II 

108TH CONGRESS 

2D SESSION S. 2059

To improve the governance and regulation of mutual funds under the 

securities laws, and for other purposes. 

IN THE SENATE OF THE UNITED STATES 

FEBRUARY 10, 2004

Mr. FITZGERALD (for himself, Mr. LEVIN, and Ms. COLLINS) introduced the 

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

Banking, Housing, and Urban Affairs 

A BILL

To improve the governance and regulation of mutual funds 

under the securities laws, 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 SECTION 1. SHORT TITLE; TABLE OF CONTENTS. 

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

5 ‘‘Mutual Fund Reform Act of 2004’’. 

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. 

Sec. 3. Rulemaking. 

TITLE I—FUND GOVERNANCE 
2

•S 2059 IS 

Sec. 110. Independent directors. 

Sec. 111. Study of director compensation and independence. 

Sec. 112. Fiduciary duties of directors. 

Sec. 113. Fiduciary duty of investment adviser. 

Sec. 114. Termination of fund advisers. 

Sec. 115. Independent accounting and auditing. 

Sec. 116. Prevention of fraud; internal compliance and control procedures. 

TITLE II—FUND TRANSPARENCY 

Sec. 210. Cost consolidation and clarity. 

Sec. 211. Advisor compensation and ownership of fund shares. 

Sec. 212. Point of sale and additional disclosure of broker compensation. 

Sec. 213. Breakpoint discounts. 

Sec. 214. Portfolio turnover ratio. 

Sec. 215. Proxy voting policies and record. 

Sec. 216. Customer information from account intermediaries. 

Sec. 217. Advertising. 

TITLE III—FUND REGULATION AND OVERSIGHT 

Sec. 310. Prohibition of asset-based distribution expenses. 

Sec. 311. Prohibition on revenue sharing, directed brokerage, and soft dollar 

arrangements. 

Sec. 312. Market timing. 

Sec. 313. Elimination of stale prices. 

Sec. 314. Prohibition of short term trading; mandatory redemption fees. 

Sec. 315. Prevention of after-hours trading. 

Sec. 316. Ban on joint management of mutual funds and hedge funds. 

Sec. 317. Selective disclosures. 

TITLE IV—STUDIES 

Sec. 410. Study of adviser conflict of interest. 

Sec. 411. Study of coordination of enforcement efforts. 

Sec. 412. Study of Commission organizational structure. 

Sec. 413. Trends in arbitration clauses. 

Sec. 414. Hedge fund regulation. 

Sec. 415. Investor education and the Internet.

1 SEC. 2. DEFINITIONS. 

2 In this Act, the following definitions shall apply: 

3 (1) COMMISSION.—The term ‘‘Commission’’ 

4 means the Securities and Exchange Commission. 

5 (2) INVESTMENT ADVISER.—The term ‘‘invest6 ment adviser’’ has the same meaning as in section 

7 2(a)(20) of the Investment Company Act of 1940 

8 (15 U.S.C. 80a–2(a)(20)). 
3

•S 2059 IS 

1 (3) INVESTMENT COMPANY—The term ‘‘invest2 ment company’’ has the same meaning as in section 

3 3 of the Investment Company Act of 1940 (15 

4 U.S.C. 80–3). 

5 (4) REGISTERED INVESTMENT COMPANY.—The 

6 term ‘‘registered investment company’’ means an in7 vestment company that is registered under section 8 

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

9 80a–8). 

10 SEC. 3. RULEMAKING. 

11 (a) TIMING.—Unless otherwise specified in this Act 

12 or the amendments made by this Act, the Commission 

13 shall issue, in final form, all rules and regulations required 

14 by this Act and the amendments made by this Act not 

15 later than 180 days after the date of enactment of this 

16 Act. 

17 (b) AUTHORITY TO DEFINE TERMS.—The Commis18 sion may, in issuing rules and regulations under this Act 

19 or the amendments made by this Act, define any term 

20 used in this Act or such amendments that is not otherwise 

21 defined for purposes of this Act or such amendment, as 

22 the Commission determines necessary and appropriate. 

23 (c) EXEMPTION AUTHORITY.—The Commission may, 

24 in issuing rules and regulations under this Act or the 

25 amendments made by this Act, exempt any investment 
4

•S 2059 IS 

1 company or other person from the application of such 

2 rules, as the Commission determines is necessary and ap3 propriate, in the public interest or for the protection of 

4 investors.

5 TITLE I—FUND GOVERNANCE 

6 SEC. 110. INDEPENDENT DIRECTORS. 

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

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

9 10(a)) is amended—

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

11 following: ‘‘shall—

12 ‘‘(1) have’’; 

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

14 ‘‘25 percent’’; 

15 (3) by striking the period at the end and insert16 ing a semicolon; and 

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

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

19 an interested person of such registered company; or 

20 ‘‘(3) have as a member of its board of directors 

21 any person that is not an interested person of such 

22 registered investment company—

23 ‘‘(A) who has served without being ap24 proved or elected by the shareholders of such 
5

•S 2059 IS 

1 registered investment company at least once 

2 every 5 years; and 

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

4 on an annual basis, by a majority of the direc5 tors who are not interested persons, after rea6 sonable inquiry by such directors, not to have 

7 any material business or familial relationship 

8 with the registered investment company, a sig9 nificant service provider to the company, or any 

10 entity controlling, controlled by, or under com11 mon control with such service provider, that is 

12 likely to impair the independence of the direc13 tor.’’. 

14 (b) ACTION BY INDEPENDENT DIRECTORS.—Section 

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

16 80a–10) is amended by adding at the end the following: 

17 ‘‘(i) INDEPENDENT COMMITTEE.—

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

19 of directors of a registered investment company who 

20 are not interested persons of such registered invest21 ment company shall establish a committee comprised 

22 solely of such members, which committee shall be re23 sponsible for—

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

25 election to the board of directors;
6

•S 2059 IS 

1 ‘‘(B) adopting qualification standards for 

2 the nomination of directors; and 

3 ‘‘(C) determining the compensation to be 

4 paid to directors. 

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

6 under paragraph (1)(B) shall be disclosed in the reg7 istration statement of the registered investment com8 pany.’’. 

