I 
108TH CONGRESS 
2D SESSION 
H. R. 4505 
To improve the governance and regulation of mutual funds under the 
securities laws, and for other purposes. 
IN THE HOUSE OF REPRESENTATIVES 
JUNE 3, 2004 
Mr. GILLMOR introduced the following bill; which was referred to the 
Committee on Financial Services 
A BILL 
To improve the governance and regulation of mutual funds 
under the securities laws, and for other purposes. 
Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled, 
SECTION 1. SHORT TITLE; TABLE OF CONTENTS. 
(a) SHORT TITLE.—This Act may be cited as the 
‘‘Mutual Fund Reform Act of 2004’’. 
(b) TABLE OF CONTENTS.—The table of contents for 
this Act is as follows: 
Sec. 1. Short title; table of contents. 
Sec. 2. Definitions. 
Sec. 3. Rulemaking. 
TITLE I—FUND GOVERNANCE 
Sec. 101. Independent directors.
Sec. 102. Study of director compensation and independence. 
Sec. 103. Fiduciary duties of directors. 
Sec. 104. Fiduciary duty of investment adviser. 
Sec. 105. Termination of fund advisers. 
Sec. 106. Independent accounting and auditing. 
Sec. 107. Prevention of fraud; internal compliance and control procedures. 
TITLE II—FUND TRANSPARENCY 
Sec. 201. Cost consolidation and clarity. 
Sec. 202. Advisor compensation and ownership of fund shares. 
Sec. 203. Point of sale and additional disclosure of broker compensation. 
Sec. 204. Breakpoint discounts. 
Sec. 205. Portfolio turnover ratio. 
Sec. 206. Proxy voting policies and record. 
Sec. 207. Customer information from account intermediaries. 
Sec. 208. Advertising. 
TITLE III—FUND REGULATION AND OVERSIGHT 
Sec. 301. Prohibition of asset-based distribution expenses. 
Sec. 302. Prohibition on revenue sharing, directed brokerage, and soft dollar 
arrangements. 
Sec. 303. Market timing. 
Sec. 304. Elimination of stale prices. 
Sec. 305. Prohibition of short term trading; mandatory redemption fees. 
Sec. 306. Prevention of after-hours trading. 
Sec. 307. Ban on joint management of mutual funds and hedge funds. 
Sec. 308. Selective disclosures. 
TITLE IV—STUDIES 
Sec. 401. Study of adviser conflict of interest. 
Sec. 402. Study of coordination of enforcement efforts. 
Sec. 403. Study of Commission organizational structure. 
Sec. 404. Trends in arbitration clauses. 
Sec. 405. Hedge fund regulation. 
Sec. 406. Investor education and the Internet. 
SEC. 2. DEFINITIONS. 
In this Act, the following definitions shall apply: 
(1) COMMISSION.—The term ‘‘Commission’’ 
means the Securities and Exchange Commission. 
(2) INVESTMENT ADVISER.—The term ‘‘invest-
ment adviser’’ has the same meaning as in section 
2(a)(20) of the Investment Company Act of 1940 
(15 U.S.C. 80a–2(a)(20)).
(3) INVESTMENT COMPANY.—The term ‘‘invest-
ment company’’ has the same meaning as in section 
3 of the Investment Company Act of 1940 (15 
U.S.C. 80–3). 
(4) REGISTERED INVESTMENT COMPANY.—The 
term ‘‘registered investment company’’ means an in-
vestment company that is registered under section 8 
of the Investment Company Act of 1940 (15 U.S.C. 
80a–8). 
SEC. 3. RULEMAKING. 
(a) TIMING.—Unless otherwise specified in this Act 
or the amendments made by this Act, the Commission 
shall issue, in final form, all rules and regulations required 
by this Act and the amendments made by this Act not 
later than 180 days after the date of enactment of this 
Act. 
