (1)(D). Such definition 

13 shall include definitions of functional cat14 egories of fees, costs, expenses, taxes, and 

15 other payments disclosed under paragraph 

16 (1)(D) that shall not be based on the con17 tract under which or with whom the serv18 ices are provided, and shall instead be 

19 based on the nature of the services pro20 vided. 

21 (ii) DISPLAY.—Each category of costs 

22 under clause (i) shall be presented in a 

23 graphical display (such as a bar or pie 

24 chart) that shows each category as a per-
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1 centage of the total dollar amount under 

2 paragraph (1)(D). 

3 (C) CERTIFICATION.—Not later than 90 

4 days after the date of enactment of this Act, 

5 the Securities and Exchange Commission shall 

6 issue rules or regulations requiring the inde7 pendent audit of the estimate required under 

8 paragraph (1)(D) and certification by the in9 vestment adviser and the chairman of the board 

10 of directors of the open-end investment com11 pany. 

12 (b) APPROPRIATE DISCLOSURE DOCUMENT.—

13 (1) IN GENERAL.—For purposes of subsection 

14 (a)(1), a disclosure shall not be considered to be 

15 made in an appropriate disclosure document if the 

16 disclosure is made exclusively in a prospectus or 

17 statement of additional information, or both such 

18 documents. 

19 (2) EXCEPTIONS.—Notwithstanding paragraph 

20 (1), the disclosures required by paragraph (1)(B), 

21 (C), and (E) of subsection (a) may be considered to 

22 be made in an appropriate disclosure document if 

23 the disclosure is made exclusively in a prospectus or 

24 statement of additional information, or both such 

25 documents. 
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1 SEC. 102. OBLIGATIONS REGARDING CERTAIN DISTRIBU2 TION AND SOFT DOLLAR ARRANGEMENTS. 

3 Section 15 of the Investment Company Act of 1940 

4 (15 U.S.C. 80a–15) is amended by adding at the end the 

5 following: 

6 ‘‘(g) OBLIGATIONS REGARDING CERTAIN DISTRIBU7 TION AND SOFT DOLLAR ARRANGEMENTS.—

8 ‘‘(1) REPORTING REQUIREMENTS.—Each in9 vestment adviser to a registered investment company 

10 shall, not less frequently than annually, submit to 

11 the board of directors of the company a report on—

12 ‘‘(A) payments during the reporting period 

13 by the adviser (or an affiliated person of the 

14 adviser) that were directly or indirectly made 

15 for the purpose of promoting the sale of shares 

16 of the investment company (referred to in para17 graph (2) as a ‘revenue sharing arrangement’); 

18 ‘‘(B) services to the company provided or 

19 paid for by a broker or dealer or an affiliated 

20 person of the broker or dealer (other than bro21 kerage and research services) in exchange for 

22 the direction of brokerage to the broker or deal23 er (referred to in paragraph (2) as a ‘directed 

24 brokerage arrangement’); and 

25 ‘‘(C) research services obtained by the ad26 viser (or an affiliated person of the adviser) 
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1 during the reporting period from a broker or 

2 dealer, the receipt of which may reasonably be 

3 attributed to securities transactions effected on 

4 behalf of the company or any other company 

5 that is a member of the same group of invest6 ment companies (referred to in paragraph (2) 

7 as a ‘soft dollar arrangement’). 

8 ‘‘(2) FIDUCIARY DUTY OF BOARD OF DIREC9 TORS.—The board of directors of a registered invest10 ment company shall have a fiduciary duty—

11 ‘‘(A) to review the investment adviser’s di12 rection of the company’s brokerage trans13 actions, including directed brokerage arrange14 ments and soft dollar arrangements, and that 

15 the direction of such brokerage adheres to the 

16 Fund’s stated policies and is in the best inter17 ests of the shareholders of the company; and 

18 ‘‘(B) to review any revenue sharing ar19 rangements to ensure compliance with this Act 

20 and the rules adopted thereunder, and that 

21 such revenue sharing arrangements adheres to 

22 the Fund’s stated policies and are in the best 

23 interests of the shareholders of the company. 

24 ‘‘(3) SUMMARIES OF REPORTS IN ANNUAL RE25 PORTS TO SHAREHOLDERS.—In accordance with reg-
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1 ulations prescribed by the Commission under para2 graph (4), annual reports to shareholders of a reg3 istered investment company shall include a summary 

4 of the most recent report submitted to the board of 

5 directors under paragraph (1). 

6 ‘‘(4) REGULATIONS.—The Commission shall 

7 adopt rules and regulations implementing this sec8 tion, which rules and regulations shall, among other 

9 things, prescribe the content of the required reports. 

10 ‘‘(5) DEFINITION.—For purposes of this sub11 section—

12 ‘‘(A) the term ‘brokerage and research 

13 services’ has the same meaning as in section 

14 28(e)(3) of the Securities Exchange Act of 

15 1934; and 

16 ‘‘(B) the term ‘research services’ means 

17 the services described in subparagraphs (A) and 

18 (B) of such section.’’. 

19 SEC. 103. DEFINITION OF NO-LOAD MUTUAL FUND. 

20 Not later than 180 days after the date of enactment 

21 of this Act, the Securities and Exchange Commission 

22 shall, by rule adopted by the Commission or a self-regu23 latory organization (or both)—

24 (1) clarify the definition of ‘‘no-load’’ as such 

25 term is used by investment companies that impose
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1 any fee under a plan adopted pursuant to rule 12b–

2 1 of the rules of the Securities and Exchange Com3 mission (17 C.F.R. 270.12b–1); and 

4 (2) require disclosure to prevent investors from 

5 being misled by the use of such terminology by the 

6 company or its adviser or principal underwriter. 