9 (c) DEFINITION OF INTERESTED PERSON.—Section 

10 2(a)(19) of the Investment Company Act of 1940 (15 

11 U.S.C. 80a–2) is amended—

12 (1) in subparagraph (A)—

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

14 inserting ‘‘5’’; and 

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

16 the following: 

17 ‘‘(vii) any natural person who has 

18 served as an officer or director, or as an 

19 employee within the preceding 10 fiscal 

20 years, of an investment adviser or principal 

21 underwriter to such registered investment 

22 company, or of any entity controlling, con23 trolled by, or under common control with 

24 such investment adviser or principal under25 writer; 
7

•S 2059 IS 

1 ‘‘(viii) any natural person who has 

2 served as an officer or director, or as an 

3 employee within the preceding 10 fiscal 

4 years, of any entity that has within the 

5 preceding 5 fiscal years acted as a signifi6 cant service provider to such registered in7 vestment company, or of any entity con8 trolling, controlled by, or under the com9 mon control with such service provider; 

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

11 member of a class of persons that the 

12 Commission, by rule or regulation, deter13 mines is unlikely to exercise an appropriate 

14 degree of independence as a result of—

15 ‘‘(I) a material business relation16 ship with the investment company or 

17 an affiliated person of such invest18 ment company; 

19 ‘‘(II) a close familial relationship 

20 with any natural person who is an af21 filiated person of such investment 

22 company; or 

23 ‘‘(III) any other reason deter24 mined by the Commission.’’; 

25 (2) in subparagraph (B)—
8

•S 2059 IS 

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

2 inserting ‘‘5’’; and 

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

4 the following: 

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

6 member of a class of persons that the 

7 Commission, by rule or regulation, deter8 mines is unlikely to exercise an appropriate 

9 degree of independence as a result of—

10 ‘‘(I) a material business relation11 ship with such investment adviser or 

12 principal underwriter or affiliated per13 son of such investment adviser or 

14 principal underwriter; 

15 ‘‘(II) a close familial relationship 

16 with any natural person who is an af17 filiated person of such investment ad18 viser or principal underwriter; or 

19 ‘‘(III) any other reason as deter20 mined by the Commission.’’. 

21 (d) DEFINITION OF SIGNIFICANT SERVICE PRO22 VIDER.—Section 2(a) of the Investment Company Act of 

23 1940 is amended by adding at the end the following: 

24 ‘‘(53) SIGNIFICANT SERVICE PROVIDER.—
9

•S 2059 IS 

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

2 days after the date of enactment of the Mutual 

3 Fund Reform Act of 2004, the Commission 

4 shall issue final rules defining the term ‘signifi5 cant service provider’. 

6 ‘‘(B) REQUIREMENTS.—The definition de7 veloped under paragraph (1) shall include, at a 

8 minimum, the investment adviser and principal 

9 underwriter of a registered investment company 

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

11 SEC. 111. STUDY OF DIRECTOR COMPENSATION AND INDE12 PENDENCE. 

13 (a) IN GENERAL.—The Commission shall conduct a 

14 study of—

15 (1) whether any limits should be placed upon 

16 the amount of compensation paid by a registered in17 vestment company or any affiliate of such company 

18 to a director thereof; and 

19 (2) whether a director of a registered invest20 ment company who is otherwise not an interested 

21 person of a registered investment company, as de22 fined in section 2(a)(19) of the Investment Company 

23 Act of 1940, as amended by this Act, but serves as 

24 a director of multiple registered investment compa25 nies, or receives substantial compensation from the 
10

•S 2059 IS 

1 investment adviser of any such company, should be 

2 considered an ‘‘interested person’’ for purposes of 

3 section 2 of the Investment Company Act of 1940. 

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

5 of enactment of this Act, the Commission shall submit a 

6 report regarding the study conducted under subsection (a) 

7 to—

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

9 Urban Affairs of the Senate; and 

10 (2) the Committee on Financial Services of the 

11 House of Representatives. 

12 SEC. 112. FIDUCIARY DUTIES OF DIRECTORS. 

13 Section 10 of the Investment Company Act of 1940 

14 (15 U.S.C. 80a–10), as amended by this Act, is amended 

15 by adding at the end the following: 

16 ‘‘(j) FIDUCIARY DUTY OF DIRECTORS.—

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

18 of directors of a registered investment company shall 

19 have a fiduciary duty to act with loyalty and care, 

20 in the best interests of the shareholders. 

21 ‘‘(2) RULEMAKING.—The Commission shall 

22 promulgate rules to clarify the scope of the fiduciary 

23 duty under paragraph (1), which rules shall, at a 

24 minimum, require the directors of a registered in25 vestment company to—
11

•S 2059 IS 

1 ‘‘(A) determine the extent to which inde2 pendent and reliable sources of information are 

3 sufficient to discharge director responsibilities; 

4 ‘‘(B) negotiate management and advisory 

5 fees with due regard for the actual cost of such 

6 services, including economies of scale; 

7 ‘‘(C) evaluate the totality of fees with ref8 erence to the interests of shareholders; 

9 ‘‘(D) evaluate the quality of the manage10 ment of the company and potentially superior 

11 alternatives; 

12 ‘‘(E) evaluate the quality, comprehensive13 ness, and clarity of disclosures to shareholders 

14 regarding costs; 

15 ‘‘(F) evaluate any distribution or mar16 keting plan of the company, including its costs 

17 and benefits; 

18 ‘‘(G) evaluate the size of the portfolio of 

19 the company and its suitability to the interests 

20 of shareholders; 

21 ‘‘(H) implement and monitor policies to 

22 ensure compliance with applicable securities 

23 laws; and 

24 ‘‘(I) implement and monitor policies with 

25 respect to predatory trading practices.’’. 
12

•S 2059 IS 

1 SEC. 113. FIDUCIARY DUTY OF INVESTMENT ADVISER. 

2 Section 36 of the Investment Company Act of 1940 

3 (15 U.S.C. 80a–35(b)) is amended—

4 (1) by redesignating subsection (c) as sub5 section (d); and 

6 (2) by inserting after subsection (b) the fol7 lowing: 

8 ‘‘(c) DUTIES WITH RESPECT TO COMPENSATION

9 AND PROVISION OF INFORMATION.—For purposes of sub10 sections (a) and (b), the fiduciary duty of an investment 

11 adviser—

12 ‘‘(1) with respect to any compensation received, 

13 may require reasonable reference to the actual costs 

14 of the adviser and economies of scale; and 

15 ‘‘(2) shall include a duty to supply such mate16 rial information as is necessary for the independent 

17 directors of a registered investment company with 

18 whom the adviser is employed to review and govern 

19 such company.’’. 

20 SEC. 114. TERMINATION OF FUND ADVISER. 

21 The Commission shall promulgate such rules as it de22 termines necessary in the public interest or for the protec23 tion of investors to facilitate the process through which 

24 the independent directors of a registered investment com25 pany may terminate the services of the investment adviser 

26 of such company in the good faith exercise of their fidu-
13

•S 2059 IS 

1 ciary duties, without undue exposure to financial or litiga2 tion risk. 

