SECTION 1. SHORT TITLE.
(a) SHORT TITLE.—This Act may be cited as the
‘‘Mutual Funds Integrity and Fee Transparency Act of
2003’’.
(b) TABLE OF CONTENTS.—
Sec. 1. Short title.
TITLE I—INTEGRITY AND FEE TRANSPARENCY
Sec. 101. Improved transparency of mutual fund costs.
Sec. 102. Obligations regarding certain distribution and soft dollar arrange-
ments.
Sec. 103. Mutual fund governance.
Sec. 104. Audit committee requirements for investment companies.
Sec. 105. Trading restrictions.
Sec. 106. Definition of no-load mutual fund.
Sec. 107. Informing directors of significant deficiencies.
Sec. 108. Exemption from in person meeting requirements.
Sec. 109. Proxy voting disclosure.
Sec. 110. Incentive compensation and mutual fund sales.
Sec. 111. Commission study and report regulating soft dollar arrangements.
Sec. 112. Study of arbitration claims.
TITLE II—PREVENTION OF ABUSIVE MUTUAL FUND PRACTICES
Sec. 201. Prevention of fraud; internal compliance and control procedures.
Sec. 202. Ban on joint management of mutual funds and hedge funds.
Sec. 203. Short term trading by interested persons prohibited.
Sec. 204. Elimination of stale prices.
Sec. 205. Prevention of unfair after-hours trading.
Sec. 206. Report on adequacy of remedial actions.
TITLE I—INTEGRITY AND FEE
TRANSPARENCY
SEC. 101. 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 for each
$1,000 of investment in the company, of the oper-
ating expenses of the company that are borne by
shareholders.
(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, and the ownership in-
terest of such individuals in the securities of the
company.
(3) The portfolio turnover rate of the company,
set forth in a manner that facilitates comparison
among investment companies, and a description of
the implications of a high turnover rate for portfolio
transaction costs and performance.
(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) APPROPRIATE DISCLOSURE DOCUMENT.—
(1) IN GENERAL.—For purposes of subsection
(a), a disclosure shall not be considered to be made
in an appropriate disclosure document if the disclo-
sure is made exclusively in a prospectus or state-
ment of additional information, or both such docu-
ments.
(2) EXCEPTIONS.—Notwithstanding paragraph
(1), the disclosures required by paragraph (2) and
(4) of subsection (a) may be considered to be made
in an appropriate disclosure document if the disclo-
sure is made exclusively in a prospectus or state-
ment of additional information, or both such docu-
ments.
(c) CONCEPT RELEASE REQUIRED.—
(1) IN GENERAL.—The Commission shall issue
a concept release examining the issue of portfolio
transaction costs incurred by investment companies,
including commission, spread, opportunity, and mar-
ket impact costs, with respect to trading of portfolio
securities and how such costs may be disclosed to
mutual fund investors in a manner that will enable
investors to compare such costs among funds.
(2) REPORT
AND
RECOMMENDATIONS
RE-
QUIRED.—The Commission shall submit a report on
the findings from the concept release required by
paragraph (1), as well as legislative and regulatory
recommendations, if any, to the Committee on Fi-
nancial Services of the House of Representatives and
the Committee on Banking, Housing, and Urban Af-
fairs of the Senate, no later than 270 days after the
date of enactment of this Act.
(d) ADDITIONAL REQUIREMENT FOR FEE STATE-
MENT.—
(1) IN
GENERAL.—Not later than 270 days
after the date of enactment of this Act, the Commis-
sion shall prescribe a rule to require, with respect to
an open-end management investment company, in
the quarterly statement or other periodic report, or
other appropriate disclosure document, a statement
informing shareholders that such shareholders have
paid fees on their investments, that such fees have
been deducted from the amounts shown on the state-
ments, and where such shareholders may find addi-
tional information regarding the amount of these
fees.
(2) APPROPRIATE
DISCLOSURE
DOCUMENT.—
The statement required by paragraph (1) shall not
be considered to be made in an appropriate disclo-
sure document unless such statement is—
(A) made in each periodic statement to a
shareholder that discloses the value of the hold-
ings of the shareholder in the securities of the
company; and
(B) prominently displayed, in a location in
close proximity to the statement of the shares
account value.
(e) REDUCING BURDENS ON SMALL FUNDS.—In pre-
scribing rules under this section, the Commission shall
give consideration to methods for reducing for small in-
vestment companies the burdens of making the disclosures
required by such rules, consistent with the public interest
and the protection of investors.