7 SEC. 104. DISCLOSURE OF INCENTIVE COMPENSATION AND 

8 MUTUAL FUND SALES. 

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

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

11 adding at the end the following: 

12 ‘‘(11) CONFIRMATION OF TRANSACTIONS FOR

13 MUTUAL FUNDS.—

14 ‘‘(A) IN GENERAL.—Each broker shall dis15 close in writing to customers that purchase the 

16 shares of an open-end company registered 

17 under section 8 of the Investment Company Act 

18 of 1940 (15 U.S.C. 80a–8)—

19 ‘‘(i) the amount of any compensation 

20 received or to be received by the broker in 

21 connection with such transaction from any 

22 sources, including—

23 ‘‘(I) the amount and source of 

24 sales fees, payments by persons other 

25 than the investment company that are 
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1 intended to facilitate the sale and dis2 tribution of the securities, and com3 missions for effecting portfolio securi4 ties transactions, or other payments, 

5 paid to such broker or dealer, or mu6 nicipal securities broker or dealer, or 

7 associated person thereof in connec8 tion with such sale; 

9 ‘‘(II) any commission or other 

10 fees or charges the investor has paid 

11 or will or might be subject to, includ12 ing as a result of purchases or re13 demptions; 

14 ‘‘(III) any conflicts of interest 

15 that any associated person of the 

16 broker, dealer, or municipal securities 

17 broker or dealer of the investor may 

18 face due to the receipt of differential 

19 compensation in connection with such 

20 sale; and 

21 ‘‘(IV) information about the esti22 mated amount of any asset-based dis23 tribution expenses incurred, or to be 

24 incurred, by the investment company 
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1 in connection with the purchase of se2 curities by the investor; and 

3 ‘‘(ii) such other information as the 

4 Commission determines appropriate. 

5 ‘‘(B) TIMING OF DISCLOSURE.—The dis6 closure required under subparagraph (A) shall 

7 be made to a customer not later than as of the 

8 date of the completion of the transaction. 

9 ‘‘(C) LIMITATION.—The disclosures re10 quired under subparagraph (A) may not be 

11 made exclusively in—

12 ‘‘(i) a registration statement or pro13 spectus of an open-end company; or 

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

15 company with the Commission. 

16 ‘‘(D) COMMISSION AUTHORITY.—Not later 

17 than 1 year after the date of enactment of the 

18 Mutual Fund Investor Confidence Restoration 

19 Act of 2003, the Commission shall, by rule, es20 tablish, to the extent practicable, standards for 

21 the disclosures required under subparagraph 

22 (A). 

23 ‘‘(E) DEFINITION OF OPEN-END COM24 PANY.—In this paragraph, the term ‘open-end 

25 company’ has the same meaning as in section 
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1 5 of the Investment Company Act of 1940 (15 

2 U.S.C. 80a–5). 

3 ‘‘(F) DEFINITIONS OF DIFFERENTIAL

4 COMPENSATION AND MUNICIPAL FUND SECU5 RITY.—

6 ‘‘(i) DIFFERENTIAL COMPENSA7 TION.—In this paragraph, an associated 

8 person of a broker or dealer shall be con9 sidered to receive differential compensation 

10 if such person receives any increased or 

11 additional remuneration, in whatever 

12 form—

13 ‘‘(I) for sales of the securities of 

14 an investment company or municipal 

15 fund security that is affiliated with, or 

16 otherwise specifically designated by, 

17 such broker or dealer or municipal se18 curities broker or dealer, as compared 

19 with the remuneration for sales of se20 curities of an investment company or 

21 municipal fund security offered by 

22 such broker or dealer or municipal se23 curities broker or dealer that are not 

24 so affiliated or designated; or 
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1 ‘‘(II) for the sale of any class of 

2 securities of an investment company 

3 or municipal fund security as com4 pared with the remuneration for the 

5 sale of a class of securities of such in6 vestment company or municipal fund 

7 security (offered by such broker or 

8 dealer or municipal securities broker 

9 or dealer) that charges a sales load 

10 (as defined in section 2(a)(35) of the 

11 Investment Company Act of 1940 (15 

12 U.S.C. 80a–2(a)(35)) only at the time 

13 of such a sale. 

14 ‘‘(ii) MUNICIPAL FUND SECURITY.—

15 In this paragraph, a municipal fund secu16 rity is any municipal security issued by an 

17 issuer that, but for the application of sec18 tion 2(b) of the Investment Company Act 

19 of 1940 (15 U.S.C. 80a–2(b)), would con20 stitute an investment company within the 

21 meaning of section 3 of the Investment 

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

23 3).’’.
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1 TITLE II—MUTUAL FUND 

2 GOVERNANCE 

3 SEC. 201. INDEPENDENT MUTUAL FUND BOARDS. 

4 (a) DIRECTOR INDEPENDENCE.—

5 (1) IN GENERAL.—Section 10(a) of the Invest6 ment Company Act of 1940 (15 U.S.C. 80a–10(a)) 

7 is amended—

8 (A) by striking ‘‘more than 60 per cen9 tum’’ and inserting ‘‘more than 25 percent’’; 

10 and 

11 (B) by striking the period at the end and 

12 inserting ‘‘, and such company shall not have as 

13 a member of its board of directors any per14 son—

15 ‘‘(1) who has served without being approved or 

16 elected by the shareholders of such registered invest17 ment company at least once every 5 years; and 

18 ‘‘(2) unless such director is an interested per19 son or has been found, on an annual basis, by a ma20 jority of the directors who are not interested per21 sons, after reasonable inquiry by such directors, not 

22 to have any material business or familial relationship 

23 with the registered investment company, a signifi24 cant service provider to the company, or any entity 

25 controlling, controlled by, or under common control 
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1 with such service provider, that is likely to impair 

2 the independence of the director.’’. 

3 (2) CHAIRMAN; FINANCIAL EXPERT; INDE4 PENDENT COMMITTEE.—Section 10 of the Invest5 ment Company Act of 1940 (15 U.S.C. 80a–10) is 

6 amended by adding at the end the following: 

7 ‘‘(i) CHAIRMAN.—No registered investment company 

8 shall have as chairman of its board of directors an inter9 ested person of such registered company. 

10 ‘‘(j) INDEPENDENT COMMITTEE.—

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

12 of directors of a registered investment company who 

13 are not interested persons of such registered invest14 ment company shall establish a committee comprised 

15 solely of such members, which committee shall be re16 sponsible for—

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

18 election to the board of directors; and 

19 ‘‘(B) adopting qualification standards for 

20 the nomination of directors. 

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

22 under paragraph (1)(B) shall be disclosed in the reg23 istration statement of the registered investment com24 pany. 

25 ‘‘(k) FINANCIAL EXPERT.—
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1 ‘‘(1) IN GENERAL.—Each registered investment 

2 company shall have as a member of its board of di3 rectors not less than 1 member who is a financial 

4 expert, as such term is defined by the Commission. 