3 SEC. 115. INDEPENDENT ACCOUNTING AND AUDITING. 

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

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

6 (1) in subsection (a)—

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

8 inserting the following: 

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

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

11 beginning of the fiscal year or before the annual 

12 meeting of stockholders in that year by the vote, 

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

14 audit committee of such registered investment com15 pany; 

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

17 for ratification or rejection at the next succeeding 

18 annual meeting of stockholders if such meeting be 

19 held, except that any vacancy occurring between an20 nual meetings, due to the death or resignation of the 

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

22 of the members of the audit committee of such reg23 istered company, cast in person at a meeting called 

24 for the purpose of voting on such action;’’; and 
14

•S 2059 IS 

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

2 ‘‘The Commission, by rule, regulation, or order, 

3 may exempt a registered management company 

4 or registered face-amount certificate company 

5 otherwise subject to this subsection from the re6 quirement in paragraph (1) that the votes by 

7 the members of the audit committee be cast at 

8 a meeting in person, when such a requirement 

9 is impracticable, subject to such conditions as 

10 the Commission may require.’’; and 

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

12 ‘‘(d) AUDIT COMMITTEE REQUIREMENTS.—

13 ‘‘(1) REQUIREMENTS AS PREREQUISITE TO FIL14 ING FINANCIAL STATEMENTS.—Any registered man15 agement company or registered face-amount certifi16 cate company that files with the Commission any fi17 nancial statement signed or certified by an inde18 pendent public accountant shall comply with the re19 quirements of paragraphs (2) through (6) of this 

20 subsection and any rule or regulation of the Com21 mission issued thereunder. 

22 ‘‘(2) RESPONSIBILITY RELATING TO INDE23 PENDENT PUBLIC ACCOUNTANTS.—The audit com24 mittee of the registered investment company, in its 

25 capacity as a committee of the board of directors,
15

•S 2059 IS 

1 shall be directly responsible for the appointment, 

2 compensation, and oversight of the work of any inde3 pendent public accountant employed by the reg4 istered investment company (including resolution of 

5 disagreements between management and the auditor 

6 regarding financial reporting) for the purpose of pre7 paring or issuing the audit report or related work, 

8 and each such independent public accountant shall 

9 report directly to the audit committee. 

10 ‘‘(3) INDEPENDENCE.—

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

12 audit committee of the registered investment 

13 company shall be a member of the board of di14 rectors of the company, and shall otherwise be 

15 independent. 

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

17 to be independent for purposes of this para18 graph, a member of an audit committee of a 

19 registered investment company may not, other 

20 than in his or her capacity as a member of the 

21 audit committee, the board of directors, or any 

22 other board committee—

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

24 or other compensatory fee from the reg25 istered investment company or the invest-
16

•S 2059 IS 

1 ment adviser or principal underwriter of 

2 the registered investment company; or

3 ‘‘(ii) be an interested person of the 

4 registered investment company. 

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

6 registered investment company shall establish proce7 dures for—

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

9 of complaints received by the registered invest10 ment company regarding accounting, internal 

11 accounting controls, or auditing matters; and 

12 ‘‘(B) the confidential, anonymous submis13 sion by employees of the registered investment 

14 company and its investment adviser or principal 

15 underwriter of concerns regarding questionable 

16 accounting or auditing matters. 

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

18 audit committee of the registered investment com19 pany shall have the authority to engage independent 

20 counsel and other advisers, as it determines nec21 essary to carry out its duties. 

22 ‘‘(6) FUNDING.—The registered investment 

23 company shall provide appropriate funding, as deter24 mined by the audit committee, in its capacity as a 
17

•S 2059 IS 

1 committee of the board of directors, for payment of 

2 compensation—

3 ‘‘(A) to the independent public accountant 

4 employed by the registered investment company 

5 for the purpose of rendering or issuing the 

6 audit report; 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 amongst 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) of 

21 the Securities Exchange Act of 1934 (15 U.S.C. 78j–

22 1(m)) is amended by adding at the end the following: 

23 ‘‘(7) EXEMPTION FOR INVESTMENT COMPA24 NIES.—Effective one year after the date of enact25 ment of the Mutual Fund Reform Act of 2004, for 
18

•S 2059 IS 

1 purposes of this subsection, the term ‘issuer’ shall 

2 not include any investment company that is reg3 istered under section 8 of the Investment Company 

4 Act of 1940.’’. 

5 (c) IMPLEMENTATION.—The Commission shall issue 

6 final regulations to carry out section 32(d) of the Invest7 ment Company Act of 1940, as added by subsection (a) 

8 of this section. 

9 SEC. 116. PREVENTION OF FRAUD; INTERNAL COMPLIANCE 

10 AND CONTROL PROCEDURES. 

11 (a) DETECTION AND PREVENTION OF FRAUD.—Sec12 tion 17(j) of the Investment Company Act of 1940 (15 

13 U.S.C. 80a–17(j)) is amended to read as follows: 

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

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

16 DECEPTION, AND MANIPULATION.—It shall be un17 lawful for any affiliated person of or principal under18 writer for a registered investment company or any 

19 affiliated person of an investment adviser of or prin20 cipal underwriter for a registered investment com21 pany, to engage in any act, practice, or course of 

22 business in connection with the purchase or sale, di23 rectly or indirectly, by such person of any security 

24 held or to be acquired by such registered investment 

25 company, or any security issued by such registered 
19

•S 2059 IS 

1 investment company or by an affiliated registered in2 vestment company, in contravention of such rules as 

3 the Commission may adopt to define, and prescribe 

4 means reasonably necessary to prevent, such acts, 

5 practices, or courses of business as are fraudulent, 

6 deceptive or manipulative. 

7 ‘‘(2) CODES OF ETHICS.—The rules adopted 

8 under paragraph (1) shall include requirements for 

9 the adoption of codes of ethics by a registered in10 vestment company and investment advisers of, and 

11 principal underwriters for, such investment compa12 nies establishing such standards as are reasonably 

13 necessary to prevent such acts, practices, or courses 

14 of business. Such rules and regulations shall require 

15 each such registered investment company to disclose 

16 such codes of ethics (and any changes therein) in 

17 the periodic report to shareholders of such company, 

18 and to disclose such code of ethics and any waivers 

19 and material violations thereof on a readily acces20 sible electronic public information facility of such 

21 company and in such additional form and manner as 

22 the Commission shall require by rule or regulation. 

23 ‘‘(3) ADDITIONAL COMPLIANCE PROCEDURES.—

24 The rules adopted under paragraph (1) shall—
20

•S 2059 IS 

1 ‘‘(A) require each registered investment 

2 company and investment adviser to adopt and 

3 implement general policies and procedures rea4 sonably designed to prevent violations of this 

5 title, the Securities Act of 1933 (15 U.S.C. 78a 

6 et seq.), the Securities Exchange Act of 1934 

7 (15 U.S.C. 78a et seq.), the Sarbanes-Oxley Act 

8 of 2002 (15 U.S.C. 7201 et seq.) and amend9 ments made by that Act, the Trust Indenture 

10 Act of 1939 (15 U.S.C. 77aaa et seq.), the In11 vestment Advisers Act of 1940 (15 U.S.C. 80b 

12 et seq.), the Securities Investor Protection Act 

13 of 1970 (15 U.S.C. 78aaa et seq.), subchapter 

14 II of chapter 53 of title 31, United States Code, 

15 chapter 2 of title I of Public Law 91–508 (12 

16 U.S.C. 1951 et seq.), or section 21 of the Fed17 eral Deposit Insurance Act (12 U.S.C. 1829b); 

18 ‘‘(B) require each registered investment 

19 company and registered investment adviser to 

20 review such policies and procedures annually for 

21 their adequacy and the effectiveness of their im22 plementation; and 

23 ‘‘(C) require each registered investment 

24 company to appoint a chief compliance officer 
21

•S 2059 IS 

1 to be responsible for overseeing such policies 

2 and procedures—

3 ‘‘(i) whose compensation shall be ap4 proved by the members of the board of di5 rectors of the company who are not inter6 ested persons of the company; 

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

8 members of the board of directors of the 

9 company who are not interested persons of 

10 such company, privately as such members 

11 request, but not less frequently than annu12 ally; and 

13 ‘‘(iii) whose report to such members 

14 shall include any violations or waivers of, 

15 and any other significant issues arising 

16 under, such policies and procedures. 

