II 

★(Star Print) 

108TH CONGRESS 

1ST SESSION S. 1958

To prevent the practice of late trading by mutual funds, and for other 

purposes. 

IN THE SENATE OF THE UNITED STATES 

NOVEMBER 25, 2003

Mr. DASCHLE (for Mr. KERRY (for himself and Mr. KENNEDY)) introduced 

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

on Banking, Housing, and Urban Affairs 

A BILL

To prevent the practice of late trading by mutual funds, 

and for other purposes.

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

3 SEC. 1. SHORT TITLE; TABLE OF CONTENTS. 

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

5 ‘‘Mutual Fund Investor Protection Act of 2003’’. 

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

7 this Act is as follows:

Sec. 1. Short title; table of contents. 

Sec. 2. Definitions. 

TITLE I—REGULATORY IMPROVEMENTS. 

Sec. 101. Regulatory improvements. 
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TITLE II—MUTUAL FUND OVERSIGHT BOARD. 

Sec. 201. Establishment; administrative provisions. 

Sec. 202. Registration with the board. 

Sec. 203. Auditing, quality control, and independence standards and rules. 

Sec. 204. Inspections of registered mutual funds. 

Sec. 205. Investigations and disciplinary proceedings. 

Sec. 206. Commission oversight of the board. 

Sec. 207. Funding. 

Sec. 208. No preemption of State securities actions. 

Sec. 209. Arbitration of investor claims in independent forum.

1 SEC. 2. DEFINITIONS. 

2 In this Act, the following definitions shall apply: 

3 (1) BOARD.—The term ‘‘Board’’ means the 

4 Mutual Fund Oversight Board established under 

5 section 201. 

6 (2) COMMISSION.—The term ‘‘Commission 

7 means the Security and Exchange Commission. 

8 (3) MUTUAL FUND.—The term ‘‘mutual fund’’ 

9 means such entities designated as mutual funds by 

10 regulation of the Mutual Fund Oversight Board es11 tablished under title II of this Act. 

12 (4) REGISTERED MUTUAL FUND.——The term 

13 ‘‘registered mutual fund’’ has the same meaning as 

14 in section 5 of the Investment Company Act of 

15 1940. 

16 (5) SECURITIES LAWS.—The term ‘‘securities 

17 laws’’ has the same meaning as in section 3 of the 

18 Securities Exchange Act of 1934. 
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1 TITLE I—REGULATORY 

2 IMPROVEMENTS 

3 SEC. 101. REGULATORY IMPROVEMENTS. 

4 (a) PRICING OF SHARES.—The Investment Company 

5 Act of 1940 (15 U.S.C. 80a–1 et seq.) is amended by in6 serting after section 11 the following: 

7 ‘‘SEC. 11A. PRICING OF SECURITIES. 

8 ‘‘On any calendar day, the purchaser of the securities 

9 of a registered open-end company shall be required to 

10 place an order to purchase such securities prior to the time 

11 at which the registered open-end company sets the price 

12 of the securities for that day in order to purchase the secu13 rities at that price.’’. 

14 (b) PENALTIES.—

15 (1) SECURITIES ACT OF 1933.—Section 24 of 

16 the Securities Act of 1933 (15 U.S.C. 77x) is 

17 amended—

18 (A) by striking ‘‘Any person’’ and inserting 

19 the following: 

20 ‘‘(a) IN GENERAL.—Except as provided under sub21 section (b), any person’’; and 

22 (B) by adding at the end the following: 

23 ‘‘(b) OPEN-END COMPANIES.—Any person who will24 fully violates section 17(a) with respect to the offer or sale 

25 of any security of a registered open-end company (as that 
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1 term is defined under section 5 of the Investment Com2 pany Act of 1940) shall, upon conviction, be fined not 

3 more than $1,000,000, imprisoned for not more than 20 

4 years, or both.’’. 

5 (2) SECURITIES EXCHANGE ACT OF 1934.—Sec6 tion 32(a) of the Securities Exchange Act of 1934 

7 (15 U.S.C. 78ff(a)) is amended—

8 (A) by striking ‘‘(a) Any person’’ and in9 serting the following: 

10 ‘‘(a) WILLFUL VIOLATIONS.—

11 ‘‘(1) IN GENERAL.—Except as provided under 

12 paragraphs (2) and (3), any person’’; and 

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

14 ‘‘(2) OPEN-END COMPANIES; BROKERAGE

15 TRANSACTIONS.—

16 ‘‘(A) IN GENERAL.—A person shall, upon 

17 conviction, be subject to the penalties in sub18 paragraph (B) if such person willfully vio19 lates—

20 ‘‘(i) section 10(b), with respect to the 

21 purchase or sale of the securities of a reg22 istered open-end company (as that term is 

23 defined under section 5 of the Investment 

24 Company Act of 1940); or 
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1 ‘‘(ii) section 17(a) of the Securities 

2 Act of 1933. 

3 ‘‘(B) PENALTIES.—Any person convicted 

4 of a violation described in subparagraph (A) 

5 shall be fined not more than $10,000,000, im6 prisoned for not more than 25 years, or both, 

7 or, if the person is not a natural person, fined 

8 not more than $50,000,000. 

9 ‘‘(3) LIFETIME BAN.—Any natural person who 

10 engages in a violation described in paragraph (2) 

11 shall be prohibited from participating in any sale or 

12 offer to sell securities for the life of such person.’’. 

13 (3) INVESTMENT COMPANY ACT OF 1940.—Sec14 tion 49 of the Investment Company Act of 1940 (15 

15 U.S.C. 80a–48) is amended—

16 (A) by striking ‘‘Any person’’ and inserting 

17 the following: 

18 ‘‘(a) IN GENERAL.—Except as provided under sub19 section (b), any person’’; and 

20 (B) by adding at the end the following: 

21 ‘‘(b) OPEN-END COMPANIES.—Any person who will22 fully violates section 22(a) with respect to the securities 

23 of a registered open-end company shall, upon conviction, 

24 be fined not more than $1,000,000, imprisoned not more 

25 than 20 years, or both.’’.
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1 (c) RICO ENFORCEMENT.—Section 1961(1) of title 

2 18, United States Code, is amended—

3 (1) in subparagraph (E), by striking ‘‘or’’ at 

4 the end; and 

5 (2) by striking the semicolon at the end and in6 serting ‘‘, (G) any act that violates section 17(a) of 

7 the Securities Act of 1933, with respect to the sale 

8 of or an offer to sell securities of a registered open9 end company (as that term is defined under section 

10 5 of the Investment Company Act of 1940), (H) sec11 tion 10(b) or 17(a) of the Securities Exchange Act 

12 of 1934, with respect to the purchase or sale of the 

13 securities of such a registered open-end company, or 

14 (I) section 22(c) of the Investment Company Act of 

15 1940, with respect to the valuation of the securities 

16 of such a registered open-end company;’’. 

17 (d) DISCLOSURE OF MARKET TIMING POLICIES.—

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

19 U.S.C. 80a–24) is amended by adding at the end the fol20 lowing: 

21 ‘‘(h) MARKET TIMING POLICIES.—Each prospectus 

22 distributed by a registered open-end company shall dis23 close—
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1 ‘‘(1) the policies of the registered open-end 

2 company with respect to the timing of the pricing of 

3 its shares; and 

4 ‘‘(2) the steps taken by the registered open-end 

5 company to prevent the abuse of such pricing poli6 cies.’’. 

7 (e) DIRECTOR AND CHAIRMAN INDEPENDENCE.—

8 Section 10(a) of the Investment Company Act of 1940 (15 

9 U.S.C. 80a–10) is amended—

10 (1) by striking ‘‘60 per centum’’ and inserting 

11 ‘‘one-fourth’’; and 

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

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

14 have as chairman of such board an interested person of 

15 such registered company. Such chairman shall have access 

16 to all information, including but not limited to any outside 

17 advisory, management, marketing, or investment service 

18 fees paid by the investment company.’’. 

