For other versions of this document, see http://wikileaks.org/wiki/CRS-RL32157 ------------------------------------------------------------------------------ Order Code RL32157 CRS Report for Congress Received through the CRS Web Mutual Fund Reform Bills in the 108th Congress: A Side-by-Side Comparison Updated February 2, 2005 Mark Jickling Specialist in Public Finance Government and Finance Division Congressional Research Service ~ The Library of Congress Mutual Fund Reform Bills: A Side-by-Side Comparison Summary The mutual fund was embroiled in scandal in September 2003, when New York Attorney General Eliot Spitzer brought charges against a few mutual funds, brokers, and hedge funds. Subsequently, the New York investigation widened, and the Securities and Exchange Commission (SEC) intensified its scrutiny of mutual funds. A number of illegal or unethical practices came under investigation: the common theme is that fund managers and insiders have permitted favored customers, including hedge funds, to engage in highly profitable short-term trading strategies that reduce the investment returns of millions of long-term investors. A number of firms have paid fines to settle civil charges. The SEC reported (in testimony before the Senate Governmental Affairs Committee on November 3, 2003) that preliminary investigations indicated that trading practices that appear to be abusive (but not in all cases illegal) were widespread in the industry. The congressional response to the mutual fund investigations included several hearings and bills. Legislative proposals in the 108th Congress included H.R. 2420 (Representative Baker), which passed the House on November 19, 2003; S. 1822 (Senator Akaka), introduced November 5, 2003; S. 1958 (Senators Kerry and Kennedy), introduced November 25, 2003; S. 1971 (Senators Dodd and Corzine), also introduced on November 25, 2003; and S. 2059 (Senators Fitzgerald, Levin, and Collins), introduced on February 10, 2004. All of these bills would have required mutual funds to provide more information to investors about the fees they charge and about the funds' financial relationships with stockbrokers and investment advisers. The bills also required that funds' governing boards contain majorities of independent directors with no financial or family ties to fund management. S. 1958 proposed the creation of a new mutual fund regulator to carry out registration, inspections, and disciplinary proceedings, and to make rules promoting mutual fund ethics and independence. None of these bills was enacted by the 108th Congress. However, the SEC, using its existing statutory authority, has issued rules that incorporate some of the provisions of the legislative proposals. For instance, the SEC has mandated that mutual fund boards have an independent chairman and a majority of independent directors. Other regulations are under consideration and the SEC appears to have become more vigilant and aggressive in its oversight of the funds. Thus, unless new scandals appear, some may now see the need for reform legislation as less pressing. This report compares the provisions of these legislative proposals. It serves as an historical record of legislative activity in the 108th Congress, and will not be updated. Contents Side-by-Side Comparison of Mutual Fund Reform Legislation in the 108th Congress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 New Regulatory Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Disclosure and Regulation of Mutual Fund Fees and Costs . . . . . . . . . 3 Soft Dollar, Revenue Sharing, and Directed Brokerage Arrangements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Mutual Fund Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Restrictions on Late Trading, Market Timing, and Other Forms of Trading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Other Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Studies and Reports Called For . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Mutual Fund Reform Bills: A Side-by-Side Comparison The mutual fund scandal began in September 2003, when New York Attorney General Eliot Spitzer brought civil and criminal charges against a few mutual funds, brokers, and hedge funds. Since then, the New York investigation has widened, and the Securities and Exchange Commission (SEC) has intensified its scrutiny of mutual funds. Several illegal or unethical practices are under investigation: the common theme is that fund managers and insiders have permitted favored customers, including hedge funds, to engage in highly profitable short-term trading strategies that reduce the investment returns of millions of long-term investors. The number of firms and individuals charged to date is fairly small, but growing. The SEC reported (in testimony before the Senate Governmental Affairs Committee on November 3, 2003) that preliminary investigations indicate that trading practices that appear to be abusive (but not in all cases illegal) are fairly widespread in the industry. Congressional response to the mutual fund investigations took the forms of hearings and proposed legislation. On November 19, 2003, the House passed a mutual fund reform bill, H.R. 2420, by a vote of 418-2. In the Senate, four bills were introduced -- S. 1822, S. 1958, S. 1971, and S. 2059 -- but none saw committee action. All the bills would have required mutual funds to make more extensive disclosure of the fees and charges that investors pay. Financial relationships among mutual