II 

108TH CONGRESS 

1ST SESSION S. 1822

To require disclosure of financial relationships between brokers and mutual 

fund companies and of certain brokerage commissions paid by mutual 

fund companies. 

IN THE SENATE OF THE UNITED STATES 

NOVEMBER 5, 2003

Mr. AKAKA (for himself, Mr. FITZGERALD, 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 require disclosure of financial relationships between brokers and mutual fund companies and of certain brokerage commissions paid by mutual fund companies.

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

3 SECTION 1. SHORT TITLE. 

4 This Act may be cited as the ‘‘Mutual Fund Trans5 parency Act of 2003’’. 
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1 SEC. 2. DISCLOSURE OF FINANCIAL RELATIONSHIPS BE2 TWEEN BROKERS AND MUTUAL FUND COM3 PANIES. 

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

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

6 adding at the end the following: 

7 ‘‘(11) CONFIRMATION OF TRANSACTIONS FOR

8 MUTUAL FUNDS.—

9 ‘‘(A) IN GENERAL.—Each broker shall dis10 close in writing to customers that purchase the 

11 shares of an open-end company registered 

12 under section 8 of the Investment Company Act 

13 of 1940 (15 U.S.C. 80a–8)—

14 ‘‘(i) the amount of any compensation 

15 received or to be received by the broker in 

16 connection with such transaction from any 

17 sources; and 

18 ‘‘(ii) such other information as the 

19 Commission determines appropriate. 

20 ‘‘(B) TIMING OF DISCLOSURE.—The dis21 closure required under subparagraph (A) shall 

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

23 date of the completion of the transaction. 

24 ‘‘(C) LIMITATION.—The disclosures re25 quired under subparagraph (A) may not be 

26 made exclusively in—
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1 ‘‘(i) a registration statement or pro2 spectus of an open-end company; or 

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

4 company with the Commission. 

5 ‘‘(D) COMMISSION AUTHORITY.—

6 ‘‘(i) IN GENERAL.—The Commission 

7 shall promulgate such rules as are nec8 essary to carry out this paragraph not 

9 later than 1 year after the date of enact10 ment of the Mutual Fund Transparency 

11 Act of 2003. 

12 ‘‘(ii) FORM OF DISCLOSURE.—Disclo13 sures under this paragraph shall be in 

14 such form as the Commission, by rule, 

15 shall require. 

16 ‘‘(E) DEFINITION.—In this paragraph, the 

17 term ‘open-end company’ has the same meaning 

18 as in section 5 of the Investment Company Act 

19 of 1940 (15 U.S.C. 80a–5).’’. 

20 (b) DISCLOSURE OF BROKERAGE COMMISSIONS.—

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

22 U.S.C. 80a–29) is amended by adding at the end the fol23 lowing: 

24 ‘‘(k) DISCLOSURE OF BROKERAGE COMMISSIONS.—

25 The Commission, by rule, shall require that brokerage 
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1 commissions as an aggregate dollar amount and percent2 age of assets paid by an open-end company be included 

3 in any disclosure of the amount of fees and expenses that 

4 may be payable by the holder of the securities of such com5 pany for purposes of—

6 ‘‘(1) the registration statement of that open-end 

7 company; and 

8 ‘‘(2) any other filing of that open-end company 

9 with the Commission, including the calculation of ex10 pense ratios.’’. 

11 SEC. 3. MUTUAL FUND GOVERNANCE. 

12 (a) INDEPENDENT FUND BOARDS.—Section 10(a) of 

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

14 10(a)) is amended—

15 (1) by striking ‘‘shall have’’ and inserting the 

16 following: ‘‘shall—

17 ‘‘(1) have’’; 

18 (2) by striking ‘‘60 per centum’’ and inserting 

19 ‘‘25 percent’’; 

20 (3) by striking the period at the end and insert21 ing a semicolon; and 

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

23 ‘‘(2) have as chairman of its board of directors 

24 an interested person of such registered company; or 
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1 ‘‘(3) have as a member of its board of directors 

2 any person that is an interested person of such reg3 istered investment company—

4 ‘‘(A) who has served without being ap5 proved or elected by the shareholders of such 

6 registered investment company at least once 

7 every 5 years; and 

8 ‘‘(B) unless such director has been found, 

9 on an annual basis, by a majority of the direc10 tors who are not interested persons, after rea11 sonable inquiry by such directors, not to have 

12 any material business or familial relationship 

13 with the registered investment company, a sig14 nificant service provider to the company, or any 

15 entity controlling, controlled by, or under com16 mon control with such service provider, that is 

17 likely to impair the independence of the direc18 tor.’’. 