SEC. 102. OBLIGATIONS REGARDING CERTAIN DISTRIBU-
TION AND SOFT DOLLAR ARRANGEMENTS.
(a) REPORTING REQUIREMENT.—Section 15 of the
Investment Company Act of 1940 (15 U.S.C. 80a–15) is
amended by adding at the end the following new sub-
section:
‘‘(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
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.’’.
(b) CONTRACTUAL RECORDS.—Within 270 days after
the date of enactment of this Act, the Securities and Ex-
change Commission shall, by rule prescribed pursuant to
section 28(e) of the Securities Exchange Act of 1934 (15
U.S.C. 78bb(e)), require that—
(1) if any research services (as such term is de-
fined in section 15(g)(5)(B) of the Investment Com-
pany Act of 1940, as amended by subsection (a) of
this section)—
(A) are provided by a member of an ex-
change, broker, or dealer who effects securities
transactions in an account, and
(B) are prepared or provided by a party
that is unaffiliated with such member, broker,
or dealer,
any person exercising investment discretion with re-
spect to such account shall maintain a copy of the
written contract between the person preparing such
research and the member of an exchange, broker, or
dealer; and
(2) such contract shall describe the nature and
value of the services provided.
SEC. 103. MUTUAL FUND GOVERNANCE.
(a) DIRECTOR INDEPENDENCE.—Section 10(a) of
the Investment Company Act of 1940 (15 U.S.C. 80a–
10) is amended by striking ‘‘60 per centum’’ and inserting
‘‘one-third’’.
(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. 104. 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) in subsection (a)—
(A) by striking paragraphs (1) and (2) 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
(B) by adding at the end the following new
sentence: ‘‘The Commission, by rule, regulation,
or order, may exempt a registered management
company or registered face-amount certificate
company subject to this subsection from the re-
quirement in paragraph (1) that the votes by
the members of the audit committee be cast at
a meeting in person when such a requirement
is impracticable, subject to such conditions as
the Commission may require.’’; 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 the investment adviser
or principal underwriter of the registered
company; or
‘‘(ii) be an ‘interested person’ of the
registered company, as such term is de-
fined in section 2(a)(19).
‘‘(4) COMPLAINTS.—The audit committee of the
registered company shall establish procedures for—
‘‘(A) the receipt, retention, and treatment
of complaints received by the registered com-
pany regarding accounting, internal accounting
controls, or auditing matters; and
‘‘(B) the confidential, anonymous submis-
sion by employees of the registered company
and its investment adviser or principal under-
writer of concerns regarding questionable ac-
counting or auditing matters.
‘‘(5) AUTHORITY TO ENGAGE ADVISERS.—The
audit committee of the registered company shall
have the authority to engage independent counsel
and other advisers, as it determines necessary to
carry out its duties.
‘‘(6) FUNDING.—The registered company shall
provide appropriate funding, as determined by the
audit committee, in its capacity as a committee of
the 
board 
of 
directors, 
for 
payment 
of
compensation—
‘‘(A) to the independent public accountant
employed by the registered company for the
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. 105. TRADING RESTRICTIONS.
Subsection (e) of section 22 of the Investment Com-
pany Act of 1940 (15 U.S.C. 80a–22(e)) is amended to
read as follows:
‘‘(e) TRADING RESTRICTIONS.—
‘‘(1) PROHIBITION AND EXCEPTIONS.—No reg-
istered investment company shall suspend the right
of redemption, or postpone the date of payment or
satisfaction upon redemption of any redeemable se-
curity in accordance with its terms for more than
seven days after the tender of such security to the
company or its agents designated for that purpose
for redemption, except—
‘‘(A) for any period (i) during which the
principal market for the securities in which the
company invests is closed, other than customary
week-end and holiday closings; or (ii) during
which trading on such exchange is restricted;
‘‘(B) for any period during which an emer-
gency exists as a result of which (i) disposal by
the company of securities owned by it is not
reasonably practicable; or (ii) it is not reason-
ably practicable for such company fairly to de-
termine the value of its net assets; or
‘‘(C) for such other periods as the Com-
mission may by order permit for the protection
of security holders of the company.