funds, brokers, and investment advisers would also have to be disclosed. Under three of the bills, brokers selling mutual funds would have had to disclose how their compensation was structured, including any incentives for selling particular funds. The proposals would all have required mutual funds' boards of directors to contain majorities of independent directors -- those not affiliated with the funds or its advisers. The bills also included various provisions to enhance the oversight role of the board, in matters such as auditing, nomination of directors, and supervision of ethical and legal compliance. S.1958 proposed an independent regulator for mutual funds, to operate under the oversight of the SEC. S. 2059 would repeal SEC Rule 12b-1, which permits funds to charge investors for certain marketing, advertising, and distribution costs. Finally, the proposals called for a number of reports or studies on subjects including the creation of an independent regulator for mutual funds, the SEC's enforcement record, "soft dollar" arrangements (financial links among brokers, advisers, and funds), transaction costs, arbitration in mutual fund disputes, fund advertising, and the financial literacy of mutual fund investors. CRS-2 Side-by-Side Comparison of Mutual Fund Reform Legislation in the 108th Congress Provision H.R. 2420 S. 1822 S. 1958 S. 1971 S. 2059 (Rep. Baker) (Sen. Akaka) (Sen. Kerry & Kennedy) (Sens. Dodd & Corzine) (Sen. Fitzgerald, et al.) Short Title Mutual Funds Integrity Mutual Fund Mutual Fund Investor Mutual Fund Investor Mutual Fund Reform Act of and Fee Transparency Act Transparency Act of Protection Act of 2003 Confidence Restoration Act 2004 of 2003 2003 of 2003 New Regulatory Structure. New mutual fund No provision. SEC shall study and Establishes a Mutual Fund GAO is directed to study Directs GAO to study the regulator report to Congress on the Oversight Board to register the feasibility and benefits efficacy of the SEC's current creation of an entity with mutual funds and establish (if any) to shareholders of organizational structure as it inspection and ethical, quality control, establishing a Mutual Fund affects the regulation of mutual enforcement authority internal auditing, Oversight Board with funds. over mutual fund boards independence, and other inspection, examination, (Sec. 412) of directors, funded by standards. The Board will and enforcement authority assessments on mutual conduct inspections and over mutual fund boards of funds, and appointed by investigations of mutual directors. the SEC. funds, and may impose a (Sec. 401) (Sec. 3(e)) range of sanctions, including civil fines. The Board will have five members, appointed by the SEC to five year terms. The SEC will have oversight authority, including the right of prior approval (or modification) of all the Board's rules. The Board's budget (to be subject to SEC approval) will be funded by an annual assessment upon registered mutual funds. (Title II) CRS-3 Provision H.R. 2420 S. 1822 S. 1958 S. 1971 S. 2059 (Rep. Baker) (Sen. Akaka) (Sen. Kerry & Kennedy) (Sens. Dodd & Corzine) (Sen. Fitzgerald, et al.) Disclosure and Regulation of Mutual Fund Fees and Costs. Improved Directs the SEC to require Brokers selling mutual Directs the SEC to revise its Directs SEC to require Directs the SEC to make rules disclosure of periodic disclosure of: funds would be required regulations to require disclosure of: setting forth standardized forms mutual fund fees (1) the estimated amount, to disclose to their disclosure of: (1) the actual dollar amount of disclosure of as many and costs in dollars per $1000 customers (1) the estimated dollar borne by each shareholder operating and transaction costs invested, of operating the amount of amount of the fund's of the fund's expenses; that are borne by shareholders as expenses borne by compensation to be operating expenses borne by (2) the structure and total is practicable. The SEC shall shareholders; (2) how the received by the broker. each shareholder (and the amount of compensation also require funds to disclose fund pays investment Such disclosure must be amount per $1000 invested); paid to investment advisers, annually the dollar amount of advisers, and those made before the sale is (2) how the fund pays and advisers' investments such costs charged to each advisers' investments in final. investment advisers, and in the fund; customer's account, based on the the fund; (3) the rate at (Sec. 2(a)) those advisers' holdings in (3) the dollar amounts of all value of customers' holdings. which the fund turns over the fund; payments made by the The SEC would define which its portfolio; (4) how the Funds would be required (3) the rate at which the fund, set out so as to permit expenses and costs could be fund pays commissions to to include the cost of fund turns over its portfolio; comparison among funds; charged to shareholders. (Sec. brokers who provide brokerage commissions (4) commission payments to (4) how the fund pays 210) investment advice or in any disclosure of fees brokers who provide commissions to brokers research or who facilitate and expenses that may be investment advice or who provide investment Would require funds to disclose the sale of the fund's payable by shareholders. research or who facilitate the advice or research or who the amount and structure of shares; (5) payments to (Sec. 2(b)) sale of the fund's shares; facilitate the sale of the compensation paid to the fund's any other person