5 ‘‘(2) RULES DEFINING FINANCIAL EXPERT.—In 

6 defining the term ‘financial expert’ for purposes of 

7 paragraph (1), the Commission shall consider wheth8 er a person has, through education and experience 

9 as a public accountant or auditor or principal finan10 cial officer, comptroller, or principal accounting offi11 cer of a registered investment company, or from a 

12 position involving the performance of similar func13 tions—

14 ‘‘(A) an understanding of generally accept15 ed accounting principles and financial state16 ments; and 

17 ‘‘(B) experience in the preparation or au18 diting of financial statements of general com19 parable registered investment companies. 

20 ‘‘(3) DEADLINE FOR RULEMAKING.—Not later 

21 than 180 days after the date of enactment of the 

22 Mutual Fund Investor Confidence Restoration Act of 

23 2003, the Commission shall issue rules under para24 graph (2).’’. 
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1 (c) DEFINITION OF INTERESTED PERSON.—Section 

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

3 U.S.C. 80a–2(a)(19)) is amended—

4 (1) in subparagraph (A)—

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

6 inserting ‘‘5’’; and 

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

8 the following: 

9 ‘‘(vii) any natural person who has 

10 served as an officer or director, or as an 

11 employee within the preceding 10 fiscal 

12 years, of an investment adviser or principal 

13 underwriter to such registered investment 

14 company, or of any entity controlling, con15 trolled by, or under common control with 

16 such investment adviser or principal under17 writer; 

18 ‘‘(viii) any natural person who has 

19 served as an officer or director, or as an 

20 employee within the preceding 10 fiscal 

21 years, of any entity that has within the 

22 preceding 5 fiscal years acted as a signifi23 cant service provider to such registered in24 vestment company, or of any entity con-
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1 trolling, controlled by, or under the com2 mon control with such service provider; or 

3 ‘‘(ix) any natural person who is a 

4 member of a class of persons that the 

5 Commission, by rule or regulation, deter6 mines is unlikely to exercise an appropriate 

7 degree of independence as a result of—

8 ‘‘(I) a material business relation9 ship with the investment company or 

10 an affiliated person of such invest11 ment company; 

12 ‘‘(II) a close familial relationship 

13 with any natural person who is an af14 filiated person of such investment 

15 company; or 

16 ‘‘(III) any other reason deter17 mined by the Commission.’’; and 

18 (2) in subparagraph (B)—

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

20 inserting ‘‘5’’; and 

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

22 the following: 

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

24 member of a class of persons that the 

25 Commission, by rule or regulation, deter-
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1 mines is unlikely to exercise an appropriate 

2 degree of independence as a result of—

3 ‘‘(I) a material business relation4 ship with such investment adviser or 

5 principal underwriter or affiliated per6 son of such investment adviser or 

7 principal underwriter; 

8 ‘‘(II) a close familial relationship 

9 with any natural person who is an af10 filiated person of such investment ad11 viser or principal underwriter; or 

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

14 (d) DEFINITION OF SIGNIFICANT SERVICE PRO15 VIDER.—Section 2(a) of the Investment Company Act of 

16 1940 (15 U.S.C. 80a–2(a)) is amended by adding at the 

17 end the following: 

18 ‘‘(53) SIGNIFICANT SERVICE PROVIDER.—

19 ‘‘(A) IN GENERAL.—Not later than 180 

20 days after the date of enactment of the Mutual 

21 Fund Investor Confidence Restoration Act of 

22 2003, the Securities and Exchange Commission 

23 shall issue final rules defining the term ‘signifi24 cant service provider’.
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1 ‘‘(B) REQUIREMENTS.—The definition de2 veloped under paragraph (1) shall include, at a 

3 minimum, the investment adviser and principal 

4 underwriter of a registered investment company 

5 for purposes of paragraph (19).’’. 

6 SEC. 202. AUDIT COMMITTEE REQUIREMENTS FOR INVEST7 MENT COMPANIES. 

8 (a) AMENDMENTS.—Section 32 of the Investment 

9 Company Act of 1940 (15 U.S.C. 80a–31) is amended—

10 (1) in subsection (a)—

11 (A) by striking paragraphs (1) and (2) and 

12 inserting the following: 

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

14 at a meeting held within 30 days before or after the 

15 beginning of the fiscal year or before the annual 

16 meeting of stockholders in that year by the vote, 

17 cast in person, of a majority of the members of the 

18 audit committee of such registered company; 

19 ‘‘(2) such selection shall have been submitted 

20 for ratification or rejection at the next succeeding 

21 annual meeting of stockholders if such meeting be 

22 held, except that any vacancy occurring between an23 nual meetings, due to the death or resignation of the 

24 accountant, may be filled by the vote of a majority 

25 of the members of the audit committee of such reg-
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1 istered company, cast in person at a meeting called 

2 for the purpose of voting on such action;’’; and 

3 (B) by adding at the end the following new 

4 sentence: ‘‘The Commission, by rule, regulation, 

5 or order, may exempt a registered management 

6 company or registered face-amount certificate 

7 company subject to this subsection from the re8 quirement in paragraph (1) that the votes by 

9 the members of the audit committee be cast at 

10 a meeting in person when such a requirement 

11 is impracticable, subject to such conditions as 

12 the Commission may require.’’; and 

13 (2) by adding at the end the following: 

14 ‘‘(d) AUDIT COMMITTEE REQUIREMENTS.—

15 ‘‘(1) REQUIREMENTS AS PREREQUISITE TO FIL16 ING FINANCIAL STATEMENTS.—Any registered man17 agement company or registered face-amount certifi18 cate company that files with the Commission any fi19 nancial statement signed or certified by an inde20 pendent public accountant shall comply with the re21 quirements of paragraphs (2) through (6) of this 

22 subsection and any rule or regulation of the Com23 mission issued thereunder. 

24 ‘‘(2) RESPONSIBILITY RELATING TO INDE25 PENDENT PUBLIC ACCOUNTANTS.—The audit com-
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1 mittee of the registered company, in its capacity as 

2 a committee of the board of directors, shall be di3 rectly responsible for the appointment, compensa4 tion, and oversight of the work of any independent 

5 public accountant employed by such registered com6 pany (including resolution of disagreements between 

7 management and the auditor regarding financial re8 porting) for the purpose of preparing or issuing the 

9 audit report or related work, and each such inde10 pendent public accountant shall report directly to 

11 the audit committee. 

