I 
108TH CONGRESS 
1ST SESSION H. R. 2420
To improve transparency relating to the fees and costs that mutual fund 
investors incur and to improve corporate governance of mutual funds. 
IN THE HOUSE OF REPRESENTATIVES 
JUNE 11, 2003
Mr. BAKER (for himself, Mr. GILLMOR, Mr. OSE, Mr. SHAYS, Mr. TIBERI, 
and Ms. GINNY BROWN-WAITE of Florida) introduced the following bill; 
which was referred to the Committee on Financial Services 
A BILL 
To improve transparency relating to the fees and costs that 
mutual fund investors incur and to improve corporate 
governance of mutual funds.
Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled, 
SECTION 1. SHORT TITLE. 
This Act may be cited as the ‘‘Mutual Funds Integ-
rity and Fee Transparency Act of 2003’’. 
SEC. 2. IMPROVED TRANSPARENCY OF MUTUAL FUND 
COSTS. 
(a) REGULATION REVISION REQUIRED.—Within 270 
days after the date of enactment of this Act, the Securities
and Exchange Commission shall revise regulations under 
the Securities Act of 1933, the Securities Exchange Act 
of 1934, or the Investment Company Act of 1940, or any 
combination thereof, to require, consistent with the protec-
tion of investors and the public interest, improved disclo-
sure with respect to an open-end management investment 
company, in the quarterly statement or other periodic re-
port to shareholders or other appropriate disclosure docu-
ment, of the following: 
(1) The estimated amount, in dollars, of the op-
erating expenses of the company that are borne by 
each shareholder. 
(2) The structure of, or method used to deter-
mine, the compensation of individuals employed by 
the investment adviser of the company to manage 
the portfolio of the company. 
(3) The portfolio transaction costs of the com-
pany, including commissions paid with respect to the 
trading of portfolio securities, set forth in a manner 
that facilitates comparison among investment com-
panies. 
(4) Information concerning the company’s poli-
cies and practices with respect to the payment of 
commissions for effecting securities transactions to a 
member of an exchange, broker, or dealer who—
(A) furnishes advice, either directly or 
through publications or writings, as to the value 
of securities, the advisability of investing in, 
purchasing, or selling securities, and the avail-
ability of securities or purchasers or sellers of 
securities; 
(B) furnishes analyses and reports con-
cerning issuers, industries, securities, economic 
factors and trends, portfolio strategy, and the 
performance of accounts; or 
(C) facilitates the sale and distribution of 
the company’s shares. 
(5) Information concerning payments by any 
person other than the company that are intended to 
facilitate the sale and distribution of the company’s 
shares. 
(6) Information concerning discounts on front-
end sales loads for which investors may be eligible, 
including the minimum purchase amounts required 
for such discounts. 
(b) DEFINITION.—For purposes of subsection (a), a 
disclosure shall not be considered to be made in an appro-
priate disclosure document if the disclosure is made exclu-
sively in a prospectus or statement of additional informa-
tion, or both such documents.
SEC. 3. OBLIGATIONS REGARDING CERTAIN DISTRIBUTION 
AND SOFT DOLLAR ARRANGEMENTS. 
Section 15 of the Investment Company of 1940 (15 
U.S.C. 80a–15) is amended by adding at the end the fol-
lowing new subsection: 
‘‘(g) OBLIGATIONS REGARDING CERTAIN DISTRIBU-
TION AND SOFT DOLLAR ARRANGEMENTS.—
‘‘(1) REPORTING
REQUIREMENTS.—Each in-
vestment adviser to a registered investment company 
shall, no less frequently than annually, submit to the 
board of directors of the company a report on—
‘‘(A) payments during the reporting period 
by the adviser (or an affiliated person of the 
adviser) that were directly or indirectly made 
for the purpose of promoting the sale of shares 
of the investment company (referred to in para-
graph (2) as a ‘revenue sharing arrangement’); 
‘‘(B) services to the company provided or 
paid for by a broker or dealer or an affiliated 
person of the broker or dealer (other than bro-
kerage and research services) in exchange for 
the direction of brokerage to the broker or deal-
er (referred to in paragraph (2) as a ‘directed 
brokerage arrangement’); and 
‘‘(C) research services obtained by the ad-
viser (or an affiliated person of the adviser)
tion, which rules and regulations shall, among other 
things, prescribe the content of the required reports. 