(b) AUTHORITY TO DEFINE TERMS.—The Commis-
sion may, in issuing rules and regulations under this Act 
or the amendments made by this Act, define any term 
used in this Act or such amendments that is not otherwise 
defined for purposes of this Act or such amendment, as 
the Commission determines necessary and appropriate. 
(c) EXEMPTION AUTHORITY.—The Commission may, 
in issuing rules and regulations under this Act or the 
amendments made by this Act, exempt any investment
company or other person from the application of such 
rules, as the Commission determines is necessary and ap-
propriate, in the public interest or for the protection of 
investors. 
TITLE I—FUND GOVERNANCE 
SEC. 101. INDEPENDENT DIRECTORS. 
(a) INDEPENDENT FUND BOARDS.—Section 10(a) of 
the Investment Company Act of 1940 (15 U.S.C. 80a– 
10(a)) is amended— 
(1) by striking ‘‘shall have’’ and inserting the 
following: ‘‘shall— 
‘‘(1) have’’; 
(2) by striking ‘‘60 per centum’’ and inserting 
‘‘25 percent’’; 
(3) by striking the period at the end and insert-
ing a semicolon; and 
(4) by adding at the end the following: 
‘‘(2) have as chairman of its board of directors 
an interested person of such registered company; or 
‘‘(3) have as a member of its board of directors 
any person that is not an interested person of such 
registered investment company— 
‘‘(A) who has served without being ap-
proved or elected by the shareholders of such
registered investment company at least once 
every 5 years; and 
‘‘(B) unless such director has been found, 
on an annual basis, by a majority of the direc-
tors who are not interested persons, after rea-
sonable inquiry by such directors, not to have 
any material business or familial relationship 
with the registered investment company, a sig-
nificant service provider to the company, or any 
entity controlling, controlled by, or under com-
mon control with such service provider, that is 
likely to impair the independence of the direc-
tor.’’. 
(b) ACTION BY INDEPENDENT DIRECTORS.—Section 
10 of the Investment Company Act of 1940 (15 U.S.C. 
80a–10) is amended by adding at the end the following: 
‘‘(i) INDEPENDENT COMMITTEE.— 
‘‘(1) IN GENERAL.—The members of the board 
of directors of a registered investment company who 
are not interested persons of such registered invest-
ment company shall establish a committee comprised 
solely of such members, which committee shall be re-
sponsible for— 
‘‘(A) selecting persons to be nominated for 
election to the board of directors;
‘‘(B) adopting qualification standards for 
the nomination of directors; and 
‘‘(C) determining the compensation to be 
paid to directors. 
‘‘(2) DISCLOSURE.—The standards developed 
under paragraph (1)(B) shall be disclosed in the reg-
istration statement of the registered investment com-
pany.’’. 
(c) DEFINITION OF INTERESTED PERSON.—Section 
2(a)(19) of the Investment Company Act of 1940 (15 
U.S.C. 80a–2) is amended— 
(1) in subparagraph (A)— 
(A) in clause (iv), by striking ‘‘two’’ and 
inserting ‘‘5’’; and 
(B) by striking clause (vii) and inserting 
the following: 
‘‘(vii) any natural person who has 
served as an officer or director, or as an 
employee within the preceding 10 fiscal 
years, of an investment adviser or principal 
underwriter to such registered investment 
company, or of any entity controlling, con-
trolled by, or under common control with 
such investment adviser or principal under-
writer;
‘‘(viii) any natural person who has 
served as an officer or director, or as an 
employee within the preceding 10 fiscal 
years, of any entity that has within the 
preceding 5 fiscal years acted as a signifi-
cant service provider to such registered in-
vestment company, or of any entity con-
trolling, controlled by, or under the com-
mon control with such service provider; 
‘‘(ix) any natural person who is a 
member of a class of persons that the 
Commission, by rule or regulation, deter-
mines is unlikely to exercise an appropriate 
degree of independence as a result of— 
‘‘(I) a material business relation-
ship with the investment company or 
an affiliated person of such invest-
ment company; 
‘‘(II) a close familial relationship 
with any natural person who is an af-
filiated person of such investment 
company; or 
‘‘(III) any other reason deter-
mined by the Commission.’’; 
(2) in subparagraph (B)—
(A) in clause (iv), by striking ‘‘two’’ and 
inserting ‘‘5’’; and 
(B) by striking clause (vii) and inserting 
the following: 
‘‘(vii) any natural person who is a 
member of a class of persons that the 
Commission, by rule or regulation, deter-
mines is unlikely to exercise an appropriate 
degree of independence as a result of— 
‘‘(I) a material business relation-
ship with such investment adviser or 
principal underwriter or affiliated per-
son of such investment adviser or 
principal underwriter; 
‘‘(II) a close familial relationship 
with any natural person who is an af-
filiated person of such investment ad-
viser or principal underwriter; or 
‘‘(III) any other reason as deter-
mined by the Commission.’’. 