12 ‘‘(3) INDEPENDENCE.—

13 ‘‘(A) IN GENERAL.—Each member of the 

14 audit committee of the registered company shall 

15 be a member of the board of directors of the 

16 company, and shall otherwise be independent. 

17 ‘‘(B) CRITERIA.—In order to be considered 

18 to be independent for purposes of this para19 graph, a member of an audit committee of a 

20 registered company may not, other than in his 

21 or her capacity as a member of the audit com22 mittee, the board of directors, or any other 

23 board committee—

24 ‘‘(i) accept any consulting, advisory, 

25 or other compensatory fee from the reg-
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1 istered company or the investment adviser 

2 or principal underwriter of the registered 

3 company; or 

4 ‘‘(ii) be an ‘interested person’ of the 

5 registered company, as such term is de6 fined in section 2(a)(19). 

7 ‘‘(4) COMPLAINTS.—The audit committee of the 

8 registered company shall establish procedures for—

9 ‘‘(A) the receipt, retention, and treatment 

10 of complaints received by the registered com11 pany regarding accounting, internal accounting 

12 controls, or auditing matters; and 

13 ‘‘(B) the confidential, anonymous submis14 sion by employees of the registered company 

15 and its investment adviser or principal under16 writer of concerns regarding questionable ac17 counting or auditing matters. 

18 ‘‘(5) AUTHORITY TO ENGAGE ADVISERS.—The 

19 audit committee of the registered company shall 

20 have the authority to engage independent counsel 

21 and other advisers, as it determines necessary to 

22 carry out its duties. 

23 ‘‘(6) FUNDING.—The registered company shall 

24 provide appropriate funding, as determined by the 

25 audit committee, in its capacity as a committee of 
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•S 1971 IS 

1 the board of directors, for payment of compensa2 tion—

3 ‘‘(A) to the independent public accountant 

4 employed by the registered company for the 

5 purpose of rendering or issuing the audit re6 port; and 

7 ‘‘(B) to any advisers employed by the audit 

8 committee under paragraph (5). 

9 ‘‘(7) AUDIT COMMITTEE.—For purposes of this 

10 subsection, the term ‘audit committee’ means—

11 ‘‘(A) a committee (or equivalent body) es12 tablished by and among the board of directors 

13 of a registered investment company for the pur14 pose of overseeing the accounting and financial 

15 reporting processes of the company and audits 

16 of the financial statements of the company; and 

17 ‘‘(B) if no such committee exists with re18 spect to a registered investment company, the 

19 entire board of directors of the company.’’. 

20 (b) CONFORMING AMENDMENT.—Section 10A(m) 

21 (15 U.S.C. 78j–1(m)) of the Securities Exchange Act of 

22 1934 is amended by adding at the end the following: 

23 ‘‘(7) EXEMPTION FOR INVESTMENT COMPA24 NIES.—Effective 1 year after the date of enactment 

25 of the Mutual Fund Investor Confidence Restoration
27

•S 1971 IS 

1 Act of 2003, for purposes of this subsection, the 

2 term ‘issuer’ shall not include any investment com3 pany that is registered under section 8 of the Invest4 ment Company Act of 1940.’’. 

5 (c) IMPLEMENTATION.—

6 (1) IN GENERAL.—Not later than 180 days 

7 after the date of enactment of this Act, the Securi8 ties and Exchange Commission shall issue final reg9 ulations to carry out section 32(d) of the Investment 

10 Company Act of 1940, as added by subsection (a) of 

11 this section. 

12 (2) INCENTIVES.—Not later than 180 days 

13 after the date of enactment of this Act, the Securi14 ties and Exchange Commission shall, by rule, estab15 lish—

16 (A) a program of incentives to encourage 

17 the filing of meritorious complaints under sec18 tion 32(d)(4)(A) of the Investment Company 

19 Act of 1940; and 

20 (B) appropriate penalties for the willful fil21 ing of materially false complaints under such 

22 section. 
28

•S 1971 IS 

1 SEC. 203. INFORMING DIRECTORS OF SIGNIFICANT DEFI2 CIENCIES. 

3 Section 42 of the Investment Company Act of 1940 

4 (15 U.S.C. 80a–41) is amended by adding at the end the 

5 following: 

6 ‘‘(f) INFORMING DIRECTORS OF SIGNIFICANT DEFI7 CIENCIES.—

8 ‘‘(1) IN GENERAL.—If the report of an inspec9 tion by the Commission of a registered investment 

10 company identifies significant deficiencies in the op11 erations of such company, or of its investment ad12 viser or principal underwriter, the company shall 

13 provide such report to the directors of such com14 pany. 

15 ‘‘(2) DISCLOSURE OF DEFICIENCIES.—The 

16 Commission shall, on an annual basis, review all in17 spection reports of registered investment companies 

18 and publicly disclose the 10 most common defi19 ciencies cited in those reports.’’. 

20 SEC. 204. CERTIFICATION BY CHAIRMAN AND CHIEF COM21 PLIANCE OFFICER. 

22 (a) IN GENERAL.—Subsection (j) of section 17 of the 

23 Investment Company Act of 1940 (15 U.S.C. 80a–17(j)), 

24 as amended by section 301 of this Act, is amended by add25 ing at the end the following: 
29

•S 1971 IS 

1 ‘‘(4) CERTIFICATION BY CHAIRMAN.—The rules 

2 and regulations established under paragraph (1) 

3 shall require the chairman of the board of directors 

4 of each registered open-end investment company to 

5 certify, in the periodic report to shareholders, or 

6 other appropriate disclosure document, that—

7 ‘‘(A) procedures are in place for verifying 

8 that the determination of current net asset 

9 value of any redeemable security issued by the 

10 company used in computing periodically the 

11 current price for the purpose of purchase, re12 demption, and sale complies with the require13 ments of the Investment Company Act of 1940 

14 and the rules and regulations thereunder, and 

15 the company is in compliance with such proce16 dures; 

17 ‘‘(B) procedures are in place for the over18 sight of the flow of funds into and out of the 

19 securities of the company, and the company is 

20 in compliance with such procedures; 

21 ‘‘(C) procedures are in place to ensure that 

22 investors are receiving any applicable discounts 

23 on front-end sales loads that are disclosed in 

24 the company’s prospectus; 
30

•S 1971 IS 

1 ‘‘(D) procedures are in place to ensure 

2 that, if the company’s shares are offered as dif3 ferent classes of shares, such classes are de4 signed in the interests of investors, and could 