‘‘(4) DEFINITION.—For purposes of this sub-
section—
‘‘(A) the term ‘brokerage and research 
services’ has the same meaning as in section 
28(e)(3) of the Securities Exchange Act of 
1934; and 
‘‘(B) the term ‘research services’ means 
the services described in subparagraphs (A) and 
(B) of such section.’’. 
SEC. 4. MUTUAL FUND GOVERNANCE. 
(a) DIRECTOR AND CHAIRMAN INDEPENDENCE.—
Section 10(a) of the Investment Company Act of 1940 (15 
U.S.C. 80a–10) is amended—
(1) by striking ‘‘60 per centum’’ and inserting 
‘‘one-third’’; and 
(2) by inserting ‘‘, nor shall such registered 
company have as chairman of such board an inter-
ested person of such registered company’’ before the 
period. 
(b) DEFINITION OF INTERESTED PERSON.—Section 
2(a)(19) of the Investment Company Act of 1940 (15 
U.S.C. 80a–2(a)(19)) is amended—
(1) in subparagraph (A)—
(A) by striking clause (vi) and redesig-
nating clause (vii) as clause (vi); and 
(B) by amending clause (v) to read as fol-
lows: 
‘‘(v) any natural person who is a 
member of a class of persons who the 
Commission, by rule or regulation, deter-
mines are unlikely to exercise an appro-
priate degree of independence as a result 
of—
‘‘(I) a material business or pro-
fessional relationship with the com-
pany or any affiliated person of the 
company, or 
‘‘(II) a close familial relationship 
with any natural person who is an af-
filiated person of the company,’’; and 
(2) in subparagraph (B)—
(A) by striking clause (vi) and redesig-
nating clause (vii) as clause (vi); and 
(B) by amending clause (v) to read as fol-
lows: 
‘‘(v) any natural person who is a 
member of a class of persons who the 
Commission, by rule or regulation, deter-
mines are unlikely to exercise an appro-
priate degree of independence as a result 
of—
‘‘(I) a material business or pro-
fessional relationship with such invest-
ment adviser or principal underwriter 
(or affiliated person thereof), or 
‘‘(II) a close familial relationship 
with a natural person who is such in-
vestment adviser or principal under-
writer (or affiliated person thereof).’’. 
SEC. 5. AUDIT COMMITTEE REQUIREMENTS FOR INVEST-
MENT COMPANIES. 
(a) AMENDMENTS.—Section 32 of the Investment 
Company Act of 1940 (15 U.S.C. 80a–31) is amended—
(1) by striking paragraphs (1) and (2) of sub-
section (a) and inserting the following: 
‘‘(1) such accountant shall have been selected 
at a meeting held within 30 days before or after the 
beginning of the fiscal year or before the annual 
meeting of stockholders in that year by the vote, 
cast in person, of a majority of the members of the 
audit committee of such registered company; 
‘‘(2) such selection shall have been submitted 
for ratification or rejection at the next succeeding
annual meeting of stockholders if such meeting be 
held, except that any vacancy occurring between an-
nual meetings, due to the death or resignation of the 
accountant, may be filled by the vote of a majority 
of the members of the audit committee of such reg-
istered company, cast in person at a meeting called 
for the purpose of voting on such action;’’; and 
(2) by adding at the end the following new sub-
section: 
‘‘(d) AUDIT COMMITTEE REQUIREMENTS.—
‘‘(1) REQUIREMENTS AS PREREQUISITE TO FIL-
ING FINANCIAL STATEMENTS.—Any registered man-
agement company or registered face-amount certifi-
cate company that files with the Commission any fi-
nancial statement signed or certified by an inde-
pendent public accountant shall comply with the re-
quirements of paragraphs (2) through (6) of this
subsection and any rule or regulation of the Com-
mission issued thereunder. 
