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H.R. 2421 (ih) To implement the recommendations of the Northern Forest Lands Council. [Introduced in House] ...
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 Representatives of the United States of America in Congress assembled, SECTION 1. SHORT TITLE. This Act may be cited as the ``Mutual Funds Integrity 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 protection of investors and the public interest, improved disclosure with respect to an open-end management investment company, in the quarterly statement or other periodic report to shareholders or other appropriate disclosure document, of the following: (1) The estimated amount, in dollars, of the operating expenses of the company that are borne by each shareholder. (2) The structure of, or method used to determine, 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 company, including commissions paid with respect to the trading of portfolio securities, set forth in a manner that facilitates comparison among investment companies. (4) Information concerning the company's policies 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 availability of securities or purchasers or sellers of securities; (B) furnishes analyses and reports concerning 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 appropriate disclosure document if the disclosure is made exclusively in a prospectus or statement of additional information, 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 following new subsection: ``(g) Obligations Regarding Certain Distribution and Soft Dollar Arrangements.-- ``(1) Reporting requirements.--Each investment 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 paragraph (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 brokerage and research services) in exchange for the direction of brokerage to the broker or dealer (referred to in paragraph (2) as a `directed brokerage arrangement'); and ``(C) research services obtained by the adviser (or an affiliated person of the adviser) during the reporting period from a broker or dealer the receipt of which may reasonably be attributed to securities transactions effected on behalf of the company or any other company that is a member of the same group of investment companies (referred to in paragraph (2) as a `soft dollar arrangement'). ``(2) Fiduciary duty of board of directors.--The board of directors of a registered investment company shall have a fiduciary duty-- ``(A) to supervise the investment adviser's direction of the company's brokerage transactions, including directed brokerage arrangements and soft dollar arrangements, and to determine that the direction of such brokerage is in the best interests of the shareholders of the company; and ``(B) to supervise any revenue sharing arrangements to ensure compliance with this Act and the rules adopted thereunder, and to determine that such revenue sharing arrangements are in the best interests of the shareholders of the company. ``(3) Regulations.--The Commission shall adopt rules and regulations implementing this section, which rules and regulations shall, among other things, prescribe the content of the required reports. ``(4) Definition.--For purposes of this subsection-- ``(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 interested 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 redesignating clause (vii) as clause (vi); and (B) by amending clause (v) to read as follows: ``(v) any natural person who is a member of a class of persons who the Commission, by rule or regulation, determines are unlikely to exercise an appropriate degree of independence as a result of-- ``(I) a material business or professional relationship with the company or any affiliated person of the company, or ``(II) a close familial relationship with any natural person who is an affiliated person of the company,''; and (2) in subparagraph (B)-- (A) by striking clause (vi) and redesignating clause (vii) as clause (vi); and (B) by amending clause (v) to read as follows: ``(v) any natural person who is a member of a class of persons who the Commission, by rule or regulation, determines are unlikely to exercise an appropriate degree of independence as a result of-- ``(I) a material business or professional relationship with such investment adviser or principal underwriter (or affiliated person thereof), or ``(II) a close familial relationship with a natural person who is such investment adviser or principal underwriter (or affiliated person thereof).''. SEC. 5. AUDIT COMMITTEE REQUIREMENTS FOR INVESTMENT 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 subsection (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 annual 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 registered 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 subsection: ``(d) Audit Committee Requirements.-- ``(1) Requirements as prerequisite to filing financial statements.--Any registered management company or registered face-amount certificate company that files with the Commission any financial statement signed or certified by an independent public accountant shall comply with the requirements of paragraphs (2) through (6) of this subsection and any rule or regulation of the Commission issued thereunder. ``(2) Responsibility relating to independent public accountants.--The audit committee of the registered 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 independent public accountant employed by such registered company (including resolution of disagreements between management and the auditor regarding financial reporting) for the purpose of preparing 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 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 paragraph, 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 committee, the board of directors, or any other board committee-- ``(i) accept any consulting, advisory, or other compensatory fee from the registered company or any affiliated person of the registered company; or ``(ii) be an `interested person' of the registered company, as such term is defined 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 company regarding accounting, internal accounting controls, or auditing matters; and ``(B) the confidential, anonymous submission by employees of the registered company and its affiliated persons of concerns regarding questionable accounting 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 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) established by and amongst the board of directors of a registered investment company for the purpose 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 respect 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 adding at the end the following new paragraph: ``(7) Exemption for investment companies.--Effective one year after the date of enactment of the Mutual Funds Integrity and Fee Transparency 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 Investment 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.
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