5 reasonably be an appropriate investment option 

6 for an investor; 

7 ‘‘(E) procedures are in place to ensure that 

8 information about the company’s portfolio secu9 rities is not disclosed in violation of the securi10 ties laws or the company’s code of ethics; 

11 ‘‘(F) the members of the board of directors 

12 who are not interested persons of the company 

13 have reviewed and approved the compensation 

14 of the company’s portfolio manager in connec15 tion with their consideration of the investment 

16 advisory contract under section 15(c); 

17 ‘‘(G) the company has established and en18 forces a code of ethics as required by paragraph 

19 (2) of this subsection; 

20 ‘‘(H) the company is in compliance with 

21 the additional requirements of paragraph (3) of 

22 this subsection; 

23 ‘‘(I) the report submitted to the board of 

24 directors under section 15(g)(1) is complete and 

25 accurate; and 
31

•S 1971 IS 

1 ‘‘(J) the board of directors has fulfilled its 

2 obligations under section 15(g)(2).’’

3 ‘‘(5) CERTIFICATION BY CHIEF COMPLIANCE

4 OFFICER.—The rules and regulations established 

5 under paragraph (1) shall require the chief compli6 ance officer of each registered open-end investment 

7 company to certify, on an annual basis, that—

8 ‘‘(A) appropriate internal controls are in 

9 place for the review required under subpara10 graphs (A) through (H) of paragraph (4); and 

11 ‘‘(B) such internal controls have been re12 viewed, and determined to reasonably achieve 

13 their stated purpose, by the chief compliance of14 ficer. 

15 ‘‘(6) REVIEW OF ADVISORY CONTRACTS.—The 

16 rules and regulations established under paragraph 

17 (1) shall require that the chairman of the board of 

18 directors and the chief compliance officer of a reg19 istered open-end investment company certify, on an 

20 annual basis, that any advisory contract entered into 

21 by the company and associated management fees 

22 have been negotiated and are in the best interests of 

23 the company.’’.
32

•S 1971 IS 

1 (b) DEADLINE FOR RULES.—Not later than 90 days 

2 after the date of enactment of this Act, the Securities and 

3 Exchange Commission shall prescribe—

4 (1) rules to implement subsection (a); and 

5 (2) minimum standards for compliance with the 

6 certification requirements of paragraphs (4) and (5) 

7 of section 17(j) of the Investment Company Act of 

8 1940 (15 U.S.C. 80a–17(j)). 

9 TITLE III—PREVENTING ABU10 SIVE MUTUAL FUND PRAC11 TICES 

12 SEC. 301. PREVENTION OF FRAUD; INTERNAL COMPLIANCE 

13 AND CONTROL PROCEDURES. 

14 (a) AMENDMENT.—Subsection (j) of section 17 of the 

15 Investment Company Act of 1940 (15 U.S.C. 80a–17(j)) 

16 is amended to read as follows: 

17 ‘‘(j) DETECTION AND PREVENTION OF FRAUD.—

18 ‘‘(1) COMMISSION RULES TO PROHIBIT FRAUD, 

19 DECEPTION, AND MANIPULATION.—It shall be un20 lawful for any affiliated person of or principal under21 writer for a registered investment company or any 

22 affiliated person of an investment adviser of or prin23 cipal underwriter for a registered investment com24 pany, to engage in any act, practice, or course of 

25 business in connection with the purchase or sale, di-
33

•S 1971 IS 

1 rectly or indirectly, by such person of any security 

2 held or to be acquired by such registered investment 

3 company, or any security issued by such registered 

4 investment company or by an affiliated registered in5 vestment company, in contravention of such rules 

6 and regulations as the Commission may adopt to de7 fine, and prescribe means reasonably necessary to 

8 prevent, such acts, practices, or courses of business 

9 as are fraudulent, deceptive, or manipulative. 

10 ‘‘(2) CODES OF ETHICS.—The rules and regula11 tions established under paragraph (1) shall include 

12 requirements for the adoption of codes of ethics by 

13 registered investment companies and investment ad14 visers of, and principal underwriters for, such invest15 ment companies establishing such standards as are 

16 reasonably necessary to prevent such acts, practices, 

17 or courses of business. Such rules and regulations 

18 shall require each such registered investment com19 pany to disclose such codes of ethics (and any 

20 changes therein) in the periodic report to share21 holders of such company, and to disclose such code 

22 of ethics and any waivers and material violations 

23 thereof on a readily accessible electronic public infor24 mation facility of such company and in such addi-
34

•S 1971 IS 

1 tional form and manner as the Commission shall re2 quire by rule or regulation. 

3 ‘‘(3) ADDITIONAL COMPLIANCE PROCEDURES.—

4 The rules and regulations established under para5 graph (1) shall—

6 ‘‘(A) require each investment company and 

7 investment adviser registered with the Commis8 sion to adopt and implement policies and proce9 dures reasonably designed to prevent violation 

10 of the Securities Act of 1933 (15 U.S.C. 78a et 

11 seq.), the Securities Exchange Act of 1934 (15 

12 U.S.C. 78a et seq.), the Sarbanes-Oxley Act of 

13 2002 (15 U.S.C. 7201 et seq.), the Trust In14 denture Act of 1939 (15 U.S.C. 77aaa et seq.), 

15 the Investment Company Act of 1940 (15 

16 U.S.C. 80a–1 et seq.), the Investment Advisers 

17 Act of 1940 (15 U.S.C. 80b et seq.), the Secu18 rities Investor Protection Act of 1970 (15 

19 U.S.C. 78aaa et seq.), subchapter II of chapter 

20 53 of title 31, United States Code, chapter 2 of 

21 title I of Public Law 91–508 (12 U.S.C. 1951 

22 et seq.), or section 21 of the Federal Deposit 

23 Insurance Act (12 U.S.C. 1829b); 

24 ‘‘(B) require each such company and ad25 viser to review such policies and procedures an-
35

•S 1971 IS 

1 nually for their adequacy and the effectiveness 

2 of their implementation; 

3 ‘‘(C) require each such company to appoint 

4 a chief compliance officer to be responsible for 

5 overseeing such policies and procedures, ensur6 ing that the practices of the company adhere to 