‘‘(2) RESPONSIBILITY
RELATING
TO
INDE-
PENDENT PUBLIC ACCOUNTANTS.—The audit com-
mittee of the registered company, in its capacity as 
a committee of the board of directors, shall be di-
rectly responsible for the appointment, compensa-
tion, and oversight of the work of any independent
public accountant employed by such registered com-
pany (including resolution of disagreements between 
management and the auditor regarding financial re-
porting) for the purpose of preparing or issuing the 
audit report or related work, and each such inde-
pendent public accountant shall report directly to 
the audit committee. 
‘‘(3) INDEPENDENCE.—
‘‘(A) IN GENERAL.—Each member of the 
audit committee of the registered company shall 
be a member of the board of directors of the 
company, and shall otherwise be independent. 
‘‘(B) CRITERIA.—In order to be considered 
to be independent for purposes of this para-
graph, a member of an audit committee of a 
registered company may not, other than in his 
or her capacity as a member of the audit com-
mittee, the board of directors, or any other 
board committee—
‘‘(i) accept any consulting, advisory, 
or other compensatory fee from the reg-
istered company or any affiliated person of 
the registered company; or
purpose of rendering or issuing the audit re-
port; and 
‘‘(B) to any advisers employed by the audit 
committee under paragraph (5). 
‘‘(7) AUDIT COMMITTEE.—For purposes of this 
subsection, the term ‘audit committee’ means—
‘‘(A) a committee (or equivalent body) es-
tablished by and amongst the board of directors 
of a registered investment company for the pur-
pose of overseeing the accounting and financial 
reporting processes of the company and audits 
of the financial statements of the company; and 
‘‘(B) if no such committee exists with re-
spect to a registered investment company, the 
entire board of directors of the company.’’. 
(b) CONFORMING AMENDMENT.—Section 10A(m) of 
the Securities Exchange Act of 1934 is amended by add-
ing at the end the following new paragraph: 
‘‘(7) EXEMPTION
FOR
INVESTMENT
COMPA-
NIES.—Effective one year after the date of enact-
ment of the Mutual Funds Integrity and Fee Trans-
parency Act of 2003, for purposes of this subsection, 
the term ‘issuer’ shall not include any investment 
company that is registered under section 8 of the In-
vestment Company Act of 1940.’’.
(c) IMPLEMENTATION.—Not later than 180 days 
after the date of enactment of this Act, the Securities and 
Exchange Commission shall issue final regulations to 
carry out section 32(d) of the Investment Company Act 
of 1940, as added by subsection (a) of this section. 
SEC. 6. COMMISSION STUDY AND REPORT REGULATING 
SOFT DOLLAR ARRANGEMENTS. 
(a) STUDY REQUIRED.—
(1) IN GENERAL.—The Commission shall con-
duct a study of the use of soft dollar arrangements 
by investment advisers as contemplated by section 
28(e) of the Securities Exchange Act of 1934 (15 
U.S.C. 78bb(e)). 
(2) AREAS OF CONSIDERATION.—The study re-
quired by this section shall examine—
(A) the trends in the average amounts of 
soft dollar commissions paid by investment ad-
visers and investment companies in the past 3 
years; 
(B) the types of services provided through 
soft dollar arrangements; 
(C) the extent to which use of soft dollar 
arrangements impairs the ability of mutual 
fund investors to evaluate and compare the ex-
penses of different mutual funds;
(D) the conflicts of interest created by soft 
dollar arrangements; 
(E) the transparency of such soft dollar 
arrangements to investment company share-
holders and investment advisory clients of in-
vestment advisers; and 
(F) whether such section 28(e) should be 
repealed or modified. 
(b) REPORT REQUIRED.—The Commission shall sub-
mit a report on the study required by subsection (a) to 
the Committee on Financial Services of the House of Rep-
resentatives and the Committee on Banking, Housing and 
Urban Affairs of the Senate, no later than 18 months 
after the date of enactment of this Act.
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