Home > 106th Congressional Bills > S. 205 (is) To establish a Federal Commission on Statistical Policy to study the [Introduced in Senate] ...S. 205 (is) To establish a Federal Commission on Statistical Policy to study the [Introduced in Senate] ...
108th CONGRESS
2d Session
S. 2059
To improve the governance and regulation of mutual funds under the
securities laws, and for other purposes.
_______________________________________________________________________
IN THE SENATE OF THE UNITED STATES
February 10, 2004
Mr. Fitzgerald (for himself, Mr. Levin, and Ms. Collins) introduced the
following bill; which was read twice and referred to the Committee on
Banking, Housing, and Urban Affairs
_______________________________________________________________________
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 Representatives 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. 110. Independent directors.
Sec. 111. Study of director compensation and independence.
Sec. 112. Fiduciary duties of directors.
Sec. 113. Fiduciary duty of investment adviser.
Sec. 114. Termination of fund advisers.
Sec. 115. Independent accounting and auditing.
Sec. 116. Prevention of fraud; internal compliance and control
procedures.
TITLE II--FUND TRANSPARENCY
Sec. 210. Cost consolidation and clarity.
Sec. 211. Advisor compensation and ownership of fund shares.
Sec. 212. Point of sale and additional disclosure of broker
compensation.
Sec. 213. Breakpoint discounts.
Sec. 214. Portfolio turnover ratio.
Sec. 215. Proxy voting policies and record.
Sec. 216. Customer information from account intermediaries.
Sec. 217. Advertising.
TITLE III--FUND REGULATION AND OVERSIGHT
Sec. 310. Prohibition of asset-based distribution expenses.
Sec. 311. Prohibition on revenue sharing, directed brokerage, and soft
dollar arrangements.
Sec. 312. Market timing.
Sec. 313. Elimination of stale prices.
Sec. 314. Prohibition of short term trading; mandatory redemption fees.
Sec. 315. Prevention of after-hours trading.
Sec. 316. Ban on joint management of mutual funds and hedge funds.
Sec. 317. Selective disclosures.
TITLE IV--STUDIES
Sec. 410. Study of adviser conflict of interest.
Sec. 411. Study of coordination of enforcement efforts.
Sec. 412. Study of Commission organizational structure.
Sec. 413. Trends in arbitration clauses.
Sec. 414. Hedge fund regulation.
Sec. 415. 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 ``investment 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 ``investment 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 investment 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 Commission 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 appropriate, in
the public interest or for the protection of investors.
TITLE I--FUND GOVERNANCE
SEC. 110. 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 inserting 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 approved 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 directors who are
not interested persons, after reasonable inquiry by
such directors, not to have any material business or
familial relationship with the registered investment
company, a significant service provider to the company,
or any entity controlling, controlled by, or under
common control with such service provider, that is
likely to impair the independence of the director.''.
(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 investment company shall establish a
committee comprised solely of such members, which committee
shall be responsible 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 registration statement of the
registered investment company.''.
(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, controlled by, or under
common control with such investment adviser or
principal underwriter;
``(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 significant service provider
to such registered investment company, or of
any entity controlling, controlled by, or under
the common 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, determines is unlikely to
exercise an appropriate degree of independence
as a result of--
``(I) a material business
relationship with the investment
company or an affiliated person of such
investment company;
``(II) a close familial
relationship with any natural person
who is an affiliated person of such
investment company; or
``(III) any other reason determined
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, determines is unlikely to
exercise an appropriate degree of independence
as a result of--
``(I) a material business
relationship with such investment
adviser or principal underwriter or
affiliated person of such investment
adviser or principal underwriter;
``(II) a close familial
relationship with any natural person
who is an affiliated person of such
investment adviser or principal
underwriter; or
``(III) any other reason as
determined by the Commission.''.
(d) Definition of Significant Service Provider.--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 `significant service provider'.
``(B) Requirements.--The definition developed 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. 111. STUDY OF DIRECTOR COMPENSATION AND INDEPENDENCE.
(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 investment company or any
affiliate of such company to a director thereof; and
(2) whether a director of a registered investment company
who is otherwise not an interested person of a registered
investment company, as defined 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
companies, 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. 112. 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 investment company to--
``(A) determine the extent to which independent 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 reference
to the interests of shareholders;
``(D) evaluate the quality of the management of the
company and potentially superior alternatives;
``(E) evaluate the quality, comprehensiveness, and
clarity of disclosures to shareholders regarding costs;
``(F) evaluate any distribution or marketing 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;
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