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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
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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-
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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
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‘‘(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 compensa-
tion—
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‘‘(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
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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;
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‘‘(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
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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.’’.
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SEC. 108. EXEMPTION FROM IN PERSON MEETING RE-
QUIREMENTS. 
Section 15(c) of the of the Investment Company Act 
of 1940 (15 U.S.C. 80a–15(c)) is amended by adding at 
the end the following new sentence: ‘‘The Commission, by 
rule, regulation, or order, may exempt a registered invest-
ment company subject to this subsection from the require-
ment that the votes of its directors be cast at a meeting 
in person when such a requirement is impracticable, sub-
ject to such conditions as the Commission may require.’’. 
SEC. 109. PROXY VOTING DISCLOSURE. 
Section 30 of the Investment Company Act of 1940 
(15 U.S.C. 80a–29) is amended by adding at the end the 
following new subsection: 
‘‘(k) PROXY VOTING DISCLOSURE.—Every registered 
management investment company, other than a small 
business investment company, shall file with the Commis-
sion not later than August 31 of each year an annual re-
port, on a form prescribed by the Commission by rule, con-
taining the registrant’s proxy voting record for the most 
recent twelve-month period ending on June 30. The finan-
cial statements of every such company shall state that in-
formation regarding how the company voted proxies relat-
ing to portfolio securities during the most recent 12-month 
period ending on June 30 is available—
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‘‘(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;
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(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-
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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).
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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
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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.
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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
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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
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material violations thereof on a readily accessible 
electronic public information facility of such com-
pany and in such additional form and manner as the 
Commission shall require by rule or regulation. 
‘‘(3) ADDITIONAL COMPLIANCE PROCEDURES.—
Such rules and regulations shall—
‘‘(A) require each investment company and 
investment adviser registered with the Commis-
sion to adopt and implement policies and proce-
dures reasonably designed to prevent violation 
of the Securities Act of 1933 (15 U.S.C. 78a et 
seq.), the Securities Exchange Act of 1934 (15 
U.S.C. 78a et seq.), the Sarbanes-Oxley Act of 
2002 (15 U.S.C. 7201 et seq.), the Trust In-
denture Act of 1939 (15 U.S.C. 77aaa et seq.), 
the Investment Company Act of 1940 (15 
U.S.C. 80a–1 et seq.), the Investment Advisers 
Act of 1940 (15 U.S.C. 80b et seq.), the Secu-
rities Investor Protection Act of 1970 (15 
U.S.C. 78aaa et seq.), subchapter II of chapter 
53 of title 31, United States Code, chapter 2 of 
title I of Public Law 91–508 (12 U.S.C. 1951 
et seq.), or section 21 of the Federal Deposit 
Insurance Act (12 U.S.C. 1829b);
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‘‘(B) require each such company and ad-
viser to review such policies and procedures an-
nually for their adequacy and the effectiveness 
of their implementation; 
‘‘(C) require each such company to appoint 
a chief compliance officer to be responsible for 
overseeing such policies and procedures—
‘‘(i) whose compensation shall be ap-
proved by the members of the board of di-
rectors of the company who are not inter-
ested persons of such company; 
‘‘(ii) who shall report directly to the 
members of the board of directors of the 
company who are not interested persons of 
such company, privately as such members 
request, but no less frequently than annu-
ally; and 
‘‘(iii) whose report to such members 
shall include any violations or waivers of, 
and any other significant issues arising 
under, such policies and procedures; and 
‘‘(D) require each such company to estab-
lish policies and procedures reasonably designed 
to protect any officer, director, employee, con-
tractor, subcontractor, or agent of such com-
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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-
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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
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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-
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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
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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-
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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
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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
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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.
HR 2420 RFS 
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.
HR 2420 RFS 
(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: 
JEFF TRANDAHL, 
Clerk.