7 those policies and procedures, and promote the 

8 interest of shareholders—

9 ‘‘(i) whose compensation shall be ap10 proved by the members of the board of di11 rectors of the company who are not inter12 ested persons of such company; 

13 ‘‘(ii) who shall report directly to the 

14 members of the board of directors of the 

15 company who are not interested persons of 

16 such company, privately as such members 

17 request, but no less frequently than annu18 ally; and 

19 ‘‘(iii) whose report to such members 

20 shall include any violations or waivers of, 

21 and any other significant issues arising 

22 under, such policies and procedures; and 

23 ‘‘(D) require each such company to estab24 lish policies and procedures reasonably designed 

25 to protect any officer, director, employee, con-
36

•S 1971 IS 

1 tractor, subcontractor, or agent of such com2 pany from retaliation, including discharge, de3 motion, suspension, harassment, or any other 

4 manner of discrimination in the terms and con5 ditions of employment, because of any lawful 

6 act done by such officer, director, employee, 

7 contractor, subcontractor, or agent to provide 

8 information, cause information to be provided, 

9 or otherwise assist in an investigation that re10 lates to any conduct which such officer, direc11 tor, employee, contractor, subcontractor, or 

12 agent reasonably believes constitutes a violation 

13 of the securities laws or the code of ethics of 

14 such investment company.’’. 

15 (b) DEADLINE FOR RULES.—Not later than 90 days 

16 after the date of enactment of this Act, the Securities and 

17 Exchange Commission shall prescribe rules to implement 

18 subsection (a). 

19 SEC. 302. BAN ON JOINT MANAGEMENT OF MUTUAL FUNDS 

20 AND HEDGE FUNDS. 

21 (a) AMENDMENT.—Section 15 of the Investment 

22 Company Act of 1940 (15 U.S.C. 80a–15) is further 

23 amended by adding at the end the following: 

24 ‘‘(h) BAN ON JOINT MANAGEMENT OF MUTUAL

25 FUNDS AND HEDGE FUNDS.—
37

•S 1971 IS 

1 ‘‘(1) PROHIBITION OF JOINT MANAGEMENT.—It 

2 shall be unlawful for any individual to serve or act 

3 as the portfolio manager or investment adviser of a 

4 registered open-end investment company if such in5 dividual also serves or acts as the portfolio manager 

6 or investment adviser of an investment company 

7 that is not registered, or of such other categories of 

8 companies as the Commission shall prescribe by rule 

9 in order to prohibit conflicts of interest, such as con10 flicts in the selection of the portfolio securities. 

11 ‘‘(2) EXCEPTIONS.—Notwithstanding para12 graph (1), the Commission may, by rule, regulation, 

13 or order, permit joint management by a portfolio 

14 manager in exceptional circumstances when nec15 essary to protect the interest of investors, provided 

16 that such rule, regulation, or order requires—

17 ‘‘(A) enhanced disclosure by the registered 

18 open-end investment company to investors of 

19 any conflicts of interest raised by such joint 

20 management; and 

21 ‘‘(B) fair and equitable policies and proce22 dures for the allocation of securities to the port23 folios of the jointly managed companies, and 

24 certification by the members of the board of di25 rectors who are not interested persons of such 
38

•S 1971 IS 

1 registered open-end investment company, in the 

2 periodic report to shareholders, or other appro3 priate disclosure document, that such policies 

4 and procedures of such company are fair and 

5 equitable. 

6 ‘‘(3) DEFINITION.—For purposes of this sub7 section, the term ‘portfolio manager’ means the indi8 vidual or individuals who are designated as respon9 sible for decision-making in connection with the se10 curities purchased and sold on behalf of a registered 

11 open-end investment company, but shall not include 

12 individuals who participate only in making research 

13 recommendations or executing transactions on behalf 

14 of such company.’’. 

15 (b) DEADLINE FOR RULES.—The Securities and Ex16 change Commission shall prescribe rules to implement the 

17 amendment made by subsection (a) of this section within 

18 90 days after the date of enactment of this Act. 

19 SEC. 303. RESTRICTIONS ON SHORT TERM TRADING AND 

20 MANDATORY REDEMPTION FEES. 

21 (a) SHORT TERM TRADING PROHIBITED.—Section 

22 17 of the Investment Company Act of 1940 (15 U.S.C. 

23 80a–17) is amended by adding at the end the following: 

24 ‘‘(k) SHORT TERM TRADING PROHIBITED.—It shall 

25 be unlawful for any officer, director, partner, or employee 
39

•S 1971 IS 

1 of a registered investment company, any affiliated person, 

2 investment adviser, or principal underwriter of such com3 pany, or any officer, director, partner, or employee of such 

4 an affiliated person, investment adviser, or principal un5 derwriter, to engage in short-term transactions, as such 

6 term is defined by the Commission by rule, in any securi7 ties of which such company, or any affiliate of such com8 pany, is the issuer, except that this subsection shall not 

9 prohibit transactions in money market funds, other funds 

10 the investment policy of which expressly permits short11 term transactions, or such other categories of registered 

12 investment companies as the Commission shall specify by 

13 rule.’’. 

14 (b) MANDATORY REDEMPTION FEES.—Not later 

15 than 180 days after the date of enactment of this Act, 

16 the Securities and Exchange Commission shall, by rule, 

17 require that any investment company that does not allow 

18 for market timing practices to charge a redemption fee 

19 upon the short-term redemption of any securities of such 

20 company. 

21 (c) DEADLINE FOR RULES.—Not later than 180 days 

22 after the date of enactment of this Act, the Securities and 

23 Exchange Commission shall prescribe rules to implement 

24 the amendment made by subsection (a) of this section. 
40

•S 1971 IS 

1 SEC. 304. ELIMINATION OF STALE PRICES. 

2 (a) IN GENERAL.—Not later than 180 days after the 

3 date of enactment of this Act, the Securities and Ex4 change Commission shall prescribe, by rule or regulation, 

5 standards concerning the obligation of registered open-end 

6 investment companies under the Investment Company Act 

7 of 1940 to apply and use fair value methods of determina8 tion of net asset value when market quotations are un9 available or do not accurately reflect the fair market value 

10 of the companies’ portfolio securities, in order to prevent 

11 dilution of the interests of long-term investors or as nec12 essary in the other interests of investors. Such rule or reg13 ulation shall identify, in addition to significant events, the 

14 conditions or circumstances from which such obligation 

15 will arise, such as the need to value securities traded on 

16 foreign exchanges, and the methods by which fair value 

17 methods shall be applied in such events, conditions, and 

18 circumstances. 