19 (f) DEFINITION OF INTERESTED PERSON.—Section 

20 2(a)(19) of the Investment Company Act of 1940 (15 

21 U.S.C. 80a–2(a)(19)) is amended—

22 (1) in subparagraph (A)—

23 (A) by striking clauses (v) and (vi) and in24 serting the following: 
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1 ‘‘(v) any natural person who is a 

2 member of a class of persons who the 

3 Commission, by rule or regulation, deter4 mines are unlikely to exercise an appro5 priate degree of independence as a result 

6 of—

7 ‘‘(I) a material business or pro8 fessional relationship with the com9 pany or any affiliated person of the 

10 company; or 

11 ‘‘(II) a close familial relationship 

12 with any natural person who is an af13 filiated person of the company,’’; and 

14 (B) by redesignating clause (vii) as clause 

15 (vi); and 

16 (2) in subparagraph (B)—

17 (A) by striking clauses (v) and (vi) and in18 serting the following: 

19 ‘‘(v) any natural person who is a 

20 member of a class of persons who the 

21 Commission, by rule or regulation, deter22 mines are unlikely to exercise an appro23 priate degree of independence as a result 

24 of—
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1 ‘‘(I) a material business or pro2 fessional relationship with such invest3 ment adviser or principal underwriter 

4 (or affiliated person thereof); or 

5 ‘‘(II) a close familial relationship 

6 with a natural person who is such in7 vestment adviser or principal under8 writer (or affiliated person thereof),’’; 

9 and 

10 (B) by redesignating clause (v) as clause 

11 (vi). 

12 (g) FIDUCIARY DUTY OF BOARD OF DIRECTORS.— 

13 (1) IN GENERAL.—Not later than 270 days 

14 after enactment of this Act, the Securities and Ex15 change Commission shall publish regulations to re16 quire that the board of directors of a registered in17 vestment company shall have a fiduciary duty— 

18 (A) to demonstrate that the negotiated ad19 visory, management, marketing, and investment 

20 service fees that are reasonable and are in the 

21 best interest of their shareholders. This may be 

22 accomplished by obtaining multiple bids, an 

23 independent evaluation or appraisal, including a 

24 provision in all fee contracts preventing con25 tractors from charging rates in excess of those
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1 paid by other clients, and any other means 

2 practicable to ensure that shareholders are not 

3 overcharged for any services provided to the 

4 registered investment company; and 

5 (B) to provide a report to the Commission, 

6 which shall also be disclosed in any prospectus 

7 delivered to shareholders of the company, on 

8 any significant or material business or profes9 sional relationship with any advisory, manage10 ment, marketing, investment, or other service 

11 provided to the registered investment company 

12 to ensure that such services are provided in the 

13 best interest of their shareholders. 

14 (h) IMPROVED TRANSPARENCY OF MUTUAL FUND

15 COSTS.—

16 (1) REGULATION REVISION REQUIRED.—Not 

17 later than 270 days after the date of enactment of 

18 this Act, the Securities and Exchange Commission 

19 shall revise regulation under the Securities Act of 

20 1933, the Securities Exchange Act of 1934, or the 

21 Investment Company Act of 1940, or any combina22 tion thereof, to require, consistent with the protec23 tion of investors and the public interest, improved 

24 disclosure with respect to any registered investment 

25 company, in the quarterly statement or other peri-
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1 odic report to shareholders or other appropriate dis2 closure document, of—

3 (A) the estimated amount, in dollars, of 

4 the operating expenses of the company, includ5 ing any advisory, management, marketing, and 

6 investment service fees, that are born by the 

7 shareholders, and the amount born by each 

8 shareholder of the company, based on the in9 vestment of each shareholder in the company; 

10 (B) the structure of, or method used to de11 termine, the compensation of individuals em12 ployed by the investment adviser of the com13 pany to manage the portfolio of the company, 

14 and the ownership interest of such individuals 

15 in the securities of the company; 

16 (C) the portfolio turnover rate of the com17 pany, set forth in a manner that facilitates 

18 comparison among investment companies, and a 

19 description of the implications of a high turn20 over rate for portfolio transaction costs and 

21 performance; 

22 (D) information concerning any payments 

23 of commissions for effecting securities trans24 actions to a member of an exchange, broker, or 

25 dealer who— 
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1 (i) furnishes advice, either directly or 

2 through publications or writings, as to the 

3 value of securities, the advisability of in4 vesting in, purchasing, or selling securities, 

5 and the availability of securities or pur6 chasers or sellers of securities; 

7 (ii) furnishes analyses and reports 

8 concerning issuers, industries, securities, 

9 economic factors and trends, portfolio 

10 strategy, and the performance of accounts; 

11 and 

12 (iii) facilitates the sale or distribution 

13 of the shares of the company; 

14 (E) information concerning payments by 

15 any person other than the company that are in16 tended to facilitate the sale and distribution of 

17 the shares of the company; and 

18 (F) information concerning discounts on 

19 front-end sales loads for which investors may be 

20 eligible including the minimum purchase 

21 amounts required for such discounts. 

22 (2) APPROPRIATE DISCLOSURE DOCUMENT.—

23 (A) IN GENERAL.—For the purposes of 

24 paragraph (1), a disclosure shall not be consid25 ered to be made in an appropriate disclosure 
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1 document if the disclosure is made exclusively 

2 in a prospectus or statement of additional infor3 mation, or both such documents. 

4 (B) EXCEPTIONS.—Notwithstanding sub5 paragraph (A), the disclosures required by sub6 paragraphs (B) and (D) of paragraph (1) may 

7 be considered to be made in an appropriate dis8 closure document if the disclosure is made ex9 clusively in a prospectus or statement of addi10 tional information, or both such documents. 

11 (3) CONCEPT RELEASE REQUIRED.—

12 (A) IN GENERAL.—The Commission shall 

13 issue a concept release examining the issue of 

14 portfolio transaction costs incurred by invest15 ment companies including commission, spread, 

16 opportunity, and market impact costs, with re17 spect to trading of portfolio securities and any 

18 advisory, management, marketing, and invest19 ment service fees paid by investment companies 

20 and how such costs may be disclosed to mutual 

21 fund investors in a manner that will enable in22 vestors to compare such costs among funds. 

23 (B) REPORT AND RECOMMENDATIONS RE24 QUIRED.—Not later than 270 days after the 

25 date of enactment of this Act, the Commission 
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1 shall submit a report on the findings from the 

2 concept release required under subparagraph 

3 (A), as well as any legislative and regulatory 

4 recommendations, if any, to the Committee on 

5 Banking, Housing, and Urban Affairs of the 

6 Senate and the Committee on Financial Serv7 ices of the House of Representatives. 

8 (4) ADDITIONAL REQUIREMENT FOR FEE

9 STATEMENT.—

10 (A) IN GENERAL.—Not later than 270 

11 days after the date of enactment of this Act, 

12 the Commission shall prescribe a rule to re13 quire, with respect to any registered investment 

14 company, in the quarterly statement or other 

15 periodic report, or other appropriate disclosure 

16 document, a statement informing shareholders 

17 of what amount of fees they have paid on each 

18 $1,000 of their investments over the past 365 

19 days, that such fees have been deducted from 

20 the amounts shown on the statements, and 

21 where such shareholders may find additional in22 formation regarding the amount of these fees. 

23 (B) APPROPRIATE DISCLOSURE DOCU24 MENT.—The statement required by subpara25 graph (A) shall not be considered to be made
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1 in an appropriate disclosure document unless 

2 such statement is— 

3 (i) made in each periodic statement to 

4 a shareholder that discloses the value of 

5 the holdings of the shareholder in the secu6 rities of the company; and 

7 (ii) prominently displayed, in a loca8 tion in close proximity to the statement of 

9 the shares account value. 

10 (5) REDUCING BURDENS ON SMALL FUNDS.—

11 In prescribing rules under this subsection, the Com12 mission shall give consideration to methods for re13 ducing for small investment companies the burdens 

14 of making disclosures by requiring such rules, con15 sistent with the public interest and the protection of 

16 investors. 