19 (b) ACTION BY INDEPENDENT DIRECTORS.—Section 

20 10 of the Investment Company Act of 1940 (15 U.S.C. 

21 80a–10) is amended by adding at the end the following: 

22 ‘‘(i) ACTION BY BOARD OF DIRECTORS.—No action 

23 taken by the board of directors of a registered investment 

24 company may require the vote of a director who is an in25 terested person of such registered investment company.
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1 ‘‘(j) INDEPENDENT COMMITTEE.—

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

3 of directors of a registered investment company who 

4 are not interested persons of such registered invest5 ment company shall establish a committee comprised 

6 solely of such members, which committee shall be re7 sponsible for—

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

9 election to the board of directors; and 

10 ‘‘(B) adopting qualification standards for 

11 the nomination of directors. 

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

13 under paragraph (1)(B) shall be disclosed in the reg14 istration statement of the registered investment com15 pany.’’. 

16 (c) DEFINITION OF INTERESTED PERSON.—Section 

17 2(a)(19) of the Investment Company Act of 1940 (15 

18 U.S.C. 80a–2) is amended—

19 (1) in subparagraph (A)—

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

21 inserting ‘‘5’’; and 

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

23 the following: 

24 ‘‘(vii) any natural person who has 

25 served as an officer or director, or as an 
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1 employee within the preceding 10 fiscal 

2 years, of an investment adviser or principal 

3 underwriter to such registered investment 

4 company, or of any entity controlling, con5 trolled by, or under common control with 

6 such investment adviser or principal under7 writer; 

8 ‘‘(viii) any natural person who has 

9 served as an officer or director, or as an 

10 employee within the preceding 10 fiscal 

11 years, of any entity that has within the 

12 preceding 5 fiscal years acted as a signifi13 cant service provider to such registered in14 vestment company, or of any entity con15 trolling, controlled by, or under the com16 mon control with such service provider; 

17 ‘‘(ix) any natural person who is a 

18 member of a class of persons that the 

19 Commission, by rule or regulation, deter20 mines is unlikely to exercise an appropriate 

21 degree of independence as a result of—

22 ‘‘(I) a material business relation23 ship with the investment company or 

24 an affiliated person of such invest25 ment company; 
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1 ‘‘(II) a close familial relationship 

2 with any natural person who is an af3 filiated person of such investment 

4 company; or 

5 ‘‘(III) any other reason deter6 mined by the Commission.’’; 

7 (2) in subparagraph (B)—

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

9 inserting ‘‘5’’; and 

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

11 the following: 

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

13 member of a class of persons that the 

14 Commission, by rule or regulation, deter15 mines is unlikely to exercise an appropriate 

16 degree of independence as a result of—

17 ‘‘(I) a material business relation18 ship with such investment adviser or 

19 principal underwriter or affiliated per20 son of such investment adviser or 

21 principal underwriter; 

22 ‘‘(II) a close familial relationship 

23 with any natural person who is an af24 filiated person of such investment ad25 viser or principal underwriter; or 
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1 ‘‘(III) any other reason as deter2 mined by the Commission.’’. 

3 (d) DEFINITION OF SIGNIFICANT SERVICE PRO4 VIDER.—Section 2(a) of the Investment Company Act of 

5 1940 is amended by adding at the end the following: 

6 ‘‘(53) SIGNIFICANT SERVICE PROVIDER.—

7 ‘‘(A) IN GENERAL.—Not later than 270 

8 days after the date of enactment of the Mutual 

9 Fund Transparency Act of 2003, the Securities 

10 and Exchange Commission shall issue final 

11 rules defining the term ‘significant service pro12 vider’. 