‘‘(2) COMMISSION
RULES.—The Commission
shall by rules and regulations—
‘‘(A) determine the conditions under which
trading shall be deemed to be restricted;
‘‘(B) determine the conditions under which
an emergency shall be deemed to exist; and
‘‘(C) provide for the determination by each
company, subject to such limitations as the
Commission shall determine are necessary and
appropriate for the protection of investors, of
the principal market for the securities in which
the company invests.’’.
SEC. 106. DEFINITION OF NO-LOAD MUTUAL FUND.
Within 270 days after the date of enactment of this
Act, the Securities and Exchange Commission shall, by
rule adopted by the Commission or a self-regulatory orga-
nization (or both)—
(1) clarify the definition of ‘‘no-load’’ as such
term is used by investment companies that impose
any fee under a plan adopted pursuant to rule 12b-
1 of the Commission’s rules (17 C.F.R. 270.12b–1);
and
(2) require disclosure to prevent investors from
being misled by the use of such terminology by the
company or its adviser or principal underwriter.
SEC. 107. INFORMING DIRECTORS OF SIGNIFICANT DEFI-
CIENCIES.
Section 42 of the Investment Company Act of 1940
(15 U.S.C. 80a–41) is amended by adding at the end the
following new subsection:
‘‘(f) INFORMING DIRECTORS OF SIGNIFICANT DEFI-
CIENCIES.—If the report of an inspection by the Commis-
sion of a registered investment company identifies signifi-
cant deficiencies in the operations of such company, or of
its investment adviser or principal underwriter, the com-
pany shall provide such report to the directors of such
company.’’.
‘‘(1) without charge, upon request, by calling a
specified toll-free (or collect) telephone number; or
on or through the company’s website at a specified
Internet address; or both; and
‘‘(2) on the Commission’s website.’’.
SEC. 110. INCENTIVE COMPENSATION AND MUTUAL FUND
SALES.
(a) COMMISSION RULE REQUIRED.—Within 270
days after the date of enactment of this Act, the Commis-
sion shall by rule prohibit, as a means reasonably designed
to prevent fraudulent, deceptive, or manipulative acts and
practices, the sale of the securities of an investment com-
pany or of municipal fund securities by a broker or dealer
or by a municipal securities broker or dealer without the
disclosure of—
(1) the amount and source of sales fees, pay-
ments by persons other than the investment com-
pany that are intended to facilitate the sale and dis-
tribution of the securities, and commissions for ef-
fecting portfolio securities transactions, or other
payments, paid to such broker or dealer, or munic-
ipal securities broker or dealer, or associated person
thereof in connection with such sale;
(2) any commission or other fees or charges the
investor has paid or will or might be subject to, in-
cluding as a result of purchases or redemptions;
(3) any conflicts of interest that any associated
person of the investor’s broker or dealer or munic-
ipal securities broker or dealer may face due to the
receipt of differential compensation in connection
with such sale; and
(4) information about the estimated amount of
any asset-based distribution expenses incurred, or to
be incurred, by the investment company in connec-
tion with the investor’s purchase of the securities.
(b) BENCHMARKS.—In connection with the rule re-
quired by subsection (a), the Commission shall, to the ex-
tent practical, establish standards for such disclosures.
(c) DEFINITIONS.—
(1) DIFFERENTIAL COMPENSATION.—For pur-
poses of this section, an associated person of a
broker or dealer shall be considered to receive dif-
ferential compensation if such person receives any
increased or additional remuneration, in whatever
form—
(A) for sales of the securities of an invest-
ment company or municipal fund security that
is affiliated with, or otherwise specifically des-
ignated by, such broker or dealer or municipal
securities broker or dealer, as compared with
the remuneration for sales of securities of an
investment company or municipal fund security
offered by such broker or dealer or municipal
securities broker or dealer that are not so affili-
ated or designated; or
(B) for the sale of any class of securities
of an investment company or municipal fund se-
curity as compared with the remuneration for
the sale of a class of securities of such invest-
ment company or municipal fund security (of-
fered by such broker or dealer or municipal se-
curities broker or dealer) that charges a sales
load (as defined in section 2(a)(35) of the In-
vestment Company Act of 1940 (15 U.S.C.
80a–2(a)(35)) only at the time of such a sale.
(2) MUNICIPAL
FUND
SECURITY.—For pur-
poses of this section, a municipal fund security is
any municipal security issued by an issuer that, but
for the application of section 2(b) of the Investment
Company Act of 1940 (15 U.S.C. 80a–2(b)), would
constitute an investment company within the mean-
ing of section 3 of the Investment Company Act of
1940 (15 U.S.C. 80a–3).