17 ‘‘(4) CERTIFICATIONS.—The rules adopted 

18 under paragraph (1) shall require each senior execu19 tive officer, or such officers designated by the Com20 mission, of an investment adviser of a registered in21 vestment company to certify in each periodic report 

22 to shareholders, or other appropriate disclosure doc23 ument, that—

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

25 that the determination of current net asset 
22

•S 2059 IS 

1 value of any redeemable security issued by the 

2 company used in computing periodically the 

3 current price for the purpose of purchase, re4 demption, and sale complies with the require5 ments of this title and the rules and regulations 

6 issued under this title, and the company is in 

7 compliance with such procedures; 

8 ‘‘(B) procedures are in place to ensure 

9 that, if the shares of the company are offered 

10 as different classes of shares, such classes are 

11 designed in the interests of shareholders, and 

12 could reasonably be an appropriate investment 

13 option for a shareholder; 

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

15 information about the portfolio securities of the 

16 company is not disclosed in violation of the se17 curities laws or the code of ethics of the com18 pany; 

19 ‘‘(D) the members of the board of directors 

20 who are not interested persons of the company 

21 have reviewed and approved the compensation 

22 of the portfolio manager of the company in con23 nection with their consideration of the invest24 ment advisory contract under section 15(c); and 
23

•S 2059 IS 

1 ‘‘(E) the company has established and en2 forces a code of ethics, as required by para3 graph (2).’’. 

4 (b) WHISTLEBLOWER PROTECTION.—Section 

5 1514A(a) of title 18, United States Code, is amended by 

6 striking the matter preceding paragraph (1) and inserting 

7 the following: 

8 ‘‘(a) WHISTLEBLOWER PROTECTION FOR EMPLOY9 EES OF PUBLICLY TRADED COMPANIES AND REGISTERED

10 INVESTMENT COMPANIES.—No company with a class of 

11 securities registered under section 12 of the Securities Ex12 change Act of 1934 (15 U.S.C. 78l), or that is required 

13 to file reports under section 15(d) of the Securities and 

14 Exchange Act of 1934 (15 U.S.C. 78o(d)), or that is an 

15 investment adviser, principal underwriter, or significant 

16 service provider (as such terms are defined under section 

17 2(a) of the Investment Company Act of 1940 (15 U.S.C. 

18 80a–2(a)) of an investment company which is registered 

19 under section 8 of the Investment Company Act of 1940, 

20 or any officer, employee, contractor, subcontractor, or 

21 agent of such company, may discharge, demote, suspend, 

22 threaten, harass, or in any other manner discriminate 

23 against an employee in the terms and conditions of em24 ployment because of any lawful act done by the em25 ployee—’’.
24

•S 2059 IS 

1 TITLE II—FUND TRANSPARENCY 

2 SEC. 210. COST CONSOLIDATION AND CLARITY. 

3 (a) EXPENSE RATIO COMPUTATION.—

4 (1) IN GENERAL.—The Commission shall, by 

5 rule, develop a standardized method of calculating 

6 the expense ratio of a registered investment com7 pany that accounts for as many operating costs to 

8 shareholders of such companies as is practicable. 

9 (2) SEPARATE DISCLOSURES.—In developing 

10 the method of calculation required under paragraph 

11 (1), if the Commission determines that the inclusion 

12 of certain costs in such calculation will lead to a sig13 nificant risk of confusing or misleading shareholders, 

14 the Commission shall develop separate standardized 

15 methods for the calculation and disclosure of such 

16 costs. 

17 (b) TRANSACTION COST RATIO.—The Commission 

18 shall, by rule, develop a standardized method of computing 

19 the transaction cost ratio of a registered investment com20 pany that practicably and fairly accounts for actual trans21 action costs to shareholders, including, at a minimum, bro22 kerage commissions and bid-ask spread costs. Such com23 putation, if necessary for ease of administration, may be 

24 based upon a fair method of estimation or a standardized 

25 derivation from easily ascertainable information.
25

•S 2059 IS 

1 (c) DISCLOSURE OF EXPENSE RATIO AND TRANS2 ACTION COST RATIO.—The Commission shall, by rule, re3 quire the prominent disclosure of the expense ratio and 

4 the transaction cost ratio of a registered company, both 

5 separately and as a total investment cost ratio, in—

6 (1) each annual report of the registered invest7 ment company; 

8 (2) any prospectus of the registered investment 

9 company, as part of a fee table; and 

10 (3) such other filings with the Commission as 

11 the Commission determines appropriate. 

12 (d) ACTUAL COST DISCLOSURE.—The Commission 

13 shall, by rule, require, on at least an annual basis, the 

14 prominent disclosure in the shareholder account statement 

15 of a registered investment company of the actual dollar 

16 amount of the projected annual costs of each shareholder 

17 of the company, based upon the asset value of the share18 holder at the time of the disclosure. 

19 (e) DEFINITION OF FEES AND EXPENSES.—

20 (1) IN GENERAL.—The Commission shall, by 

21 rule, define all specific allowable types or categories 

22 of fees and expenses that may be borne by the 

23 shareholders of a registered investment company. 

24 (2) NEW FEES AND EXPENSES.—No new fee or 

25 expense, other than any defined under paragraph 
26

•S 2059 IS 

1 (1), shall be borne by the shareholders of a reg2 istered investment company, unless the Commission 

3 finds that such new fee or expense fairly reflects the 

4 services provided to, or is in the best interests of the 

5 shareholders of—

6 (A) a particular registered investment com7 pany; 

8 (B) specific types or categories of reg9 istered investment companies; or 

10 (C) registered investment companies in 

11 general. 

12 (f) COST STRUCTURES.—The Commission shall pro13 mulgate such rules or regulations as are necessary—

14 (1) to promote the standardization and sim15 plification of the disclosure of the cost structures of 

16 registered investment companies; and 

17 (2) to ensure that the shareholders of such reg18 istered investment companies receive all material in19 formation regarding such costs—

20 (A) in a nonmisleading manner; and 

21 (B) in such form and prominence as to fa22 cilitate, to the extent practicable, ease of com23 prehension and comparison of such costs. 