13 ‘‘(B) REQUIREMENTS.—The definition de14 veloped under paragraph (1) shall include, at a 

15 minimum, the investment adviser and principal 

16 underwriter of a registered investment company 

17 for purposes of paragraph (19).’’. 

18 (e) STUDY.—

19 (1) IN GENERAL.—The Securities and Ex20 change Commission shall conduct a study to deter21 mine whether the best interests of investors in mu22 tual funds would be served by the creation of a Mu23 tual Fund Oversight Board that—
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1 (A) has inspection, examination, and en2 forcement authority over mutual fund boards of 

3 directors; 

4 (B) is funded by assessments against mu5 tual fund assets; 

6 (C) the members of which are selected by 

7 the Securities and Exchange Commission; and 

8 (D) has rulemaking authority. 

9 (2) REPORT.—Not later than 1 year after the 

10 date of enactment of this Act, the Securities and Ex11 change Commission shall submit a report on the 

12 study required under paragraph (1) to—

13 (A) the Committee on Banking, Housing, 

14 and Urban Affairs of the Senate; and 

15 (B) the Committee on Financial Services 

16 of the House of Representatives. 

17 SEC. 4. PORTFOLIO MANAGER COMPENSATION. 

18 Not later than 270 days after the date of enactment 

19 of this Act, the Securities and Exchange Commission shall 

20 prescribe rules under the Investment Company Act of 

21 1940, requiring that a registered investment company dis22 close the structure of, or method used to determine, the 

23 compensation of—
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1 (1) individuals employed by the investment ad2 viser of the company to manage the portfolio of the 

3 company; and 

4 (2) the ownership interest of such individuals in 

5 the securities of the registered investment company. 

6 SEC. 5. FINANCIAL LITERACY AMONG MUTUAL FUND IN7 VESTORS STUDY. 

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

9 Commission shall conduct a study to identify—

10 (1) the existing level of financial literacy among 

11 investors that purchase shares of open-end compa12 nies, as such term is defined under section 5 of the 

13 Investment Company Act of 1940, that are reg14 istered under section 8 of such Act; 

15 (2) the most useful and understandable relevant 

16 information that investors need to make sound fi17 nancial decisions prior to purchasing such shares; 

18 (3) methods to increase the transparency of ex19 penses and potential conflicts of interest in trans20 actions involving the shares of open-end companies; 

21 (4) the existing private and public efforts to 

22 educate investors; and 

23 (5) a strategy to increase the financial literacy 

24 of investors that results in a positive change in in25 vestor behavior. 
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1 (b) REPORT.—Not later than 1 year after the date 

2 of enactment of this Act, the Securities and Exchange 

3 Commission shall submit a report on the study required 

4 under subsection (a) to—

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

6 Urban Affairs of the Senate; and 

7 (2) the Committee on Financial Services of the 

8 House of Representatives. 

9 SEC. 6. STUDY REGARDING MUTUAL FUND ADVERTISING. 

10 (a) IN GENERAL.—The Comptroller General of the 

11 United States shall conduct a study on mutual fund adver12 tising to identify—

13 (1) existing and proposed regulatory require14 ments for open-end investment company advertise15 ments; 

16 (2) current marketing practices for the sale of 

17 open-end investment company shares, including the 

18 use of unsustainable past performance data, funds 

19 that have merged, and incubator funds; 

20 (3) the impact of such advertising on con21 sumers; 

22 (4) recommendations to improve investor pro23 tections in mutual fund advertising and additional 

24 information necessary to ensure that investors can 
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1 make informed financial decisions when purchasing 

2 shares. 

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

4 of enactment of this Act, the Comptroller General of the 

5 United States shall submit a report on the results of the 

6 study conducted under subsection (a) to—

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

8 Urban Affairs of the United States Senate; and 

9 (2) the Committee on Financial Services of the 

10 House of Representatives.

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