17 (i) SHORT-TERM TRADING BY INTERESTED PERSONS

18 PROHIBITED.—

19 (1) SHORT-TERM TRADING PROHIBITED.—Sec20 tion 17 of the Investment Company Act of 1940 (15 

21 U.S.C. 80a–17) is amended by adding at the end the 

22 following: 

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

24 be unlawful for any officer, director, partner, or employee 

25 of a registered investment company, any affiliated person, 
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1 investment adviser, or principal underwriter of such com2 pany, or any officer, director, partner, or employee of such 

3 affiliated person, investment adviser, or principal under4 writer, to engage in short-term transactions, as such term 

5 is defined by the Commission by rule, in any securities 

6 of which such company, or any affiliate of such company, 

7 is the issuer, except that this subsection shall not prohibit 

8 transactions in money market funds, or other funds the 

9 investment policy of which expressly permits short-term 

10 transactions, or such other categories of registered invest11 ment companies as the Commission shall specify by rule.’’. 

12 (j) MUTUAL FUND COMPLIANCE OFFICER.—Not 

13 later than 270 days after the date of enactment of this 

14 Act, the Commission shall, by rule, require each registered 

15 investment company to appoint a compliance officer to en16 sure that such company is complying with all relevant 

17 rules and regulations, consistent with the protection of in18 vestors and the public interest. Each compliance officer 

19 of a registered investment company shall report only to 

20 directors that are not interested persons of the company, 

21 as such term is defined in section 2(a)(19) of the Invest22 ment Company Act of 1940 (15 U.S.C. 80a–2(a)(19)).
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1 TITLE II—MUTUAL FUND 

2 OVERSIGHT BOARD 

3 SEC. 201. ESTABLISHMENT; ADMINISTRATIVE PROVISIONS. 

4 (a) ESTABLISHMENT OF BOARD.—There is estab5 lished the Mutual Fund Oversight Board, to oversee the 

6 conduct of mutual funds and related matters, in order to 

7 protect the interests of investors. The Board shall be a 

8 body corporate, operate as a nonprofit corporation, and 

9 have succession until dissolved by an Act of Congress. 

10 (b) STATUS.—The Board shall not be an agency or 

11 establishment of the United States Government, and, ex12 cept as otherwise provided in this title, shall be subject 

13 to, and have all of the powers conferred upon a nonprofit 

14 corporation by the District of Columbia Nonprofit Cor15 poration Act. Each member and person employed by the 

16 Board shall be deemed to be an officer or employee of, 

17 or agent for, the Federal Government by reason of such 

18 service. 

19 (c) DUTIES OF THE BOARD.—The Board shall, sub20 ject to action by the Commission under section 206, and 

21 once a determination is made by the Commission under 

22 subsection (d) of this section—

23 (1) register mutual funds in accordance with 

24 section 202; 
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1 (2) establish or adopt, or both, by rule, internal 

2 auditing, quality control, ethics, independence, and 

3 other standards relating to the conduct of mutual 

4 funds, in accordance with section 203; 

5 (3) conduct inspections of mutual funds, in ac6 cordance with section 204 and the rules of the 

7 Board; 

8 (4) conduct investigations and disciplinary pro9 ceedings concerning, and impose appropriate sanc10 tions where justified upon, mutual funds and associ11 ated persons of such mutual funds, in accordance 

12 with section 205; 

13 (5) perform such other duties and functions as 

14 the Board determines are necessary or appropriate 

15 to promote high professional standards among, and 

16 improve the quality of services offered by, mutual 

17 funds, in order to protect investors, or to further the 

18 public interest; 

19 (6) enforce compliance with this title, the rules 

20 of the Board, professional standards, and the securi21 ties laws relating to mutual funds and associated 

22 persons thereof; and 

23 (7) set the budget and manage the operations 

24 of the Board and the staff of the Board. 
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1 (d) COMMISSION DETERMINATION.—The members of 

2 the Board shall take such action (including hiring of staff, 

3 proposal of rules, and adoption of initial and transitional 

4 auditing and other professional standards) as may be nec5 essary or appropriate to enable the Commission to deter6 mine, not later than 270 days after the date of enactment 

7 of this Act, that the Board is so organized and has the 

8 capacity to carry out the requirements of this title, and 

9 to enforce compliance with this title by registered mutual 

10 funds and associated persons thereof. 

11 (e) BOARD MEMBERSHIP.—

12 (1) COMPOSITION.—The Board shall have 5 

13 members, appointed in accordance with paragraph 

14 (3), from among prominent individuals of integrity 

15 and reputation who have a demonstrated commit16 ment to the interests of investors and the public, 

17 and an understanding of the responsibilities for and 

18 nature of the financial services offered by registered 

19 mutual funds. 

20 (2) FULL-TIME INDEPENDENT SERVICE.—Each 

21 member of the Board shall serve on a full-time basis, 

22 and may not, concurrent with service on the Board, 

23 be employed by any other person or engage in any 

24 other professional or business activity. No member 

25 of the Board may share in any of the profits of,
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1 or receive payments from, a mutual fund (or any 

2 other person, as determined by rule of the Commis3 sion), other than fixed continuing payments, subject 

4 to such conditions as the Commission may impose, 

5 under standard arrangements for the retirement of 

6 employees of mutual funds. 

7 (3) APPOINTMENT OF BOARD MEMBERS.—

8 (A) INITIAL BOARD.—Not later than 90 

9 days after the date of enactment of this Act, 

10 the Commission, after consultation with the 

11 Chairman of the Board of Governors of the 

12 Federal Reserve System and the Secretary of 

13 the Treasury, shall appoint the chairperson and 

14 other initial members of the Board. 

15 (B) VACANCIES.—A vacancy on the Board 

16 shall not affect the powers of the Board, but 

17 shall be filled in the same manner as provided 

18 for appointments under this section. 

19 (4) TERM OF SERVICE.—

20 (A) IN GENERAL.—The term of service of 

21 each Board member shall be 5 years, and until 

22 a successor is appointed, except that—

23 (i) the terms of office of the initial 

24 Board members (other than the chair25 person) shall expire in annual increments, 
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1 1 on each of the first 4 anniversaries of 

2 the initial date of appointment; and 

3 (ii) any Board member appointed to 

4 fill a vacancy occurring before the expira5 tion of the term for which the predecessor 

6 was appointed shall be appointed only for 

7 the remainder of that term. 

8 (B) TERM LIMITATION.—No person may 

9 serve as a member of the Board, or as chair10 person of the Board, for more than 2 terms, 

11 whether or not such terms of service are con12 secutive. 

13 (5) REMOVAL FROM OFFICE.—A member of the 

14 Board may be removed by the Commission from of15 fice, in accordance with section 206(d)(3), for good 

16 cause shown before the expiration of the term of 

17 that member. 

18 (f) POWERS OF THE BOARD.—In addition to any au19 thority granted to the Board under this title, the Board 

20 shall have the power, subject to section 206—

21 (1) to sue and be sued, complain and defend, in 

22 its corporate name and through its own counsel, 

23 with the approval of the Commission, in any Fed24 eral, State, or other court; 
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1 (2) to conduct its operations and maintain of2 fices, and to exercise all other rights and powers au3 thorized by this title, in any State, without regard 

4 to any qualification, licensing, or other provision of 

5 law in effect in such State (or a political subdivision 

6 thereof); 

7 (3) to lease, purchase, accept gifts or donations 

8 of, or otherwise acquire, improve, use, sell, exchange, 

9 or convey, all of or an interest in any property, 

10 wherever situated; 

11 (4) to appoint such employees, accountants, at12 torneys, and other agents as may be necessary or 

13 appropriate, and to determine their qualifications, 

14 define their duties, and fix their salaries or other 

15 compensation (at a level that is comparable to pri16 vate sector self-regulatory, accounting, technical, su17 pervisory, or other staff or management positions); 

18 (5) to allocate, assess, and collect support fees 

19 established pursuant to section 209, for the Board, 

20 and other fees and charges imposed under this title; 

21 and 

22 (6) to enter into contracts, execute instruments, 

23 incur liabilities, and do any and all other acts and 

24 things necessary, appropriate, or incidental to the 

25 conduct of its operations and the exercise of its obli-
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1 gations, rights, and powers imposed or granted by 

2 this title. 