24 (g) DESCRIPTIONS OF FEES, EXPENSES, AND

25 COSTS.—The Commission shall, by rule, require—
27

•S 2059 IS 

1 (1) the disclosure, in any annual or periodic re2 port filed with the Commission or any prospectus de3 livered to the shareholders of a registered investment 

4 company, of all types of fees, expenses, or costs 

5 borne by shareholders; 

6 (2) a clear definition of each such fee, expense, 

7 or cost; and 

8 (3) information as to where shareholders may 

9 find out more information concerning such fees, ex10 penses, or costs. 

11 SEC. 211. ADVISOR COMPENSATION AND OWNERSHIP OF 

12 FUND SHARES. 

13 (a) COMPENSATION OF INVESTMENT ADVISER.—The 

14 Commission shall, by rule, require—

15 (1) the disclosure to the shareholders of a reg16 istered investment company of— 

17 (A) the amount and structure of, or the 

18 method used to determine, the compensation 

19 paid by the registered investment company to 

20 the portfolio manager or portfolio management 

21 team of the investment adviser; and 

22 (B) the ownership interest in such com23 pany of the portfolio manager or portfolio man24 agement team; and 
28

•S 2059 IS 

1 (2) the disclosure to the board of directors of 

2 the registered investment company of all trans3 actions in the securities of the company by the port4 folio manager or management team of the invest5 ment adviser of such company. 

6 (b) FORM OF DISCLOSURE.—The disclosures re7 quired under subparagraphs (A) and (B) of subsection 

8 (a)(1) shall be made by a registered investment company 

9 in—

10 (1) the registration statement of the company; 

11 and 

12 (2) any other filings with the Commission that 

13 the Commission determines appropriate. 

14 SEC. 212. POINT OF SALE AND ADDITIONAL DISCLOSURE 

15 OF BROKER COMPENSATION. 

16 Section 15(b) of the Securities Exchange Act of 1934 

17 (15 U.S.C. 78o(b)) is amended by adding at the end the 

18 following: 

19 ‘‘(11) BROKER DISCLOSURES IN MUTUAL FUND

20 TRANSACTIONS.—

21 ‘‘(A) IN GENERAL.—Each broker shall dis22 close in writing to each person that purchases 

23 the shares of an investment company registered 

24 under section 8 of the Investment Company Act 

25 of 1940 (15 U.S.C. 80a–8)—
29

•S 2059 IS 

1 ‘‘(i) the source and amount of any 

2 compensation received or to be received by 

3 the broker in connection with such trans4 action; and 

5 ‘‘(ii) such other information as the 

6 Commission determines appropriate. 

7 ‘‘(B) TIMING OF DISCLOSURE.—The dis8 closures required under subparagraph (A) shall 

9 be made at or before the time of the purchase 

10 transaction. 

11 ‘‘(C) LIMITATION.—The disclosures re12 quired under subparagraph (A) may not be 

13 made exclusively in—

14 ‘‘(i) a registration statement or pro15 spectus of the registered investment com16 pany; or 

17 ‘‘(ii) any other filing of a registered 

18 investment company with the Commis19 sion.’’. 

20 SEC. 213. BREAKPOINT DISCOUNTS. 

21 The Commission, by rule, shall require the disclosure 

22 by any registered investment company, in any quarterly 

23 or other periodic report filed with the Commission, infor24 mation concerning discounts on front-end sales loads for
30

•S 2059 IS 

1 which shareholders may be eligible, including the min2 imum purchase amounts required for such discounts. 

3 SEC. 214. PORTFOLIO TURNOVER RATIO. 

4 The Commission, by rule, shall require the disclosure, 

5 by any registered investment company, in any quarterly 

6 or periodic report filed with the Commission, and in any 

7 prospectus delivered to the shareholders of such company, 

8 of the portfolio turnover ratio of the company, and an ex9 planation of its meaning and implications for cost and per10 formance. Such rules shall require the disclosures to be 

11 prominently displayed within the appropriate document. 

12 SEC. 215. PROXY VOTING POLICIES AND RECORD. 

13 Section 30 of the Investment Company Act of 1940 

14 (15 U.S.C. 80a–29) is amended by adding at the end the 

15 following: 

16 ‘‘(k) PROXY VOTING DISCLOSURE.—

17 ‘‘(1) IN GENERAL.—Each registered investment 

18 company, other than a small business investment 

19 company, shall file with the Commission, not later 

20 than August 31 of each year, an annual report, on 

21 a form prescribed by the Commission by rule, con22 taining the proxy voting record of the registrant and 

23 policies of the company with respect to the voting of 

24 such proxies for the most recent 12-month period 

25 ending on June 30. 
31

•S 2059 IS 

1 ‘‘(2) NOTICE IN FINANCIAL STATEMENTS.—The 

2 financial statements of each registered investment 

3 company shall state that information regarding how 

4 the company voted proxies and proxy voting policies 

5 relating to portfolio securities during the most re6 cent 12-month period ending on June 30 is avail7 able— 

8 ‘‘(A) without charge, upon request, by call9 ing a specified toll-free (or collect) telephone 

10 number; or on or through the company’s 

11 website at a specified Internet address, or both; 

12 and 

13 ‘‘(B) on the website of the Commission.’’. 

14 SEC. 216. CUSTOMER INFORMATION FROM ACCOUNT 

15 INTERMEDIARIES. 

16 (a) IN GENERAL.—The Commission shall, by rule, re17 quire that each account intermediary of a registered in18 vestment company provide to such company, with respect 

19 to each account serviced by the intermediary, such infor20 mation as is necessary for the company to enforce its in21 vestment, trading, and fee policies. 

22 (b) REQUIREMENTS.—The information provided by a 

23 registered investment company under subsection (a) shall 

24 include, at a minimum—
32

•S 2059 IS 

1 (1) the name under which the account is opened 

2 with the intermediary; 

3 (2) the taxpayer identification number of such 

4 person; 

5 (3) the mailing address of such person; and 

6 (4) individual transaction data for all pur7 chases, redemptions, transfers, and exchanges by or 

8 on behalf of such person. 

9 (c) PRIVACY OF INFORMATION.—The information 

10 provided under subsection (a), and the use thereof, shall 

11 be subject to all Federal and State laws with regard to 

12 privacy and proprietary information. 

13 SEC. 217. ADVERTISING. 

14 (a) PERFORMANCE ADVERTISING.—The Commission 

15 shall promulgate such rules as the Commission determines 

16 necessary with respect to the advertising of a registered 

17 investment company regarding—

18 (1) unrepresentative short-term performance; 

19 (2) performance based upon an undisclosed or 

20 improbable event; and 

21 (3) performance based upon incomplete or mis22 leading data. 

23 (b) DOLLAR AND TIME-WEIGHTED RETURNS.—

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

25 the Commission shall, by rule, require each reg-
33

•S 2059 IS 

1 istered investment company to disclose, in its annual 

2 report and any prospectus delivered to shareholders, 

3 dollar-weighted returns and time-weighted returns 

4 for each of—

5 (A) the preceding fiscal year; 

6 (B) the preceding 5 fiscal years; 

7 (C) the preceding 10 fiscal years; and 

8 (D) the life of the company. 

