To improve transparency relating to the fees and costs that mutual fund investors incur and to improve corporate governance of mutual funds.

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.

(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 arrangements.

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 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 for each $1,000 of investment in the company, of the operating expenses of the company that are borne by shareholders.

(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, and the ownership interest 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 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) 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 disclosure is made exclusively in a prospectus or statement of additional information, or both such documents.

(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 disclosure is made exclusively in a prospectus or statement of additional information, or both such documents.

(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 market 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 REQUIRED- 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 Financial Services of the House of Representatives and the Committee on Banking, Housing, and Urban Affairs of the Senate, no later than 270 days after the date of enactment of this Act.

(d) ADDITIONAL REQUIREMENT FOR FEE STATEMENT-

(1) IN GENERAL- Not later than 270 days after the date of enactment of this Act, the Commission 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 statements, and where such shareholders may find additional 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 disclosure document unless such statement is--

(A) made in each periodic statement to a shareholder that discloses the value of the holdings 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 prescribing rules under this section, the Commission shall give consideration to methods for reducing for small investment 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 DISTRIBUTION 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 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 review 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 review 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) SUMMARIES OF REPORTS IN ANNUAL REPORTS TO SHAREHOLDERS- In accordance with regulations prescribed by the Commission under paragraph (4), annual reports to shareholders of a registered investment company shall include a summary of the most recent report submitted to the board of directors under paragraph (1).

`(4) 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.

`(5) 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.'.

(b) CONTRACTUAL RECORDS- Within 270 days after the date of enactment of this Act, the Securities and Exchange 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 defined in section 15(g)(5)(B) of the Investment Company Act of 1940, as amended by subsection (a) of this section)--

(A) are provided by a member of an exchange, 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 respect 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 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. 104. 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) 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 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

(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 requirement 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 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 the investment adviser or principal underwriter 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 investment adviser or principal underwriter 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. 105. TRADING RESTRICTIONS.

Subsection (e) of section 22 of the Investment Company Act of 1940 (15 U.S.C. 80a-22(e)) is amended to read as follows:

`(e) TRADING RESTRICTIONS-

`(1) PROHIBITION AND EXCEPTIONS- No registered investment company shall suspend the right of redemption, or postpone the date of payment or satisfaction upon redemption of any redeemable security 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 emergency 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 reasonably practicable for such company fairly to determine the value of its net assets; or

`(C) for such other periods as the Commission 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 organization (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 DEFICIENCIES.

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 DEFICIENCIES- If the report of an inspection by the Commission of a registered investment company identifies significant deficiencies in the operations of such company, or of its investment adviser or principal underwriter, the company shall provide such report to the directors of such company.'.

SEC. 108. EXEMPTION FROM IN PERSON MEETING REQUIREMENTS.

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 investment company subject to this subsection from the requirement that the votes of its directors be cast at a meeting in person when such a requirement is impracticable, subject 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 Commission not later than August 31 of each year an annual report, on a form prescribed by the Commission by rule, containing the registrant's proxy voting record for the most recent twelve-month period ending on June 30. The financial statements of every such company shall state that information regarding how the company voted proxies relating to portfolio securities during the most recent 12-month period ending on June 30 is available--

`(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 Commission 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 company 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, payments by persons other than the investment company that are intended to facilitate the sale and distribution of the securities, and commissions for effecting portfolio securities transactions, or other payments, paid to such broker or dealer, or municipal 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, including as a result of purchases or redemptions;

(3) any conflicts of interest that any associated person of the investor's broker or dealer or municipal 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 connection with the investor's purchase of the securities.

(b) BENCHMARKS- In connection with the rule required by subsection (a), the Commission shall, to the extent practical, establish standards for such disclosures.