(d) DEFINITION
OF SIGNIFICANT SERVICE PRO-
VIDER.—Section 2(a) of the Investment Company Act of 
1940 is amended by adding at the end the following: 
‘‘(53) SIGNIFICANT SERVICE PROVIDER.—
‘‘(A) IN
GENERAL.—Not later than 270 
days after the date of enactment of the Mutual 
Fund Reform Act of 2004, the Commission 
shall issue final rules defining the term ‘signifi-
cant service provider’. 
‘‘(B) REQUIREMENTS.—The definition de-
veloped under paragraph (1) shall include, at a 
minimum, the investment adviser and principal 
underwriter of a registered investment company 
for purposes of paragraph (19).’’. 
SEC. 102. STUDY OF DIRECTOR COMPENSATION AND INDE-
PENDENCE. 
(a) IN GENERAL.—The Commission shall conduct a 
study of— 
(1) whether any limits should be placed upon 
the amount of compensation paid by a registered in-
vestment company or any affiliate of such company 
to a director thereof; and 
(2) whether a director of a registered invest-
ment company who is otherwise not an interested 
person of a registered investment company, as de-
fined in section 2(a)(19) of the Investment Company 
Act of 1940, as amended by this Act, but serves as 
a director of multiple registered investment compa-
nies, or receives substantial compensation from the
investment adviser of any such company, should be 
considered an ‘‘interested person’’ for purposes of 
section 2 of the Investment Company Act of 1940. 
(b) REPORT.—Not later than 1 year after the date 
of enactment of this Act, the Commission shall submit a 
report regarding the study conducted under subsection (a) 
to— 
(1) the Committee on Banking, Housing, and 
Urban Affairs of the Senate; and 
(2) the Committee on Financial Services of the 
House of Representatives. 
SEC. 103. FIDUCIARY DUTIES OF DIRECTORS. 
Section 10 of the Investment Company Act of 1940 
(15 U.S.C. 80a–10), as amended by this Act, is amended 
by adding at the end the following: 
‘‘(j) FIDUCIARY DUTY OF DIRECTORS.— 
‘‘(1) IN GENERAL.—The members of the board 
of directors of a registered investment company shall 
have a fiduciary duty to act with loyalty and care, 
in the best interests of the shareholders. 
‘‘(2) RULEMAKING.—The Commission shall 
promulgate rules to clarify the scope of the fiduciary 
duty under paragraph (1), which rules shall, at a 
minimum, require the directors of a registered in-
vestment company to—
‘‘(A) determine the extent to which inde-
pendent and reliable sources of information are 
sufficient to discharge director responsibilities; 
‘‘(B) negotiate management and advisory 
fees with due regard for the actual cost of such 
services, including economies of scale; 
‘‘(C) evaluate the totality of fees with ref-
erence to the interests of shareholders; 
‘‘(D) evaluate the quality of the manage-
ment of the company and potentially superior 
alternatives; 
‘‘(E) evaluate the quality, comprehensive-
ness, and clarity of disclosures to shareholders 
regarding costs; 
‘‘(F) evaluate any distribution or mar-
keting plan of the company, including its costs 
and benefits; 
‘‘(G) evaluate the size of the portfolio of 
the company and its suitability to the interests 
of shareholders; 
‘‘(H) implement and monitor policies to 
ensure compliance with applicable securities 
laws; and 
‘‘(I) implement and monitor policies with 
respect to predatory trading practices.’’.