3 (g) RULES OF THE BOARD.—The rules of the Board 

4 shall, subject to the approval of the Commission—

5 (1) provide for the operation and administration 

6 of the Board, the exercise of its authority, and the 

7 performance of its responsibilities under this title; 

8 (2) permit, as the Board determines necessary 

9 or appropriate, delegation by the Board of any of its 

10 functions to an individual member or employee of 

11 the Board, or to a division of the Board, including 

12 functions with respect to hearing, determining, or13 dering, certifying, reporting, or otherwise acting as 

14 to any matter, except that—

15 (A) the Board shall retain a discretionary 

16 right to review any action pursuant to any such 

17 delegated function, upon its own motion; 

18 (B) a person shall be entitled to a review 

19 by the Board with respect to any matter so del20 egated, and the decision of the Board upon 

21 such review shall be deemed to be the action of 

22 the Board for all purposes (including appeal or 

23 review thereof); and 

24 (C) if the right to exercise a review de25 scribed in subparagraph (A) is declined, or if no 
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1 such review is sought within the time stated in 

2 the rules of the Board, then the action taken by 

3 the holder of such delegation shall for all pur4 poses, including appeal or review thereof, be 

5 deemed to be the action of the Board; 

6 (3) establish ethics rules and standards of con7 duct for Board members and staff, including a bar 

8 on practice before the Board (and the Commission, 

9 with respect to Board-related matters) of 1 year for 

10 former members of the Board, and appropriate peri11 ods (not to exceed 1 year) for former staff of the 

12 Board; and 

13 (4) provide as otherwise required by this title. 

14 (h) ANNUAL REPORT TO THE COMMISSION.—

15 (1) IN GENERAL.—The Board shall submit an 

16 annual report (including its audited financial state17 ments) to the Commission. 

18 (2) SUBMISSION TO CONGRESS.—Not later than 

19 30 days after the date of receipt of a report under 

20 paragraph (1), the Commission shall transmit a copy 

21 of that report to—

22 (A) the Committee on Banking, Housing, 

23 and Urban Affairs of the Senate; and 

24 (B) the Committee on Financial Services 

25 of the House of Representatives.
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1 SEC. 202. REGISTRATION WITH THE BOARD. 

2 (a) MANDATORY REGISTRATION.—Beginning 180 

3 days after the date of the determination of the Commis4 sion under section 201(d), it shall be unlawful for any mu5 tual fund to conduct business if that mutual fund is not 

6 registered with the Board under this section. 

7 (b) APPLICATIONS FOR REGISTRATION.—

8 (1) FORM OF APPLICATION.—A mutual fund 

9 shall use such form as the Board may prescribe, by 

10 rule, to apply for registration under this section. 

11 (2) CONTENTS OF APPLICATIONS.—Each mu12 tual fund shall submit, as part of its application for 

13 registration, in such detail as the Board shall speci14 fy—

15 (A) the policies of each mutual fund re16 garding, and efforts taken by that mutual fund 

17 to eliminate, market timing practices; 

18 (B) the annual fees received by the mutual 

19 fund; 

20 (C) such other current financial informa21 tion for the most recently completed fiscal year 

22 of the mutual fund as the Board may reason23 ably request; 

24 (D) a statement of the quality control poli25 cies of the mutual fund; 
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1 (E) the policies of each mutual fund re2 garding, and efforts taken by that mutual fund 

3 to eliminate, late trading practices; and 

4 (F) information relating to criminal, civil, 

5 or administrative actions or disciplinary pro6 ceedings pending against the mutual fund or 

7 any associated person of the mutual fund in 

8 connection with the conduct of the mutual fund; 

9 and 

10 (G) such other information as the rules of 

11 the Board or the Commission shall specify as 

12 necessary or appropriate in the public interest 

13 or for the protection of investors. 

14 (3) CONSENTS.—Each application for registra15 tion under this subsection shall include—

16 (A) a consent executed by the mutual fund 

17 to cooperation in and compliance with any re18 quest for testimony or the production of docu19 ments made by the Board in the furtherance of 

20 its authority and responsibilities under this title 

21 (and an agreement to secure and enforce simi22 lar consents from each of the associated persons 

23 of the mutual fund as a condition of their con24 tinued employment by or other association with 

25 such mutual fund); and 
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1 (B) a statement that such mutual fund un2 derstands and agrees that cooperation and com3 pliance, as described in the consent required by 

4 subparagraph (A), and the securing and en5 forcement of such consents from its associated 

6 persons, in accordance with the rules of the 

7 Board, shall be a condition to the continuing ef8 fectiveness of the registration of the mutual 

9 fund with the Board. 

10 (c) ACTION ON APPLICATIONS.—

11 (1) TIMING.—The Board shall approve a com12 pleted application for registration not later than 45 

13 days after the date of receipt of the application, in 

14 accordance with the rules of the Board, unless the 

15 Board, prior to such date, issues a written notice of 

16 disapproval to, or requests more information from, 

17 the prospective registrant. 

18 (2) TREATMENT.—A written notice of dis19 approval of a completed application under paragraph 

20 (1) for registration shall be treated as a disciplinary 

21 sanction for purposes of sections 205(d) and 206(c). 

22 (d) PERIODIC REPORTS.—Each registered mutual 

23 fund shall submit an annual report to the Board, and may 

24 be required to report more frequently, as necessary to up25 date the information contained in its application for reg-
28

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1 istration under this section, and to provide to the Board 

2 such additional information as the Board or the Commis3 sion may specify, in accordance with subsection (b)(2). 

4 (e) PUBLIC AVAILABILITY.—Registration applica5 tions and annual reports required by this subsection, or 

6 such portions of such applications or reports as may be 

7 designated under rules of the Board, shall be made avail8 able for public inspection, subject to rules of the Board 

9 or the Commission, and to applicable laws relating to the 

10 confidentiality of proprietary, personal, or other informa11 tion contained in such applications or reports, provided 

12 that, in all events, the Board shall protect from public dis13 closure information reasonably identified by the subject 

14 mutual fund as proprietary information. 

15 (f) REGISTRATION AND ANNUAL FEES.—The Board 

16 shall assess and collect a registration fee and an annual 

17 fee from each registered mutual fund, in amounts that are 

18 sufficient to recover the costs of processing and reviewing 

19 applications and annual reports. 

20 SEC. 203. AUDITING, QUALITY CONTROL, AND INDEPEND21 ENCE STANDARDS AND RULES. 

22 (a) AUDITING, QUALITY CONTROL, AND ETHICS

23 STANDARDS.—

24 (1) IN GENERAL.—The Board shall, by rule, es25 tablish such internal auditing and quality control 
29

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1 standards, and such ethics standards to be used by 

2 registered mutual funds in conducting their busi3 ness, as required by this title or the rules of the 

4 Commission, or as may be necessary or appropriate 

5 in the public interest or for the protection of inves6 tors. 

7 (2) RULE REQUIREMENTS.—In carrying out 

8 paragraph (1), the Board—

9 (A) shall include in the internal auditing 

10 standards that it adopts, requirements that 

11 each registered mutual fund shall—

12 (i) prepare, and maintain for a period 

13 of not less than 7 years, audit work pa14 pers, and other information related to any 

15 internal audit report, in sufficient detail to 

16 support the conclusions reached in such re17 port; and 

18 (ii) provide a concurring or second ex19 ecutive officer review and approval of such 

20 audit report (and other related informa21 tion), and concurring approval in its 

22 issuance, by a qualified person (as pre23 scribed by the Board) associated with the 

24 mutual fund, other than the person in
30

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1 charge of the audit, or by an independent 

2 reviewer (as prescribed by the Board); and 

3 (B) shall include in the quality control 

4 standards that it adopts with respect to the 

5 issuance of audit reports, requirements applica6 ble to every registered mutual fund relating 

7 to—

8 (i) monitoring of professional ethics 

9 and quality standards; 

10 (ii) consultation within such mutual 

11 fund on auditing questions; 

12 (iii) supervision of internal audit 

13 work; 

14 (iv) hiring, professional development, 

15 and advancement of audit personnel; 

16 (v) internal inspection; and 

17 (vi) such other requirements as the 

18 Board may prescribe, subject to paragraph 

19 (1). 