19 (b) FORMAL POLICIES AND PROCEDURES.—

20 (1) IN GENERAL.—Not later than 180 days 

21 after the date of enactment of this Act, the Securi22 ties and Exchange Commission shall, by rule or reg23 ulation— 

24 (A) require that each registered open-end 

25 investment company and registered investment 

26 advisor establish formal policies with respect to 
41

•S 1971 IS 

1 compliance with the regulations established 

2 under subsection (a); 

3 (B) require such policies to be publicly dis4 closed to shareholders; 

5 (C) require the adoption of internal proce6 dures to ensure compliance with such policies; 

7 (D) require that such policies be subject to 

8 ongoing review by the company or investment 

9 adviser; and 

10 (E) require, on an annual basis, a certifi11 cation by the chief executive officer of the com12 pany or investment adviser that such policies 

13 are being adhered to. 

14 (2) CHANGES TO POLICIES.—Any policies 

15 adopted by a registered open-end company or reg16 istered investment adviser under paragraph (1) shall 

17 not be altered without the prior approval of a major18 ity of the shareholders of such company or adviser. 

19 SEC. 305. FORMAL POLICIES AND PROCEDURES RELATED 

20 TO MARKET TIMING. 

21 (a) IN GENERAL.—Not later than 180 days after the 

22 date of enactment of this Act, the Securities and Ex23 change Commission shall, by rule—

24 (1) require that each registered open-end in25 vestment company and registered investment advisor
42

•S 1971 IS 

1 establish formal policies with respect to whether it 

2 permits market timing and short term trading, and 

3 under what circumstances such practices will be per4 mitted; 

5 (2) require such policies to be publicly disclosed 

6 in any prospectus delivered by the company or in7 vestment advisor; 

8 (3) require the adoption of internal procedures 

9 reasonably designed to ensure compliance with such 

10 policies; 

11 (4) require that such policies be subject to on12 going review by the company or investment advisor; 

13 and 

14 (5) require, on an annual basis, a certification 

15 by the chief executive officer of the investment ad16 viser, and chairman of the board of directors and 

17 chief compliance officer of the company that such 

18 policies are being adhered to by the investment ad19 viser or the company. 

20 SEC. 306. PREVENTION OF LATE TRADES. 

21 (a) ADDITIONAL RULES REQUIRED.—Not later than 

22 180 days after the date of enactment of this Act, the Secu23 rities and Exchange Commission shall issue rules to pre24 vent transactions in the securities of any registered open25 end investment company in violation of section 22 of the 
43

•S 1971 IS 

1 Investment Company Act of 1940 (15 U.S.C. 80a–22), in2 cluding after-hours trades that are executed at a price 

3 based on a net asset value that was determined as of a 

4 time prior to the actual execution of the transaction. 

5 (b) TRADES COLLECTED BY INTERMEDIARIES.—

6 (1) IN GENERAL.—The rules established under 

7 subsection (a) shall permit execution of after-hours 

8 trades that are provided to the registered open-end 

9 investment company by a broker-dealer, retirement 

10 plan administrator, insurance company, or other 

11 intermediary, after the time as of which such net 

12 asset value was determined, if the late trading and 

13 detection procedures and policies of such inter14 mediary are subject to inspection by the Commission 

15 (in this subsection, a ‘‘permitted intermediary’’). 

16 (2) RULES.—The Commission, by rule, shall—

17 (A) require each permitted intermediary to 

18 certify that it has policies and procedures in 

19 place to prevent and detect late-trades, and that 

20 such policies have been adhered to by the per21 mitted intermediary; 

22 (B) require each permitted intermediary to 

23 submit an independent annual audit verifying 

24 that its policies and procedures do not permit 

25 the acceptance of late order trading; and 
44

•S 1971 IS 

1 (C) provide that any intermediary that is 

2 not a permitted intermediary shall be required 

3 to submit all transactions to the open-end in4 vestment company before the determination of 

5 the related net asset value. 

6 SEC. 307. DISCLOSURE OF INSIDER TRANSACTIONS. 

7 Not later than 180 days after the date of enactment 

8 of this Act, the Securities and Exchange Commission 

9 shall, by rule, require—

10 (1) that any senior executive officer of an open11 end management investment company publicly dis12 close, prior to the actual time of purchase, any in13 tended sale or purchase of securities of an open-end 

14 management investment company that employs the 

15 same investment adviser as the company with whom 

16 such senior executive officer is employed; and 

17 (2) that any such securities purchased be held 

18 by the senior executive officer for not less than 6 

19 months. 

20 TITLE IV—STRENGTHENING MU21 TUAL FUND INDUSTRY OVER22 SIGHT 

23 SEC. 401. STUDY OF MUTUAL FUND OVERSIGHT BOARD. 

24 (a) IN GENERAL.—The General Accounting Office 

25 shall conduct a study to determine the feasibility of, and 
45

•S 1971 IS 

1 assess what, if any, benefits to shareholders, mutual fund 

2 governance and mutual fund supervision would result from 

3 establishing a Mutual Fund Oversight Board that would—

4 (1) have inspection, examination, and enforce5 ment authority over mutual fund boards of directors; 

6 (2) be funded by assessments against mutual 

7 fund assets or management fees; 

8 (3) have members selected by Commission; and 

9 (4) have rulemaking authority. 

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

11 of enactment of this Act, the General Accounting Office 

12 shall submit a report on the study required under para13 graph (1) to—

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

15 Urban Affairs of the Senate; and 

16 (2) the Committee on Financial Services of the 

17 House of Representatives. 

18 SEC. 402. STUDY OF COORDINATION OF ENFORCEMENT EF19 FORTS. 

20 (a) IN GENERAL.—The General Accounting Office 

21 shall conduct a study of the coordination of enforcement 

22 efforts related to allegations of misconduct by open-end 

23 management companies between the headquarters of the 

24 Securities and Exchange Commission, the regional offices 

25 of the Commission, and appropriate State regulatory and 
46

•S 1971 IS 

1 law enforcement entities, such as State attorneys general 

2 and the North American Securities Administrators Asso3 ciation. 

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

5 of enactment of this Act, the General Accounting Office 

6 shall submit a report on the study required under sub7 section (a) to Congress. 