SEC. 104. FIDUCIARY DUTY OF INVESTMENT ADVISER. 
Section 36 of the Investment Company Act of 1940 
(15 U.S.C. 80a–35(b)) is amended— 
(1) by redesignating subsection (c) as sub-
section (d); and 
(2) by inserting after subsection (b) the fol-
lowing: 
‘‘(c) DUTIES WITH RESPECT TO COMPENSATION AND 
PROVISION
OF INFORMATION.—For purposes of sub-
sections (a) and (b), the fiduciary duty of an investment 
adviser— 
‘‘(1) with respect to any compensation received, 
may require reasonable reference to the actual costs 
of the adviser and economies of scale; and 
‘‘(2) shall include a duty to supply such mate-
rial information as is necessary for the independent 
directors of a registered investment company with 
whom the adviser is employed to review and govern 
such company.’’. 
SEC. 105. TERMINATION OF FUND ADVISER. 
The Commission shall promulgate such rules as it de-
termines necessary in the public interest or for the protec-
tion of investors to facilitate the process through which 
the independent directors of a registered investment com-
pany may terminate the services of the investment adviser 
of such company in the good faith exercise of their fidu-
ciary duties, without undue exposure to financial or litiga-
tion risk. 
SEC. 106. INDEPENDENT ACCOUNTING AND AUDITING. 
(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 investment com-
pany; 
‘‘(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: 
‘‘The Commission, by rule, regulation, or order, 
may exempt a registered management company 
or registered face-amount certificate company 
otherwise 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: 
‘‘(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 investment company, in its 
capacity as a committee of the board of directors,
shall be directly responsible for the appointment, 
compensation, and oversight of the work of any inde-
pendent public accountant employed by the reg-
istered investment company (including resolution of 
disagreements between management and the auditor 
regarding financial reporting) for the purpose of pre-
paring or issuing the audit report or related work, 
and each such independent public accountant shall 
report directly to the audit committee. 
‘‘(3) INDEPENDENCE.— 
‘‘(A) IN GENERAL.—Each member of the 
audit committee of the registered investment 
company shall be a member of the board of di-
rectors 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 investment company may not, other 
than in his or her capacity as a member of the 
audit committee, the board of directors, or any 
other board committee— 
‘‘(i) accept any consulting, advisory, 
or other compensatory fee from the reg-
istered investment company or the invest-
ment adviser or principal underwriter of 
the registered investment company; or 
‘‘(ii) be an interested person of the 
registered investment company. 
‘‘(4) COMPLAINTS.—The audit committee of the 
registered investment company shall establish proce-
dures for— 
‘‘(A) the receipt, retention, and treatment 
of complaints received by the registered invest-
ment company regarding accounting, internal 
accounting controls, or auditing matters; and 
‘‘(B) the confidential, anonymous submis-
sion by employees of the registered investment 
company and its investment adviser or principal 
underwriter of concerns regarding questionable 
accounting or auditing matters. 
‘‘(5) AUTHORITY TO ENGAGE ADVISERS.—The 
audit committee of the registered investment com-
pany shall have the authority to engage independent 
counsel and other advisers, as it determines nec-
essary to carry out its duties. 
‘‘(6) FUNDING.—The registered investment 
company shall provide appropriate funding, as deter-
mined 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 investment company 
for the purpose of rendering or issuing the 
audit report; 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 (15 U.S.C. 78j– 
1(m)) is amended by adding at the end the following: 
‘‘(7) EXEMPTION
FOR
INVESTMENT
COMPA-
NIES.—Effective one year after the date of enact-
ment of the Mutual Fund Reform Act of 2004, for