SEC. 111. 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 benefits and disadvantages of the
use of soft dollars for investors, including the
extent to which use of soft dollar arrangements
affects the ability of mutual fund investors to
evaluate and compare the expenses of different
mutual funds;
(D) the potential or actual conflicts of in-
terest (or both potential and actual conflicts)
created by soft dollar arrangements, including
whether certain potential conflicts are being
managed effectively by other laws and regula-
tions specifically addressing those situations,
the role of the board of directors in managing
these potential or actual (or both) conflicts, and
the effectiveness of the board in this capacity;
(E) the transparency of such soft dollar
arrangements to investment company share-
holders and investment advisory clients of in-
vestment advisers, the extent to which enhanced
disclosure is necessary or appropriate to enable
investors to better understand the impact of
these arrangements, and an assessment of
whether the cost of any enhanced disclosure or
other regulatory change would result in benefits
to the investor; and
(F) whether such section 28(e) should be
modified, and whether other regulatory or legis-
lative changes should be considered and adopted
to benefit investors.
(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 one year after
the date of enactment of this Act.
SEC. 112. STUDY OF ARBITRATION CLAIMS.
(a) STUDY REQUIRED.—The Securities and Ex-
change Commission shall conduct a study of the increased
rate of arbitration claims and decisions involving mutual
funds since 1995 for the purposes of identifying trends
in arbitration claim rates and, if applicable, the causes of
such increased rates and the means to avert such causes.
(b) REPORT.—The Securities and Exchange Commis-
sion shall submit a report on the study required by sub-
section (a) to the Committee on Financial Services of the
House of Representatives and the Committee on Banking,
Housing, and Urban Affairs of the Senate not later than
one year after the date of enactment of this Act.
TITLE II—PREVENTION OF ABU-
SIVE MUTUAL FUND PRAC-
TICES
SEC. 201. PREVENTION OF FRAUD; INTERNAL COMPLIANCE
AND CONTROL PROCEDURES.
(a) AMENDMENT.—Subsection (j) of section 17 of the
Investment Company Act of 1940 (15 U.S.C. 80a–17(j))
is amended to read as follows:
‘‘(j) DETECTION AND PREVENTION OF FRAUD.—
‘‘(1) COMMISSION RULES TO PROHIBIT FRAUD,
DECEPTION, AND MANIPULATION.—It shall be un-
lawful for any affiliated person of or principal under-
writer for a registered investment company or any
affiliated person of an investment adviser of or prin-
cipal underwriter for a registered investment com-
pany, to engage in any act, practice, or course of
business in connection with the purchase or sale, di-
rectly or indirectly, by such person of any security
held or to be acquired by such registered investment
company, or any security issued by such registered
investment company or by an affiliated registered in-
vestment company, in contravention of such rules
and regulations as the Commission may adopt to de-
fine, and prescribe means reasonably necessary to
prevent, such acts, practices, or courses of business
as are fraudulent, deceptive or manipulative.
‘‘(2) CODES OF ETHICS.—Such rules and regu-
lations shall include requirements for the adoption of
codes of ethics by registered investment companies
and investment advisers of, and principal under-
writers for, such investment companies establishing
such standards as are reasonably necessary to pre-
vent such acts, practices, or courses of business.
Such rules and regulations shall require each such
registered investment company to disclose such
codes of ethics (and any changes therein) in the
periodic report to shareholders of such company, and
to disclose such code of ethics and any waivers and
pany from retaliation, including discharge, de-
motion, suspension, harassment, or any other
manner of discrimination in the terms and con-
ditions of employment, because of any lawful
act done by such officer, director, employee,
contractor, subcontractor, or agent to provide
information, cause information to be provided,
or otherwise assist in an investigation that re-
lates to any conduct which such officer, direc-
tor, employee, contractor, subcontractor, or
agent reasonably believes constitutes a violation
of the securities laws or the code of ethics of
such investment company.