20 (3) AUTHORITY TO ADOPT OTHER STAND21 ARDS.—

22 (A) IN GENERAL.—The Board—

23 (i) may adopt as its rules, subject to 

24 section 206, any portion of any statement 

25 of professional standards that the Board 
31

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1 determines satisfy the requirements of 

2 paragraph (1), and that were proposed by 

3 1 or more professional groups that shall be 

4 designated or recognized by the Board, by 

5 rule, for such purpose, pursuant to this 

6 paragraph or 1 or more advisory groups 

7 convened pursuant to paragraph (4); and 

8 (ii) notwithstanding clause (i), shall 

9 retain full authority to modify, supplement, 

10 revise, or subsequently amend, modify, or 

11 repeal, in whole or in part, any portion of 

12 any statement described in clause (i). 

13 (B) INITIAL AND TRANSITIONAL STAND14 ARDS.—The Board shall adopt standards de15 scribed in subparagraph (A)(i) as initial or 

16 transitional standards, to the extent the Board 

17 determines necessary, prior to a determination 

18 of the Commission under section 201(d), and 

19 such standards shall be separately approved by 

20 the Commission at the time of that determina21 tion, without regard to the procedures required 

22 by section 206 that otherwise would apply to 

23 the approval of rules of the Board. 

24 (4) ADVISORY GROUPS.—The Board shall con25 vene, or authorize its staff to convene, such expert 
32

S 1958 IS1S 

1 advisory groups as may be appropriate, which may 

2 include representatives of the mutual fund industry 

3 and other experts, as well as representatives of other 

4 interested groups, subject to such rules as the Board 

5 may prescribe to prevent conflicts of interest, to 

6 make recommendations concerning the content (in7 cluding proposed drafts) of auditing, quality control, 

8 ethics, independence, or other standards required to 

9 be established under this section. 

10 (b) INDEPENDENCE STANDARDS AND RULES.—The 

11 Board shall establish such rules ensuring compliance with 

12 section 10 of the Investment Company Act of 1940, as 

13 may be necessary or appropriate in the public interest or 

14 for the protection of investors. 

15 (c) COOPERATION WITH DESIGNATED PROFES16 SIONAL GROUPS OF MUTUAL FUNDS AND ADVISORY

17 GROUPS.—

18 (1) IN GENERAL.—The Board shall—

19 (A) cooperate on an ongoing basis with 

20 professional groups designated under subsection 

21 (a)(3)(A) and advisory groups convened under 

22 subsection (a)(4) in the examination of the need 

23 for changes in any standards subject to its au24 thority under subsection (a); 
33

S 1958 IS1S 

1 (B) recommend issues for inclusion on the 

2 agendas of such designated professional groups 

3 or advisory groups; and 

4 (C) take such other steps as it deems ap5 propriate to increase the effectiveness of the 

6 standard setting process. 

7 (2) BOARD RESPONSES.—The Board shall re8 spond in a timely fashion to requests from des9 ignated professional groups and advisory groups re10 ferred to in paragraph (1) for any changes in stand11 ards over which the Board has authority. 

12 (d) EVALUATION OF STANDARD SETTING PROC13 ESS.—The Board shall include in the annual report re14 quired by section 201(h) the results of its standard setting 

15 responsibilities during the period to which the report re16 lates, including a discussion of the work of the Board with 

17 any designated professional groups and advisory groups 

18 described in paragraphs (3)(A) and (4) of subsection (a), 

19 and its pending issues agenda for future standard setting 

20 projects. 

21 SEC. 204. INSPECTIONS OF REGISTERED MUTUAL FUNDS. 

22 (a) IN GENERAL.—The Board shall conduct a con23 tinuing program of inspections, at such intervals as are 

24 established under the rules of the Board to assess the de25 gree of compliance of each registered mutual fund and as-
34

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1 sociated persons of that mutual fund with this title, the 

2 rules of the Board, the rules of the Commission, or profes3 sional standards. 

4 (b) INSPECTION FREQUENCY.—

5 (1) IN GENERAL.—Subject to paragraph (2), 

6 inspections required by this section shall be con7 ducted annually with respect to each registered mu8 tual fund that is the basis for any difference be9 tween these 2 standards. 

10 (2) ADJUSTMENTS TO SCHEDULES.—The 

11 Board may, by rule, adjust the inspection schedules 

12 set under paragraph (1) if the Board finds that dif13 ferent inspection schedules are consistent with the 

14 purposes of this title, the public interest, and the 

15 protection of investors. 

16 (c) PROCEDURES.—The Board shall, in each inspec17 tion under this section, and in accordance with its rules 

18 for such inspections—

19 (1) identify any act or practice or omission to 

20 act by the registered mutual fund, or by any associ21 ated person thereof, revealed by such inspection that 

22 may be in violation of this title, the rules of the 

23 Board, the rules of the Commission, the quality con24 trol policies of the mutual fund, or professional 

25 standards;
35

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1 (2) report any such act, practice, or omission, 

2 if appropriate, to the Commission and each appro3 priate State regulatory authority; and 

4 (3) begin a formal investigation or take appro5 priate disciplinary action, if any, with respect to any 

6 such violation, in accordance with this title and the 

7 rules of the Board. 

8 (d) CONDUCT OF INSPECTIONS.—In conducting an 

9 inspection of a registered mutual fund under this section, 

10 the Board shall—

11 (1) inspect and review internal audits per12 formed by the mutual fund; 

13 (2) evaluate the sufficiency of the quality con14 trol system of the mutual fund, and the manner of 

15 the documentation and communication of that sys16 tem by the mutual fund; and 

17 (3) perform such other testing of the internal 

18 audit, supervisory, and quality control procedures of 

19 the mutual fund as are necessary or appropriate in 

20 light of the purpose of the inspection and the re21 sponsibilities of the Board. 

22 (e) RECORD RETENTION.—The rules of the Board 

23 may require the retention by registered mutual funds for 

24 inspection purposes of records, the retention of which is 
36

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1 not otherwise required by section 203 or the rules issued 

2 thereunder. 

3 (f) PROCEDURES FOR REVIEW.—

4 (1) REVIEW AND RESPONSE.—The rules of the 

5 Board shall provide a procedure for the review of 

6 and response to a draft inspection report by the reg7 istered mutual fund under inspection. 

8 (2) ACTION ON RESPONSE.—The Board shall 

9 take such action with respect to such response as it 

10 considers appropriate (including revising the draft 

11 report or continuing or supplementing its inspection 

12 activities before issuing a final report, as appro13 priate). The text of any such response, appropriately 

14 redacted to protect information reasonably identified 

15 by the mutual fund as confidential, shall be attached 

16 to and made part of the inspection report. 

17 (g) REPORT.—A written report of the findings of the 

18 Board for each inspection under this section, subject to 

19 subsection (h), shall be—

20 (1) transmitted, in appropriate detail, to the 

21 Commission and each appropriate State regulatory 

22 authority, accompanied by any letter or comments 

23 by the Board or the inspector, and any letter of re24 sponse from the registered mutual fund; and 
37

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1 (2) made available in appropriate detail to the 

2 public (subject to section 205(b)(5)(A), and to the 

3 protection of such confidential and proprietary infor4 mation as the Board may determine to be appro5 priate, or as may be required by law), except that 

6 no portion of the inspection report that deals with 

7 criticisms of or potential defects in the quality con8 trol systems of the mutual fund under inspection 

9 shall be made public if those criticisms or defects are 

10 addressed by the mutual fund, to the satisfaction of 

11 the Board, not later than 12 months after the date 

12 of the inspection report.