9 (2) EXCEPTION.—The Commission may omit or 

10 require additional disclosures required under para11 graph (1) for such time periods as the Commission 

12 determines necessary. 

13 (3) COMMISSION USE OF BENCHMARKS.—The 

14 Commission may require, in the interest of facili15 tating non-misleading disclosures, that any perform16 ance-related advertising by a registered investment 

17 company be accompanied by such benchmarks as the 

18 Commission may deem appropriate. 

19 (c) SUBSIDIZED YIELDS.—The Commission shall, by 

20 rule, require that any registered investment company that 

21 discloses in any publication a subsidized yield to disclose 

22 in the same publication the amount and duration of such 

23 subsidy.
34

•S 2059 IS 

1 TITLE III—FUND REGULATION 

2 AND OVERSIGHT 

3 SEC. 310. PROHIBITION OF ASSET-BASED DISTRIBUTION 

4 EXPENSES. 

5 (a) REPEAL OF RULE 12b–1.—

6 (1) IN GENERAL.—Beginning 180 days after 

7 the date of enactment of this Act (or such earlier 

8 time as the Commission may elect), as in effect on 

9 the date of enactment of this Act, section 270.12b–

10 1 of chapter II of title 17 of the Code of Federal 

11 Regulations, promulgated under section 12 of the 

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

13 12), is repealed, and shall have no force or effect. 

14 (2) PRESERVATION OF ACTIONS.—Paragraph 

15 (1) shall have no effect on any case pending or pen16 alty imposed under section 270.12b–1 of the Code of 

17 Federal Regulations prior to the date of repeal 

18 under paragraph (1). 

19 (b) PAYMENT OF DISTRIBUTION EXPENSES FROM

20 MANAGEMENT FEE.—Section 12 of the Investment Com21 pany Act of 1940 (15 U.S.C. 80a–12) is amended by add22 ing at the end the following: 

23 ‘‘(h) PAYMENT OF DISTRIBUTION EXPENSES.—Not24 withstanding any provision of subsection (b), or any rule 

25 or regulation promulgated thereunder, distribution ex-
35

•S 2059 IS 

1 penses incurred by an investment adviser may be paid out 

2 of the management fee received by the investment ad3 viser.’’. 

4 (c) SUMS EXPENDED PROMOTING SALE OF SECURI5 TIES.—The Commission shall, by rule—

6 (1) require that any sums expended by the in7 vestment adviser of a registered investment company 

8 to promote or facilitate the sale of the securities of 

9 such company be disclosed to the board of directors 

10 of the company; 

11 (2) require that such sums be accounted for 

12 and identified in the expense ratio of any such com13 pany; and 

14 (3) authorize the board of directors of any such 

15 company to prohibit its investment adviser from 

16 using any compensation received from the company 

17 for distribution expenses that the board determines 

18 not to be in the best interest of the shareholders of 

19 the company. 

20 (d) PROHIBITION OF ASSET-BASED FEES.—Section 

21 12 of the Investment Company Act of 1940 (15 U.S.C. 

22 80a–12), as amended by subsection (a), is amended by 

23 adding at the end the following: 

24 ‘‘(i) ASSET-BASED FEES.—
36

•S 2059 IS 

1 ‘‘(1) IN GENERAL.—It shall be unlawful for any 

2 registered investment company to pay asset-based 

3 fees to any broker or dealer in connection with the 

4 offer or sale of the securities of such investment 

5 company. 

6 ‘‘(2) DEFINITION OF ASSET-BASED FEES.—The 

7 Commission shall, by rule, define the term ‘asset8 based fees’ for purposes of this subsection.’’. 

9 SEC. 311. PROHIBITION ON REVENUE SHARING, DIRECTED 

10 BROKERAGE, AND SOFT DOLLAR ARRANGE11 MENTS. 

12 (a) IN GENERAL.—The Investment Company Act of 

13 1940 (15 U.S.C. 80a–1 et seq.) is amended by inserting 

14 after section 12 the following: 

15 ‘‘SEC. 12A. PROHIBITION ON REVENUE SHARING, DIRECTED 

16 BROKERAGE, AND SOFT DOLLAR ARRANGE17 MENTS. 

18 ‘‘(a) REVENUE SHARING ARRANGEMENTS.—It shall 

19 be unlawful for any investment adviser to enter into a rev20 enue sharing arrangement with any broker or dealer with 

21 respect to the securities of a registered investment com22 pany. 

23 ‘‘(b) DIRECTED BROKERAGE ARRANGEMENTS.—It 

24 shall be unlawful for any registered investment company, 
37

•S 2059 IS 

1 or any affiliate of such company, to enter into a directed 

2 brokerage arrangement with a broker or dealer. 

3 ‘‘(c) SOFT-DOLLAR ARRANGEMENTS.—It shall be un4 lawful for any registered investment company or reg5 istered investment adviser to enter into a soft-dollar ar6 rangement with any broker or dealer. 

7 ‘‘(d) REGULATIONS RESPECTING SECTION 28(E) OF

8 THE SECURITIES EXCHANGE ACT OF 1934.—The Com9 mission shall, by rule, narrow the soft-dollar safe harbor 

10 under section 28(e) of the Securities Exchange Act of 

11 1934 (15 U.S.C. 78bb(e)(1)) to promote such parity as 

12 the Commission determines appropriate, and in the best 

13 interests of shareholders of a registered investment com14 pany, between registered investment companies governed 

15 by section 12A, and companies not covered by section 12A. 

16 ‘‘(e) DEFINITIONS.—

17 ‘‘(1) IN GENERAL.—In this section—

18 ‘‘(A) the term ‘directed brokerage arrange19 ment’ means the direction of discretionary bro20 kerage by an investment company or an affil21 iate of that company, to a broker or dealer in 

22 exchange for services other than trade execu23 tions; 

24 ‘‘(B) the term ‘revenue sharing arrange25 ment’ means any direct or indirect payment 
38

•S 2059 IS 

1 made by an investment adviser (or any affiliate 

2 of an investment adviser) to a broker or dealer 

3 for the purpose of promoting the sales of secu4 rities of a registered investment company, other 

5 than any payment made directly by a share6 holder as a commission for the purchase of such 

7 securities; 

8 ‘‘(C) the term ‘soft-dollar arrangement’ 

9 means payments to a broker or dealer for best 

10 trade executions in exchange for, or which gen11 erate credits for, services or products other 

12 than trade executions; and 

13 ‘‘(D) the term ‘trade executions’ has the 

14 meaning given that term by the Commission, by 

15 rule; 

16 ‘‘(2) REGULATIONS.—The Commission may, by 

17 rule, refine the definitions under paragraph (1), de18 fine such other terms as the Commission determines 

19 necessary, and otherwise tailor the proscriptions set 

20 forth under this section to achieve the purposes of—

21 ‘‘(A) protecting the best interests of share22 holders of a registered investment company; 

23 ‘‘(B) minimizing or eliminating conflicts 

24 with the best interests of shareholders of a reg25 istered investment company;
39

•S 2059 IS 

1 ‘‘(C) enhancing market negotiation for and 

2 price competition in trade execution services, 

3 and products and services previously obtained 

4 under arrangements prohibited by this section; 

5 ‘‘(D) ensuring the transparency of trans6 actions for trade executions, and products and 

7 services previously obtained under arrange8 ments prohibited by this section, and disclosure 

9 to shareholders of costs associated with trade 

10 executions, and products and services previously 

11 obtained under arrangements prohibited by this 

12 section, that is simplified, clear, and com13 prehensible; and 

14 ‘‘(E) providing reasonable safe harbors for 

15 conduct otherwise consistent with such pur16 poses.’’. 