‘‘(4) SELF-CERTIFICATION.—Such rules and
regulations shall require the members of the board
of directors who are not interested persons of each
registered open-end investment company to certify,
in the periodic report to shareholders, or other ap-
propriate disclosure document, that—
‘‘(A) procedures are in place for verifying
that the determination of current net asset
value of any redeemable security issued by the
company used in computing periodically the
current price for the purpose of purchase, re-
demption, and sale complies with the require-
ments of the Investment Company Act of 1940
and the rules and regulations thereunder, and
the company is in compliance with such proce-
dures;
‘‘(B) procedures are in place for the over-
sight of the flow of funds into and out of the
securities of the company, and the company is
in compliance with such procedures;
‘‘(C) procedures are in place to ensure that
investors are receiving any applicable discounts
on front-end sales loads that are disclosed in
the company’s prospectus;
‘‘(D) procedures are in place to ensure
that, if the company’s shares are offered as dif-
ferent classes of shares, such classes are de-
signed in the interests of investors, and could
reasonably be an appropriate investment option
for an investor;
‘‘(E) procedures are in place to ensure that
information about the company’s portfolio secu-
rities is not disclosed in violation of the securi-
ties laws or the company’s code of ethics;
‘‘(F) the members of the board of directors
who are not interested persons of the company
have reviewed and approved the compensation
of the company’s portfolio manager in connec-
tion with their consideration of the investment
advisory contract under section 15(c);
‘‘(G) the company has established and en-
forces a code of ethics as required by paragraph
(2) of this subsection; and
‘‘(H) the company is in compliance with
the additional requirements of paragraph (3) of
this subsection.’’.
(b) DEADLINE FOR RULES.—The Securities and Ex-
change Commission shall prescribe rules to implement the
amendment made by subsection (a) of this section within
90 days after the date of enactment of this Act.
SEC. 202. BAN ON JOINT MANAGEMENT OF MUTUAL FUNDS
AND HEDGE FUNDS.
(a) AMENDMENT.—Section 15 of the Investment
Company Act of 1940 (15 U.S.C. 80a-15) is further
amended by adding at the end the following new sub-
section:
‘‘(h) BAN
ON JOINT MANAGEMENT
OF MUTUAL
FUNDS AND HEDGE FUNDS.—
‘‘(1) PROHIBITION OF JOINT MANAGEMENT.—It
shall be unlawful for any individual to serve or act
as the portfolio manager or investment adviser of a
registered open-end investment company if such in-
dividual also serves or acts as the portfolio manager
or investment adviser of an investment company
that is not registered or of such other categories of
companies as the Commission shall prescribe by rule
in order to prohibit conflicts of interest, such as con-
flicts in the selection of the portfolio securities.
‘‘(2) 
EXCEPTIONS.—Notwithstanding 
para-
graph (1), the Commission may, by rule, regulation,
or order, permit joint management by a portfolio
manager in exceptional circumstances when nec-
essary to protect the interest of investors, provided
that such rule, regulation, or order requires—
‘‘(A) enhanced disclosure by the registered
open-end investment company to investors of
any conflicts of interest raised by such joint
management; and
‘‘(B) fair and equitable policies and proce-
dures for the allocation of securities to the port-
folios of the jointly managed companies, and
certification by the members of the board of di-
rectors who are not interested persons of such
registered open-end investment company, in the
periodic report to shareholders, or other appro-
priate disclosure document, that such policies
and procedures of such company are fair and
equitable.
‘‘(3) DEFINITION.—For purposes of this sub-
section, the term ‘portfolio manager’ means the indi-
vidual or individuals who are designated as respon-
sible for decision-making in connection with the se-
curities purchased and sold on behalf of a registered
open-end investment company, but shall not include
individuals who participate only in making research
recommendations or executing transactions on behalf
of such company.’’.
(b) DEADLINE FOR RULES.—The Securities and Ex-
change Commission shall prescribe rules to implement the
amendment made by subsection (a) of this section within
90 days after the date of enactment of this Act.
SEC. 203. SHORT TERM TRADING BY INTERESTED PERSONS
PROHIBITED.
(a) SHORT TERM TRADING PROHIBITED.—Section
17 of the Investment Company Act of 1940 (15 U.S.C.
80a–17) is further amended by adding at the end the fol-
lowing new subsection:
‘‘(k) SHORT TERM TRADING PROHIBITED.—It shall
be unlawful for any officer, director, partner, or employee
of a registered investment company, any affiliated person,
investment adviser, or principal underwriter of such com-
pany, or any officer, director, partner, or employee of such
an affiliated person, investment adviser, or principal un-
derwriter, to engage in short-term transactions, as such
term is defined by the Commission by rule, in any securi-
ties of which such company, or any affiliate of such com-
pany, is the issuer, except that this subsection shall not
prohibit transactions in money market funds, other funds
the investment policy of which expressly permits short-
term transactions, or such other categories of registered
investment companies as the Commission shall specify by
rule.’’.