13 (h) INTERIM COMMISSION REVIEW.—

14 (1) REVIEWABLE MATTERS.—A registered mu15 tual fund may seek review by the Commission, pur16 suant to such rules as the Commission shall promul17 gate, if the mutual fund— 

18 (A) has provided the Board with a re19 sponse, pursuant to rules issued by the Board 

20 under subsection (f), to the substance of par21 ticular items in a draft inspection report, and 

22 disagrees with the assessments contained in any 

23 final report prepared by the Board following 

24 such response; or 
38

S 1958 IS1S 

1 (B) disagrees with the determination of the 

2 Board that criticisms or defects identified in an 

3 inspection report have not been addressed to 

4 the satisfaction of the Board within 12 months 

5 after the date of the inspection report, for pur6 poses of subsection (g)(2). 

7 (2) TREATMENT OF REVIEW.—Any decision of 

8 the Commission with respect to a review under para9 graph (1) shall not be reviewable under section 25 

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

11 78y), or deemed to be ‘‘final agency action’’ for pur12 poses of section 704 of title 5, United States Code. 

13 (3) TIMING.—Review under paragraph (1) may 

14 be sought during the 30-day period following the 

15 date of the event giving rise to the review under sub16 paragraph (A) or (B) of paragraph (1). 

17 SEC. 205. INVESTIGATIONS AND DISCIPLINARY PRO18 CEEDINGS. 

19 (a) IN GENERAL.—The Board shall establish, by 

20 rule, subject to the requirements of this section, fair proce21 dures for the investigation and disciplining of registered 

22 mutual funds and associated persons of such mutual 

23 funds. 

24 (b) INVESTIGATIONS.—
39

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1 (1) AUTHORITY.—In accordance with the rules 

2 of the Board, the Board may conduct an investiga3 tion of any act or practice, or omission to act, by a 

4 registered mutual fund, any associated person of 

5 such mutual fund, or both, that may violate any pro6 vision of this title, the rules of the Board, the provi7 sions of the securities laws relating to mutual funds, 

8 or professional standards, regardless of how the act, 

9 practice, or omission is brought to the attention of 

10 the Board. 

11 (2) TESTIMONY AND DOCUMENT PRODUC12 TION.—In addition to such other actions as the 

13 Board determines to be necessary, the rules of the 

14 Board may—

15 (A) require the testimony of the registered 

16 mutual fund or of any person associated with a 

17 registered mutual fund, with respect to any 

18 matter that the Board considers relevant or 

19 material to an investigation; 

20 (B) require the production of audit work 

21 papers and any other document or information 

22 in the possession of a registered mutual fund or 

23 any associated person thereof, wherever domi24 ciled, that the Board considers relevant or ma25 terial to the investigation, and may inspect the
40

S 1958 IS1S 

1 books and records of such mutual fund or asso2 ciated person to verify the accuracy of any doc3 uments or information supplied; 

4 (C) request the testimony of, and produc5 tion of any document in the possession of, any 

6 other person, including any client of a reg7 istered mutual fund that the Board considers 

8 relevant or material to an investigation under 

9 this section, with appropriate notice, subject to 

10 the needs of the investigation, as permitted 

11 under the rules of the Board; and 

12 (D) provide for procedures to seek issuance 

13 by the Commission, in a manner established by 

14 the Commission, of a subpoena to require the 

15 testimony of, and production of any document 

16 in the possession of, any person, including any 

17 client of a registered mutual fund, that the 

18 Board considers relevant or material to an in19 vestigation under this section. 

20 (3) NONCOOPERATION WITH INVESTIGA21 TIONS.—

22 (A) IN GENERAL.—If a registered mutual 

23 fund or any associated person thereof refuses to 

24 testify, produce documents, or otherwise cooper-
41

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1 ate with the Board in connection with an inves2 tigation under this section, the Board may—

3 (i) suspend or bar such person from 

4 being associated with a registered mutual 

5 fund, or require the registered mutual fund 

6 to end such association; 

7 (ii) suspend or revoke the registration 

8 of the mutual fund; and 

9 (iii) invoke such other lesser sanctions 

10 as the Board considers appropriate, and as 

11 specified by rule of the Board. 

12 (B) PROCEDURE.—Any action taken by 

13 the Board under this paragraph shall be subject 

14 to the terms of section 206(c). 

15 (4) REFERRAL.—The Board may refer an in16 vestigation under this section—

17 (A) to the Commission; and 

18 (B) at the direction of the Commission, 

19 to—

20 (i) the Attorney General of the United 

21 States; 

22 (ii) the attorney general of 1 or more 

23 States; and 

24 (iii) the appropriate State regulatory 

25 authority. 
42

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1 (5) USE OF DOCUMENTS.—

2 (A) CONFIDENTIALITY.—Except as pro3 vided in subparagraph (B), all documents and 

4 information prepared or received by or specifi5 cally for the Board, and deliberations of the 

6 Board and its employees and agents, in connec7 tion with an inspection under section 204 or 

8 with an investigation under this section, shall 

9 be confidential and privileged as an evidentiary 

10 matter (and shall not be subject to civil dis11 covery or other legal process) in any proceeding 

12 in any Federal or State court or administrative 

13 agency, and shall be exempt from disclosure, in 

14 the hands of an agency or establishment of the 

15 Federal Government, under the Freedom of In16 formation Act (5 U.S.C. 552a), or otherwise, 

17 unless and until presented in connection with a 

18 public proceeding or released in accordance with 

19 subsection (c). 

20 (B) AVAILABILITY TO GOVERNMENT AGEN21 CIES.—All information referred to in subpara22 graph (A) may, in the discretion of the Board, 

23 when determined by the Board to be necessary 

24 to accomplish the purposes of this title or to 

25 protect investors, and without the loss of its 
43

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1 status as confidential and privileged in the 

2 hands of the Board, be made available to the 

3 Commission, the Attorney General of the 

4 United States, to State attorneys general in 

5 connection with any criminal investigation, and 

6 to any appropriate State regulatory authority, 

7 which shall maintain such information as con8 fidential and privileged. 

9 (6) IMMUNITY.—Any employee of the Board en10 gaged in carrying out an investigation under this 

11 title shall be immune from any civil liability arising 

12 out of such investigation in the same manner and to 

13 the same extent as an employee of the Federal Gov14 ernment in similar circumstances. 

15 (c) DISCIPLINARY PROCEDURES.—

16 (1) NOTIFICATION; RECORDKEEPING.—The 

17 rules of the Board shall provide that in any pro18 ceeding by the Board to determine whether a reg19 istered mutual fund, or an associated person thereof, 

20 should be disciplined, the Board shall—

21 (A) bring specific charges with respect to 

22 the mutual fund or associated person; 

23 (B) notify such mutual fund or associated 

24 person of, and provide to the mutual fund or 
44

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1 associated person an opportunity to defend 

2 against, such charges; and 

3 (C) keep a record of the proceedings. 

4 (2) PUBLIC HEARINGS.—Hearings under this 

5 section shall be open to the public, unless otherwise 

6 ordered by the Board for good cause shown. 

7 (3) SUPPORTING STATEMENT.—A determina8 tion by the Board to impose a sanction under this 

9 subsection shall be supported by a statement setting 

10 forth—

11 (A) each act or practice in which the reg12 istered mutual fund, or associated person, has 

13 engaged (or omitted to engage), or that forms 

14 a basis for all or a part of such sanction; 

15 (B) the specific provision of this title, the 

16 securities laws, the rules of the Board, or pro17 fessional standards which the Board determines 

18 has been violated; and 

19 (C) the sanction imposed, including a jus20 tification for that sanction. 