(c) DEFINITIONS-

(1) DIFFERENTIAL COMPENSATION- For purposes of this section, an associated person of a broker or dealer shall be considered to receive differential compensation if such person receives any increased or additional remuneration, in whatever form--

(A) for sales of the securities of an investment company or municipal fund security that is affiliated with, or otherwise specifically designated 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 affiliated or designated; or

(B) for the sale of any class of securities of an investment company or municipal fund security as compared with the remuneration for the sale of a class of securities of such investment company or municipal fund security (offered by such broker or dealer or municipal securities broker or dealer) that charges a sales load (as defined in section 2(a)(35) of the Investment 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 purposes 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 meaning 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 conduct 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 required by this section shall examine--

(A) the trends in the average amounts of soft dollar commissions paid by investment advisers 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 interest (or both potential and actual conflicts) created by soft dollar arrangements, including whether certain potential conflicts are being managed effectively by other laws and regulations 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 shareholders and investment advisory clients of investment 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 legislative changes should be considered and adopted to benefit investors.

(b) REPORT REQUIRED- The Commission shall submit a report on the study required by subsection (a) to the Committee on Financial Services of the House of Representatives 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 Exchange 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 Commission shall submit a report on the study required by subsection (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 ABUSIVE MUTUAL FUND PRACTICES

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 unlawful for any affiliated person of or principal underwriter for a registered investment company or any affiliated person of an investment adviser of or principal underwriter for a registered investment company, to engage in any act, practice, or course of business in connection with the purchase or sale, directly 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 investment company, in contravention of such rules and regulations as the Commission may adopt to define, 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 regulations shall include requirements for the adoption of codes of ethics by registered investment companies and investment advisers of, and principal underwriters for, such investment companies establishing such standards as are reasonably necessary to prevent 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 material violations thereof on a readily accessible electronic public information facility of such company 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 Commission to adopt and implement policies and procedures 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 Indenture 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 Securities 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);

`(B) require each such company and adviser to review such policies and procedures annually 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 approved by the members of the board of directors of the company who are not interested 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 annually; 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 establish policies and procedures reasonably designed to protect any officer, director, employee, contractor, subcontractor, or agent of such company from retaliation, including discharge, demotion, suspension, harassment, or any other manner of discrimination in the terms and conditions 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 relates to any conduct which such officer, director, 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 appropriate 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, redemption, and sale complies with the requirements of the Investment Company Act of 1940 and the rules and regulations thereunder, and the company is in compliance with such procedures;

`(B) procedures are in place for the oversight 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 different classes of shares, such classes are designed 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 securities is not disclosed in violation of the securities 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 connection with their consideration of the investment advisory contract under section 15(c);

`(G) the company has established and enforces 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 Exchange 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 subsection:

`(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 individual 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 conflicts in the selection of the portfolio securities.

`(2) EXCEPTIONS- Notwithstanding paragraph (1), the Commission may, by rule, regulation, or order, permit joint management by a portfolio manager in exceptional circumstances when necessary 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 procedures for the allocation of securities to the portfolios of the jointly managed companies, and certification by the members of the board of directors who are not interested persons of such registered open-end investment company, in the periodic report to shareholders, or other appropriate disclosure document, that such policies and procedures of such company are fair and equitable.

`(3) DEFINITION- For purposes of this subsection, the term `portfolio manager' means the individual or individuals who are designated as responsible for decision-making in connection with the securities 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 Exchange 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 following 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 company, or any officer, director, partner, or employee of such an affiliated person, investment adviser, or principal underwriter, to engage in short-term transactions, as such term is defined by the Commission by rule, in any securities of which such company, or any affiliate of such company, 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 excess 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 Exchange 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 prescribe, by rule or regulation, standards concerning the obligation 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 accurately reflect the fair market value of the companies' portfolio securities, in order to prevent dilution of the interests of long-term investors or as necessary in the other interests of investors. Such rule or regulation shall identify, in addition to significant events, the conditions or circumstances 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 applied 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 transactions in the securities of any registered open-end investment 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 investment company by a broker-dealer, retirement plan administrator, 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 acceptance 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 enactment, the Securities and Exchange Commission shall submit 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 mutual 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 Enforcement, 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 surrounding the Commission's discovery of that activity.

(4) The steps the Commission has taken since becoming aware of market timing practices to protect long-term mutual fund investors.

(5) Any additional legislative or regulatory action 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.

END