(b) INCREASED REDEMPTION FEES PERMITTED FOR
SHORT TERM TRADING.—Within 90 days after the date
of enactment of this Act, the Securities and Exchange
Commission shall revise rule 11a–3 of its rules under the
Investment Company Act of 1940 (17 CFR 270.11a–30),
or other rules of the Commission, as necessary to permit
an investment company to charge redemption fees in ex-
cess of 2 percent upon the redemption of any securities
of such company that are redeemed within such period
after their purchase as the Commission specifies in such
rule to prevent short term trading that is unfair to the
shareholders of such company.
(c) DEADLINE FOR RULES.—The Securities and Ex-
change Commission shall prescribe rules to implement the
amendment made by subsection (a) of this section within
90 days after the date of enactment of this Act.
SEC. 204. ELIMINATION OF STALE PRICES.
Within 90 days after the date of enactment of this
Act, the Securities and Exchange Commission shall pre-
scribe, by rule or regulation, standards concerning the ob-
ligation of registered open-end investment companies
under the Investment Company Act of 1940 to apply and
use fair value methods of determination of net asset value
when market quotations are unavailable or do not accu-
rately reflect the fair market value of the companies’ port-
folio securities, in order to prevent dilution of the interests
of long-term investors or as necessary in the other inter-
ests of investors. Such rule or regulation shall identify,
in addition to significant events, the conditions or cir-
cumstances from which such obligation will arise, such as
the need to value securities traded on foreign exchanges,
and the methods by which fair value methods shall be ap-
plied in such events, conditions, and circumstances.
SEC. 205. PREVENTION OF UNFAIR AFTER-HOURS TRADING.
(a) ADDITIONAL RULES REQUIRED.—Within 90 days
after the date of enactment of this Act, the Securities and
Exchange Commission shall issue rules to prevent trans-
actions in the securities of any registered open-end invest-
ment company in violation of section 22 of the Investment
Company Act of 1940 (15 U.S.C. 80a–22), including
after-hours trades that are executed at a price based on
a net asset value that was determined as of a time prior
to the actual execution of the transaction.
(b) TRADES COLLECTED
BY INTERMEDIARIES.—
Such rules shall permit execution of such after-hours
trades that are provided to the registered open-end invest-
ment company by a broker-dealer, retirement plan admin-
istrator, or other intermediary, after the time as of which
such net asset value was determined, if such trades are
collected by such intermediaries subject to procedures that
are—
(1) designed to prevent the acceptance of trades
by such intermediaries after the time as of which net
asset value was determined; and
(2) subject to an independent annual audit to
verify that the procedures do not permit the accept-
ance of trades after the time as of which such net
asset value was determined.
(c) INDEPENDENTLY MAINTAINED SYSTEMS.—Such
rules shall permit firms that utilize computer systems and
procedures provided by unaffiliated entities to collect
transactions to satisfy the independent audit requirements
under subsection (b)(2) by means of an independent audit
obtained by such unaffiliated entity.
SEC. 206. REPORT ON ADEQUACY OF REMEDIAL ACTIONS.
(a) REPORT REQUIRED.—Within 180 days of enact-
ment, the Securities and Exchange Commission shall sub-
mit a report to the Committee on Financial Services of
the House of Representatives and the Committee on
Banking, Housing, and Urban Affairs of the Senate on
market timing and late trading of mutual funds.
(b) REQUIRED CONTENTS OF REPORT.—The report
required by this section shall include the following:
(1) The economic harm of market timing and
late trading of mutual fund shares on long-term mu-
tual fund shareholders.
(2) The findings by the Commission’s Office of
Compliance, Inspections and Examinations, and the
actions taken by the Commission’s Division of En-
forcement, regarding—
(A) illegal late trading practices;
(B) illegal market timing practices; and
(C) market timing practices that are not in
violation of prospectus disclosures.
(3) When the Commission became aware that
the use of market timing practices was harming
long-term shareholders, and the circumstances sur-
rounding the Commission’s discovery of that activity.
(4) The steps the Commission has taken since
becoming aware of market timing practices to pro-
tect long-term mutual fund investors.
(5) Any additional legislative or regulatory ac-
tion that is necessary to protect long-term mutual
fund shareholders against the detrimental effects of
late trading and market timing practices.
Passed the House of Representatives November 19,
2003.
Attest:
Clerk.