8 SEC. 403. REVIEW OF COMMISSION RESOURCES. 

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

10 Commission shall conduct a study on the allocation and 

11 adequacy of the supervision and enforcement resources of 

12 the Commission dedicated to the oversight of open-end 

13 management companies. 

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

15 of enactment of this Act, the Securities and Exchange 

16 Commission shall submit a report on the study required 

17 under subsection (a) to—

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

19 Urban Affairs of the Senate; and 

20 (2) the Committee on Financial Services of the 

21 House of Representatives. 

22 SEC. 404. COMMISSION STUDY AND REPORT REGULATING 

23 SOFT DOLLAR ARRANGEMENTS. 

24 (a) STUDY REQUIRED.—
47

•S 1971 IS 

1 (1) IN GENERAL.—The Commission shall con2 duct a study of the use of soft dollar arrangements 

3 by investment advisers as contemplated by section 

4 28(e) of the Securities Exchange Act of 1934 (15 

5 U.S.C. 78bb(e)). 

6 (2) AREAS OF CONSIDERATION.—The study re7 quired by this section shall examine—

8 (A) the trends in the average amounts of 

9 soft dollar commissions paid by investment ad10 visers and investment companies in the past 3 

11 years; 

12 (B) the types of services provided through 

13 soft dollar arrangements; 

14 (C) the benefits and disadvantages of the 

15 use of soft dollars for investors, including the 

16 extent to which use of soft dollar arrangements 

17 affects the ability of mutual fund investors to 

18 evaluate and compare the expenses of different 

19 mutual funds; 

20 (D) the potential or actual conflicts of in21 terest (or both potential and actual conflicts) 

22 created by soft dollar arrangements, including 

23 whether certain potential conflicts are being 

24 managed effectively by other laws and regula25 tions specifically addressing those situations, 
48

•S 1971 IS 

1 the role of the board of directors in managing 

2 these potential or actual (or both) conflicts, and 

3 the effectiveness of the board in this capacity; 

4 (E) the transparency of such soft dollar 

5 arrangements to investment company share6 holders and investment advisory clients of in7 vestment advisers, the extent to which enhanced 

8 disclosure is necessary or appropriate to enable 

9 investors to better understand the impact of 

10 these arrangements, and an assessment of 

11 whether the cost of any enhanced disclosure or 

12 other regulatory change would result in benefits 

13 to the investor; and 

14 (F) whether such section 28(e) should be 

15 modified, and whether other regulatory or legis16 lative changes should be considered and adopted 

17 to benefit investors. 

18 (b) REPORT REQUIRED.—Not later than 1 year after 

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

20 submit a report on the study required by subsection (a) 

21 to the Committee on Financial Services of the House of 

22 Representatives and the Committee on Banking, Housing, 

23 and Urban Affairs of the Senate. 
49

•S 1971 IS 

1 SEC. 405. REPORT ON ADEQUACY OF REGULATORY RE2 SPONSE TO LATE TRADING AND MARKET 

3 TIMING. 

4 (a) REPORT REQUIRED.—Not later than 180 days 

5 after the date of enactment of this Act, the Securities and 

6 Exchange Commission shall submit a report to the Com7 mittee on Financial Services of the House of Representa8 tives and the Committee on Banking, Housing, and Urban 

9 Affairs of the Senate on market timing and late trading 

10 of mutual funds. 

11 (b) REQUIRED CONTENTS OF REPORT.—The report 

12 required by this section shall include the following: 

13 (1) The economic harm of market timing and 

14 late trading of mutual fund shares on long-term mu15 tual fund shareholders. 

16 (2) The findings by the Commission’s Office of 

17 Compliance, Inspections and Examinations, and the 

18 actions taken by the Commission’s Division of En19 forcement, regarding—

20 (A) illegal late trading practices; 

21 (B) illegal market timing practices; and 

22 (C) market timing practices that are not in 

23 violation of prospectus disclosures. 

24 (3) When the Commission became aware that 

25 the use of market timing practices was harming 
50

•S 1971 IS 

1 long-term shareholders, and the circumstances sur2 rounding the Commission’s discovery of that activity. 

3 (4) The steps the Commission has taken since 

4 becoming aware of market timing practices to pro5 tect long-term mutual fund investors. 

6 (5) Any additional legislative or regulatory ac7 tion that is necessary to protect long-term mutual 

8 fund shareholders against the detrimental effects of 

9 late trading and market timing practices. 

10 SEC. 406. STUDY OF ARBITRATION CLAIMS. 

11 (a) STUDY REQUIRED.—The Securities and Ex12 change Commission shall conduct a study of the increased 

13 rate of arbitration claims and decisions involving mutual 

14 funds since 1995 for the purposes of identifying trends 

15 in arbitration claim rates and, if applicable, the causes of 

16 such increased rates and the means to avert such causes. 

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

18 of enactment of this Act, the Securities and Exchange 

19 Commission shall submit a report on the study required 

20 by subsection (a) to the Committee on Financial Services 

21 of the House of Representatives and the Committee on 

22 Banking, Housing, and Urban Affairs of the Senate. 
51

•S 1971 IS 

1 TITLE V—PROMOTING 

2 SHAREHOLDER LITERACY 

3 SEC. 501. FINANCIAL LITERACY AMONG MUTUAL FUND IN4 VESTORS STUDY. 

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

6 Commission shall conduct a study to identify—

7 (1) the existing level of financial literacy among 

8 investors that purchase shares of open-end compa9 nies, as such term is defined under section 5 of the 

10 Investment Company Act of 1940, that are reg11 istered under section 8 of such Act; 

12 (2) the most useful and understandable relevant 

13 information that investors need to make sound fi14 nancial decisions prior to purchasing such shares; 

15 (3) methods to increase the transparency of ex16 penses and potential conflicts of interest in trans17 actions involving the shares of open-end companies; 

18 (4) the existing private and public efforts to 

19 educate investors; and 

20 (5) a strategy to increase the financial literacy 

21 of investors that results in a positive change in in22 vestor behavior. 

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

24 of enactment of this Act, the Securities and Exchange 
52

•S 1971 IS 

1 Commission shall submit a report on the study required 

2 under subsection (a) to—

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

4 Urban Affairs of the Senate; and 

5 (2) the Committee on Financial Services of the 

6 House of Representatives.

Æ