21 (4) SANCTIONS.—If the Board finds, based on 

22 all of the facts and circumstances, that a registered 

23 mutual fund or associated person thereof has en24 gaged in any act or practice, or omitted to act, in 

25 violation of this title, the rules of the Board, the
45

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1 provisions of the securities laws relating to the prep2 aration and issuance of audit reports and the obliga3 tions and liabilities of accountants with respect 

4 thereto, including the rules of the Commission issued 

5 under this title, or professional standards, the Board 

6 may impose such disciplinary or remedial sanctions 

7 as it determines appropriate, subject to applicable 

8 limitations under paragraph (5), including—

9 (A) temporary suspension or permanent 

10 revocation of registration under this title; 

11 (B) temporary or permanent suspension or 

12 bar of a person from further association with 

13 any registered mutual fund; 

14 (C) temporary or permanent limitation on 

15 the activities, functions, or operations of such 

16 mutual fund or person (other than in connec17 tion with required additional professional edu18 cation or training); 

19 (D) a civil money penalty for each such 

20 violation, in an amount equal to—

21 (i) not more than $100,000 for a nat22 ural person or $2,000,000 for any other 

23 person; and 

24 (ii) in any case to which paragraph 

25 (5) applies, not more than $750,000 for a 
46

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1 natural person or $15,000,000 for any 

2 other person; 

3 (E) censure; 

4 (F) required additional professional edu5 cation or training; or 

6 (G) any other appropriate sanction pro7 vided for in the rules of the Board. 

8 (5) INTENTIONAL OR OTHER KNOWING CON9 DUCT.—The sanctions and penalties described in 

10 subparagraphs (A) through (C) and (D)(ii) of para11 graph (4) shall only apply to—

12 (A) intentional or knowing conduct, includ13 ing reckless conduct, that results in violation of 

14 the applicable statutory, regulatory, or profes15 sional standard; or 

16 (B) repeated instances of negligent con17 duct, each resulting in a violation of the appli18 cable statutory, regulatory, or professional 

19 standard. 

20 (6) FAILURE TO SUPERVISE.—

21 (A) IN GENERAL.—The Board may impose 

22 sanctions under this section on a registered mu23 tual fund or upon the supervisory personnel of 

24 such mutual fund, if the Board finds that—
47

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1 (i) the mutual fund has failed reason2 ably to supervise an associated person, ei3 ther as required by the rules of the Board 

4 relating to auditing or quality control 

5 standards, or otherwise, with a view to pre6 venting violations of this Act, the rules of 

7 the Board, the provisions of the securities 

8 laws relating to mutual funds, including 

9 the rules of the Commission under this 

10 title, or professional standards; and 

11 (ii) such associated person commits a 

12 violation of this title, or any of such rules, 

13 laws, or standards. 

14 (B) RULE OF CONSTRUCTION.—No associ15 ated person of a registered mutual fund shall be 

16 deemed to have failed to reasonably supervise 

17 any other person for purposes of subparagraph 

18 (A), if—

19 (i) there have been established in and 

20 for that mutual fund procedures, and a 

21 system for applying such procedures, that 

22 comply with applicable rules of the Board 

23 and that would reasonably be expected to 

24 prevent and detect any such violation by 

25 such associated person; and 
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1 (ii) such person has reasonably dis2 charged the duties and obligations incum3 bent upon that person by reason of such 

4 procedures and system, and had no reason5 able cause to believe that such procedures 

6 and system were not being complied with. 

7 (7) EFFECT OF SUSPENSION.—It shall be un8 lawful for any person that is suspended or barred 

9 from being associated with a registered mutual fund 

10 under this subsection willfully to become or remain 

11 associated with any registered mutual fund, or for 

12 any registered mutual fund that knew, or, in the ex13 ercise of reasonable care should have known, of the 

14 suspension or bar, to permit such an association, 

15 without the consent of the Board or the Commis16 sion. 

17 (d) REPORTING OF SANCTIONS.—

18 (1) RECIPIENTS.—If the Board imposes a dis19 ciplinary sanction, in accordance with this section, 

20 the Board shall report the sanction to—

21 (A) the Commission; 

22 (B) any appropriate State regulatory au23 thorities; and 

24 (C) the public (once any stay on the impo25 sition of such sanction has been lifted). 
49

S 1958 IS1S 

1 (2) CONTENTS.—The information reported 

2 under paragraph (1) shall include— 

3 (A) the name of the sanctioned person; 

4 (B) a description of the sanction and the 

5 basis for its imposition; and 

6 (C) such other information as the Board 

7 deems appropriate.

8 (e) STAY OF SANCTIONS.—

9 (1) IN GENERAL.—Application to the Commis10 sion for review, or the institution by the Commission 

11 of review, of any disciplinary action of the Board 

12 shall operate as a stay of any such disciplinary ac13 tion, unless and until the Commission orders (sum14 marily or after notice and opportunity for hearing on 

15 the question of a stay, which hearing may consist 

16 solely of the submission of affidavits or presentation 

17 of oral arguments) that no such stay shall continue 

18 to operate. 

19 (2) EXPEDITED PROCEDURES.—The Commis20 sion shall establish for appropriate cases an expe21 dited procedure for consideration and determination 

22 of the question of the duration of a stay pending re23 view of any disciplinary action of the Board under 

24 this subsection.
50

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1 SEC. 206. COMMISSION OVERSIGHT OF THE BOARD. 

2 (a) GENERAL OVERSIGHT RESPONSIBILITY.—The 

3 Commission shall have oversight and enforcement author4 ity over the Board, as provided in this title. 

5 (b) RULES OF THE BOARD.—

6 (1) DEFINITION.—In this section, the term 

7 ‘‘proposed rule’’ means any proposed rule of the 

8 Board, and any modification of any such rule. 

9 (2) PRIOR APPROVAL REQUIRED.—No rule of 

10 the Board shall become effective without prior ap11 proval of the Commission in accordance with this 

12 section, other than as provided in section 

13 203(a)(3)(B) with respect to initial or transitional 

14 standards. 

15 (3) APPROVAL CRITERIA.—The Commission 

16 shall approve a proposed rule, if it finds that the 

17 rule is consistent with the requirements of this title 

18 and the securities laws, or is necessary in the public 

19 interest or for the protection of investors. 

20 (4) PROPOSED RULE PROCEDURES.—The provi21 sions of paragraphs (1) through (3) of section 19(b) 

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

23 78s(b)) shall govern the proposed rules of the 

24 Board, as fully as if the Board were a ‘‘registered 

25 securities association’’ for purposes of that section 

26 19(b), except that, for purposes of this paragraph—
51

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1 (A) the phrase ‘‘consistent with the re2 quirements of this title and the rules and regu3 lations thereunder applicable to such organiza4 tion’’ in section 19(b)(2) of that Act shall be 

5 deemed to read ‘‘consistent with the require6 ments of title II of the Mutual Fund Investor 

7 Protection Act of 2003, and the rules and regu8 lations issued thereunder applicable to such or9 ganization, or as necessary in the public inter10 est or for the protection of investors’’; and 

11 (B) the phrase ‘‘otherwise in furtherance 

12 of the purposes of this title’’ in section 

13 19(b)(3)(C) of that Act shall be deemed to read 

14 ‘‘otherwise in furtherance of the purposes of 

15 title II of the Mutual Fund Investor Protection 

16 Act of 2003’’. 

17 (5) COMMISSION AUTHORITY TO AMEND RULES

18 OF THE BOARD.—The provisions of section 19(c) of 

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

20 78s(c)) shall govern the abrogation, deletion, or ad21 dition to portions of the rules of the Board by the 

22 Commission as fully as if the Board were a ‘‘reg23 istered securities association’’ for purposes of that 

24 section 19(c), except that the phrase ‘‘to conform its 

25 rules to the requirements of this title and the rules 
52

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1 and regulations thereunder applicable to such orga2 nization, or otherwise in furtherance of the purposes 

3 of this title’’ in section 19(c) of that Act shall, for 

4 purposes of this paragraph, be deemed to read ‘‘to 

5 assure the fair administration of the Mutual Fund 

6 Oversight Board, conform the rules promulgated by 

7 that Board to the requirements of title II of the Mu8 tual Fund Investor Protection Act of 2002, or other9 wise further the purposes of that Act, the securities 

10 laws, and the rules and regulations thereunder appli11 cable to that Board’’. 

12 (c) COMMISSION REVIEW OF DISCIPLINARY ACTION

13 TAKEN BY THE BOARD.—

14 (1) NOTICE OF SANCTION.—The Board shall 

15 promptly file notice with the Commission of any 

16 final sanction on any registered mutual fund or on 

17 any associated person thereof, in such form and con18 taining such information as the Commission, by rule, 

19 may prescribe. 