17 (b) TECHNICAL AND CONFORMING AMENDMENT.—

18 Section 28(e)(1) of the Securities Exchange Act of 1934 

19 (15 U.S.C. 78bb(e)(1)) is amended by striking ‘‘This sec20 tion is exclusive’’ and inserting ‘‘Except as provided under 

21 section 12A of the Investment Company Act of 1940, this 

22 section is exclusive’’. 

23 SEC. 312. MARKET TIMING. 

24 (a) IN GENERAL.—The Commission shall, by rule, re25 quire—
40

•S 2059 IS 

1 (1) the disclosure in any registration statement 

2 filed with the Commission by a registered investment 

3 company of the market timing policies of that com4 pany and the procedures adopted to enforce such 

5 policies; and 

6 (2) that any registered investment company 

7 that declines to adopt restrictions on market timing 

8 disclose such fact in the registration statement of 

9 the company, and in any advertising or other pub10 licly available documents, as the Commission deter11 mines necessary. 

12 (b) FUNDAMENTAL INVESTMENT POLICY.—The poli13 cies required to be disclosed under paragraph (1) shall be 

14 deemed ‘‘fundamental investment policies’’ for purposes of 

15 sections 8(b)(3) and 13(a)(3) of the Investment Company 

16 Act of 1940 (15 U.S.C. 80a–8(b)(3) and 80a–13(a)(3)). 

17 SEC. 313. ELIMINATION OF STALE PRICES. 

18 (a) IN GENERAL.—Not later than 90 days after the 

19 date of enactment of this Act, the Commission shall pre20 scribe, by rule or regulation, standards concerning the ob21 ligation of registered investment companies under the In22 vestment Company Act of 1940, to apply and use fair 

23 value methods of determination of net asset value when 

24 market quotations are unavailable or do not accurately re25 flect the fair market value of the portfolio securities of 
41

•S 2059 IS 

1 such a company, in order to prevent dilution of the inter2 ests of long-term shareholders or as necessary in the pub3 lic interest or for the protection of shareholders. 

4 (b) CONTENT.—The rule or regulation prescribed 

5 under subsection (a) shall identify, in addition to signifi6 cant events, the conditions or circumstances from which 

7 such an obligation will arise, such as the need to value 

8 securities traded on foreign exchanges, and the methods 

9 by which fair value methods shall be applied in such 

10 events, conditions, and circumstances. 

11 SEC. 314. PROHIBITION OF SHORT TERM TRADING; MANDA12 TORY REDEMPTION FEES. 

13 (a) SHORT-TERM TRADING PROHIBITED.—Section 

14 17 of the Investment Company Act of 1940 (15 U.S.C. 

15 80a–17) is amended by adding at the end the following: 

16 ‘‘(k) SHORT-TERM TRADING PROHIBITED.—

17 ‘‘(1) PROHIBITION.—It shall be unlawful for 

18 any officer, director, partner, or employee of a reg19 istered investment company, any affiliated person, 

20 investment adviser, or principal underwriter of such 

21 company, or any officer, director, partner, or em22 ployee of such an affiliated person, investment ad23 viser, or principal underwriter, to engage in any 

24 short-term transaction, in any securities issued by 

25 such company, or any affiliate of such company. 
42

•S 2059 IS 

1 ‘‘(2) LIMITATION.—This subsection does not 

2 prohibit any transaction in a money market fund, or 

3 in funds, the investment policy of which expressly 

4 permits short-term transactions, or such other cat5 egory of registered investment company as the Com6 mission shall specify, by rule. 

7 ‘‘(3) DEFINITION.—For purposes of this sub8 section, the term ‘short-term transaction’ has the 

9 meaning given that term by the Commission, by 

10 rule.’’. 

11 (b) MANDATORY REDEMPTION FEES.—The Commis12 sion shall, by rule, require any registered investment com13 pany that does not allow for market timing practices to 

14 charge a redemption fee upon the short-term redemption 

15 of any securities of such company. In determining the ap16 plication of mandatory redemption fees, shares shall be 

17 considered in the reverse order of their purchase. 

18 (c) INCREASED REDEMPTION FEES PERMITTED FOR

19 SHORT-TERM TRADING.—Not later than 90 days after the 

20 date of enactment of this Act, the Commission shall per21 mit a registered investment company to charge redemption 

22 fees in excess of 2 percent upon the redemption of any 

23 securities of such company that are redeemed within such 

24 period after their purchase as the Commission specifies 
43

•S 2059 IS 

1 in such rule to deter short term trading that is unfair to 

2 the shareholders of such company. 

3 (d) DEADLINE FOR RULES.—The Commission shall 

4 prescribe rules to implement section 17(k) of the Invest5 ment Company Act of 1940, as added by subsection (a) 

6 of this section, not later than 90 days after the date of 

7 enactment of this Act. 

8 SEC. 315. PREVENTION OF AFTER-HOURS TRADING. 

9 (a) ADDITIONAL RULES REQUIRED.—The Commis10 sion shall issue rules to prevent transactions in the securi11 ties of any registered investment company in violation of 

12 section 22 of the Investment Company Act of 1940 (15 

13 U.S.C. 80a–22), including after-hours trades that are exe14 cuted at a price based on a net asset value that was deter15 mined as of a time prior to the actual execution of the 

16 transaction. 

17 (b) TRADES COLLECTED BY INTERMEDIARIES.—The 

18 Commission shall determine the circumstances under 

19 which to permit, subject to rules of the Commission and 

20 an annual independent audit of such trades, the execution 

21 of after-hours trades that are provided to a registered in22 vestment company by a broker, dealer, retirement plan ad23 ministrator, insurance company, or other intermediary, 

24 after the time as of which the net asset value was deter25 mined.
44

•S 2059 IS 

1 SEC. 316. BAN ON JOINT MANAGEMENT OF MUTUAL FUNDS 

2 AND HEDGE FUNDS. 

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

4 Company Act of 1940 (15 U.S.C. 80a–15) is amended by 

5 adding at the end the following: 

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

7 FUNDS AND HEDGE FUNDS.—

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

9 shall be unlawful for any individual to serve or act 

10 as the portfolio manager or investment adviser of a 

11 registered open-end investment company if such in12 dividual also serves or acts as the portfolio manager 

13 or investment adviser of an investment company 

14 that is not registered or of such other categories of 

15 companies as the Commission shall prescribe by rule 

16 in order to prohibit conflicts of interest, such as con17 flicts in the selection of the portfolio securities. 