20 (2) REVIEW OF SANCTIONS.—The provisions of 

21 sections 19(d)(2) and 19(e)(1) of the Securities Ex22 change Act of 1934 (15 U.S.C. 78s (d)(2) and 

23 (e)(1)) shall govern the review by the Commission of 

24 final disciplinary sanctions imposed by the Board 

25 (including sanctions imposed under section 
53

S 1958 IS1S 

1 205(b)(3) of this title for noncooperation in an in2 vestigation of the Board), as fully as if the Board 

3 were a self-regulatory organization and the Commis4 sion were the appropriate regulatory agency for such 

5 organization for purposes of those sections 19(d)(2) 

6 and 19(e)(1), except that, for purposes of this para7 graph—

8 (A) section 205(e) of this title (rather than 

9 that section 19(d)(2)) shall govern the extent to 

10 which application for, or institution by the 

11 Commission on its own motion of, review of any 

12 disciplinary action of the Board operates as a 

13 stay of such action; 

14 (B) references in that section 19(e)(1) to 

15 ‘‘members’’ of such an organization shall be 

16 deemed to be references to registered mutual 

17 funds; 

18 (C) the phrase ‘‘consistent with the pur19 poses of this title’’ in that section 19(e)(1) shall 

20 be deemed to read ‘‘consistent with the pur21 poses of this title and title II of the Mutual 

22 Fund Investor Protection Act of 2002’’; 

23 (D) references to rules of the Municipal 

24 Securities Rulemaking Board in that section 

25 19(e)(1) shall not apply; and 
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1 (E) the reference to section 19(e)(2) of the 

2 Securities Exchange Act of 1934 shall refer in3 stead to section 206(c)(3) of this title. 

4 (3) COMMISSION MODIFICATION AUTHORITY.—

5 The Commission may enhance, modify, cancel, re6 duce, or require the remission of a sanction imposed 

7 by the Board upon a registered mutual fund or asso8 ciated person thereof, if the Commission, having due 

9 regard for the public interest and the protection of 

10 investors, finds, after a proceeding in accordance 

11 with this subsection, that the sanction— 

12 (A) is not necessary or appropriate in fur13 therance of this title or the securities laws; or 

14 (B) is excessive, oppressive, inadequate, or 

15 otherwise not appropriate to the finding or the 

16 basis on which the sanction was imposed. 

17 (d) CENSURE OF THE BOARD; OTHER SANCTIONS.—

18 (1) RESCISSION OF BOARD AUTHORITY.—The 

19 Commission, by rule, consistent with the public in20 terest, the protection of investors, and the other pur21 poses of this title and the securities laws, may re22 lieve the Board of any responsibility to enforce com23 pliance with any provision of this title, the securities 

24 laws, the rules of the Board, or professional stand25 ards.
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1 (2) CENSURE OF THE BOARD; LIMITATIONS.—

2 The Commission may, by order, as it determines 

3 necessary or appropriate in the public interest, for 

4 the protection of investors, or otherwise in further5 ance of the purposes of this title or the securities 

6 laws, censure or impose limitations upon the activi7 ties, functions, and operations of the Board, if the 

8 Commission finds, on the record, after notice and 

9 opportunity for a hearing, that the Board—

10 (A) has violated or is unable to comply 

11 with any provision of this title, the rules of the 

12 Board, or the securities laws; or 

13 (B) without reasonable justification or ex14 cuse, has failed to enforce compliance with any 

15 such provision or rule, or any professional 

16 standard by a registered mutual fund or an as17 sociated person thereof. 

18 (3) CENSURE OF BOARD MEMBERS; REMOVAL

19 FROM OFFICE.—The Commission may, as necessary 

20 or appropriate in the public interest, for the protec21 tion of investors, or otherwise in furtherance of the 

22 purposes of this title or the securities laws, remove 

23 from office or censure any member of the Board, if 

24 the Commission finds, on the record, after notice 

25 and opportunity for a hearing, that such member—
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1 (A) has willfully violated any provision of 

2 this title, the rules of the Board, or the securi3 ties laws; 

4 (B) has willfully abused the authority of 

5 that member; or 

6 (C) without reasonable justification or ex7 cuse, has failed to enforce compliance with any 

8 such provision or rule, or any professional 

9 standard by any registered mutual fund or any 

10 associated person thereof. 

11 SEC. 207. FUNDING. 

12 (a) IN GENERAL.—The Board shall be funded as pro13 vided in this section. 

14 (b) ANNUAL BUDGETS.—The Board shall establish 

15 a budget for each fiscal year, which shall be reviewed and 

16 approved according to procedures established by the 

17 Board, not less than 1 month prior to the commencement 

18 of the fiscal year to which the budget pertains. The budget 

19 of the Board shall be subject to approval by the Commis20 sion. 

21 (c) SOURCES AND USES OF FUNDS.—The budget of 

22 the Board (reduced by any registration or annual fees re23 ceived under section 202(e) for the year preceding the year 

24 for which the budget is being computed), for each fiscal 
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1 year shall be payable from annual support fees, in accord2 ance with subsection (d). 

3 (d) ANNUAL SUPPORT FEE FOR THE BOARD.—

4 (1) ESTABLISHMENT OF FEE.—The Board shall 

5 establish, with the approval of the Commission, a 

6 reasonable annual support fee (or a formula for the 

7 computation thereof), as may be necessary or appro8 priate to establish and maintain the Board. 

9 (2) ASSESSMENTS.—The rules of the Board 

10 under paragraph (1) shall provide for the equitable 

11 allocation, assessment, and collection by the Board 

12 (or an agent appointed by the Board) of the fee es13 tablished under paragraph (1), among mutual funds, 

14 in accordance with subsection (f), allowing for dif15 ferentiation among classes of mutual funds, as ap16 propriate. 

17 (e) ALLOCATION OF SUPPORT FEES AMONG MUTUAL

18 FUNDS.—Any amount due from mutual funds (or a par19 ticular class of mutual funds) under this section to fund 

20 the budget of the Board shall be allocated among and pay21 able by each mutual fund (or each mutual fund in a par22 ticular class, as applicable) in an amount equal to the total 

23 of such amount, multiplied by a fraction—

24 (1) the numerator of which is the average 

25 monthly equity market capitalization of the mutual 
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1 fund for the 12-month period immediately preceding 

2 the beginning of the fiscal year to which such budget 

3 relates; and 

4 (2) the denominator of which is the average 

5 monthly equity market capitalization of all such mu6 tual funds for such 12-month period. 

7 (f) RULE OF CONSTRUCTION.—Nothing in this sec8 tion shall be construed to render the Board subject to pro9 cedures in Congress to authorize or appropriate public 

10 funds, or to prevent such organization from utilizing addi11 tional sources of revenue for its activities, such as earnings 

12 from publication sales, provided that each additional 

13 source of revenue shall not jeopardize, in the judgment 

14 of the Commission, the actual and perceived independence 

15 of such organization. 

16 SEC. 208. NO PREEMPTION OF STATE SECURITIES ACTIONS. 

17 No action taken by the Mutual Fund Oversight 

18 Board shall preempt any State securities investigation or 

19 enforcement action, or any State law, regulation, order, 

20 interpretation, or other action related to corporate govern21 ance or antitrust, provided such corporate governance or 

22 antitrust law, regulation, order, interpretation, or other 

23 action is of general applicability. 
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1 SEC. 209. ARBITRATION OF INVESTOR CLAIMS IN AN INDE2 PENDENT FORUM. 

3 Not later than 270 days after the date of enactment 

4 of this Act, the Commission shall prescribe rules under 

5 the Securities Act of 1933, the Securities Exchange Act 

6 of 1934, the Investment Company Act of 1940, and the 

7 Investment Advisers Act of 1940, as appropriate, to be 

8 adopted by the Commission, any self-regulatory organiza9 tion, or both, requiring that complainants who bring 

10 claims under such Acts shall have the option, at the time 

11 the complaint is filed, to have any arbitration of that com12 plaint held in an independent arbitration forum the com13 plainant chooses.

Æ