18 ‘‘(2) EXCEPTIONS.—Notwithstanding para19 graph (1), the Commission may, by rule, regulation, 

20 or order, permit joint management by a portfolio 

21 manager in exceptional circumstances when nec22 essary to protect the interest of shareholders, pro23 vided that such rule, regulation, or order requires—

24 ‘‘(A) enhanced disclosure by the registered 

25 open-end investment company to shareholders 
45

•S 2059 IS 

1 of any conflicts of interest raised by such joint 

2 management; and 

3 ‘‘(B) fair and equitable policies and proce4 dures for the allocation of securities to the port5 folios of the jointly managed companies, and 

6 certification by the members of the board of di7 rectors who are not interested persons of such 

8 registered open-end investment company, in the 

9 periodic report to shareholders, or other appro10 priate disclosure document, that such policies 

11 and procedures of such company are fair and 

12 equitable. 

13 ‘‘(3) DEFINITION.—For purposes of this sub14 section, the term ‘portfolio manager’ means the indi15 vidual or individuals who are designated as respon16 sible for decision-making in connection with the se17 curities purchased and sold on behalf of a registered 

18 open-end investment company, but shall not include 

19 individuals who participate only in making research 

20 recommendations or executing transactions on behalf 

21 of such company.’’. 

22 (b) DEADLINE FOR RULES.—The Commission shall 

23 prescribe rules to implement section 15(h) of the Invest24 ment Company Act of 1940, as added by subsection (a) 
46

•S 2059 IS 

1 of this section, not later than 90 days after the date of 

2 enactment of this Act. 

3 SEC. 317. SELECTIVE DISCLOSURES. 

4 (a) IN GENERAL.—The Commission shall promulgate 

5 such rules as the Commission determines necessary to pre6 vent the selective disclosure by a registered investment 

7 company of material information relating to the portfolio 

8 of securities held by such company. 

9 (b) REQUIREMENTS.—The rules promulgated under 

10 subsection (a) shall treat selective disclosures of material 

11 information by a registered investment company in sub12 stantially the same manner as selective disclosures by 

13 issuers of securities registered under section 12 of the Se14 curities Exchange Act of 1934 under the rules of the Com15 mission.

16 TITLE IV—STUDIES 

17 SEC. 410. STUDY OF ADVISER CONFLICT OF INTEREST. 

18 (a) IN GENERAL.—The Commission shall conduct a 

19 study of—

20 (1) the consequences of the inherent conflicts of 

21 interest confronting investment advisers employed by 

22 registered investment companies; 

23 (2) the extent to which legislative or regulatory 

24 measures could minimize such conflicts of interest; 

25 and 
47

•S 2059 IS 

1 (3) the extent to which legislative or regulatory 

2 measures could incentivize internal management of a 

3 registered investment company. 

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

5 of enactment of this Act, the Commission shall submit a 

6 report on the results of the study required under sub7 section (a) to—

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

9 Urban Affairs of the Senate; and 

10 (2) the Committee on Financial Services of the 

11 House of Representatives. 

12 SEC. 411. STUDY OF COORDINATION OF ENFORCEMENT EF13 FORTS. 

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

15 United States, with the cooperation of the Commission, 

16 shall conduct a study of the coordination of enforcement 

17 efforts between—

18 (1) the headquarters of the Commission; 

19 (2) the regional offices of the Commission; and 

20 (3) State regulatory and law enforcement agen21 cies. 

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

23 of enactment of this Act, the Commission shall submit a 

24 report on the results of the study required under sub25 section (a) to—
48

•S 2059 IS 

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

2 Urban Affairs of the Senate; and 

3 (2) the Committee on Financial Services of the 

4 House of Representatives. 

5 SEC. 412. STUDY OF COMMISSION ORGANIZATIONAL 

6 STRUCTURE. 

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

8 United States, with the cooperation of the Commission, 

9 shall conduct a study of—

10 (1) the current organizational structure of the 

11 Commission with respect to the regulation of invest12 ment companies; 

13 (2) whether the organizational structure and re14 sources of the Commission sufficiently credit the im15 portance of oversight of investment companies to the 

16 95 million investors in such companies within the 

17 United States; 

18 (3) whether certain organizational features of 

19 that structure, such as the separation of regulatory 

20 and enforcement functions, are sufficient to promote 

21 the optimal understanding of the current practices 

22 of investment companies; and 

23 (4) whether a separate regulatory entity would 

24 improve or impair effective oversight. 
49

•S 2059 IS 

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

2 of enactment of this Act, the Comptroller General shall 

3 submit a report on the results of the study required under 

4 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. 413. TRENDS IN ARBITRATION CLAUSES. 

10 (a) IN GENERAL.—The Commission shall conduct a 

11 study on the trends in arbitration clauses between brokers, 

12 dealers, and investors since December 31, 1995, and alter13 native means to avert the filing of claims in Federal or 

14 State courts. 

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

16 of enactment of this Act, the Commission shall submit a 

17 report on the results of the study required under sub18 section (a) to—

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

20 Urban Affairs of the Senate; and 

21 (2) the Committee on Financial Services of the 

22 House of Representatives. 

23 SEC. 414. HEDGE FUND REGULATION. 

24 (a) IN GENERAL.—The Commission shall conduct a 

25 study of whether additional regulation of alternative in-
50

•S 2059 IS 

1 vestment vehicles, such as hedge funds, is appropriate to 

2 deter the recurrence of trading abuses, manipulation of 

3 registered investment companies by unregistered invest4 ment companies, or other distortions that may harm inves5 tors in registered investment companies. 

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

7 of enactment of this Act, the Commission shall submit a 

8 report on the results of the study required under sub9 section (a) to—

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

11 Urban Affairs of the Senate; and 

12 (2) the Committee on Financial Services of the 

13 House of Representatives. 

14 SEC. 415. INVESTOR EDUCATION AND THE INTERNET. 

15 (a) IN GENERAL.—The Commission shall conduct a 

16 study of—

17 (1) the means of enhancing the role of the 

18 Internet in educating investors and providing timely 

19 information regarding laws, regulations, enforcement 

20 proceedings, and individual registered investment 

21 companies; 

22 (2) the feasibility of mandating that each reg23 istered investment company maintain a website on 

24 which shall be posted filings of the registered invest25 ment company with the Commission and any other 
51

•S 2059 IS 

1 material information related to the registered invest2 ment company; and 

3 (3) the means of ensuring that the EDGAR 

4 database maintained by the Commission is user5 friendly and contains a search engine that facilitates 

6 the expeditious location of material information. 

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

8 of enactment of this Act, the Commission shall submit a 

9 report on the results of the study required under sub10 section (a) to—

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

12 Urban Affairs of the Senate; and 

13 (2) the Committee on Financial Services of the 

14 House of Representatives.

Æ