who (5) payments to any other fund's shares; portfolio management team, as facilitates the sale of the SEC shall by rule require persons who facilitate the (5) payments to any other well as the value of their fund's shares; and (6) funds to disclose how sale of the fund's shares; person who facilitates the holdings of the fund's shares. information on fee they compensate and (6) information on sale of the fund's shares; (Sec. 211) discounts for which portfolio managers, and discounts in front-end fees and investors may be eligible, the ownership of fund for which investors may be (6) information on Reports filed with the SEC including the minimum shares by such eligible, including the discounts in front-end fees would include information on purchase amounts investment advisers and minimum required purchase for which investors may be "breakpoints," or volume (breakpoints) required to their employees. amounts ("breakpoints"). eligible, including the discounts for which investors qualify for discounts. (Sec. 4) (Sec. 101) minimum required purchase may be eligible. (Sec. 213) (Sec. 101) amounts (breakpoints). (Sec. 101) Funds would be required to disclose and explain their portfolio turnover ratio. (Sec. 214) CRS-4 Provision H.R. 2420 S. 1822 S. 1958 S. 1971 S. 2059 (Rep. Baker) (Sen. Akaka) (Sen. Kerry & Kennedy) (Sens. Dodd & Corzine) (Sen. Fitzgerald, et al.) Mandatory SEC shall require that No provision. Fee disclosure must be No provision. Disclosures about operating costs inclusions in fee quarterly statements included in each statement and transaction cost ratios must disclosures disclose that investors of account, and fee be displayed prominently, and all have been charged fees, information must be fees, charges, and expenses must and where additional displayed in close proximity be clearly defined. information on fees may to the value of the investor's (Sec. 210) be found. shares. (Sec. 101) (Sec 101) Disclosure of SEC shall by rule require Brokers selling mutual No provision. Brokers would be required Brokers would be required to fees and disclosure by brokers of funds would be required to disclose in writing to disclose in writing the amount compensation in the amount and source of to disclose to their their customers the amount and source of compensation they mutual fund sales sales fees and charges, customers and nature of compensation receive for selling the fund. incentives, commissions, the amount of they receive for selling Such disclosure must be made any other expenses compensation to be mutual funds, and any before the sale is concluded, and incurred in the sale of received by the broker. conflicts of interest that may not be made exclusively in a mutual funds or municipal (Sec. 2(a)) arise from such registration statement or securities, as well as compensation. prospectus. related conflicts of interest (Sec. 104) (Sec. 212) between the broker and the customer. (Sec. 110) SEC approval of No provision. No provision. No provision. No provision. SEC directed to define by rule all new fees and specific types of fees and expenses expenses that may be borne by fund shareholders. No new fee may be imposed on shareholders unless the SEC determines that the fee fairly reflects services provided, or that the fee is in the shareholders' best interests. (Sec. 210(e)) CRS-5 Provision H.R. 2420 S. 1822 S. 1958 S. 1971 S. 2059 (Rep. Baker) (Sen. Akaka) (Sen. Kerry & Kennedy) (Sens. Dodd & Corzine) (Sen. Fitzgerald, et al.) Repeal of Rule No provision. No provision. No provision. No provision. Repeals SEC Rule 12b-1, which 12b-1 allows funds to charge marketing and distribution expenses to the shareholders. Such expenses would instead be paid out of the management fee received by the investment adviser. The adviser's expenditures related to sale of fund shares must be disclosed to the fund's board of directors and accounted for in the fund's published expense ratio. The board may prohibit the adviser from incurring distribution expenses that are not in the shareholders' interest. (Sec. 310) Prohibition of No provision. No provision. No provision. No provision. Asset-based distribution fees (to asset-based be defined by the SEC) are distribution fees prohibited. (Sec. 310) Reduction of SEC shall consider ways No provision. SEC shall consider ways of No provision. No provision. disclosure burden of reducing costs reducing costs associated on small funds associated with disclosure with disclosure to small to small funds, consistent funds, consistent with public with public interest. interest. (Sec. 101) (Sec. 101) Definition of no- SEC directed to make No provision. No provision. SEC directed to make rules No provision. load fund rules defining "no-load" defining "no-load" mutual mutual funds and funds and requiring requiring disclosure to disclosure to prevent prevent investors from investors from being misled being misled by the use of by the use of such such terminology. terminology. (Sec. 106) (Sec. 103) CRS-6 Provision H.R. 2420 S. 1822 S. 1958 S. 1971 S. 2059 (Rep. Baker) (Sen. Akaka) (Sen. Kerry & Kennedy) (Sens. Dodd & Corzine) (Sen. Fitzgerald, et al.) Soft Dollar, Revenue Sharing, and Directed Brokerage Arrangements. Disclosure of, or Investment advisers to Soft dollar payments Certain soft dollar payments Investment advisers to Amends statute to prohibit soft restrictions upon, mutual funds must report would be included in the would be included in the registered mutual funds dollar, revenue sharing, and soft dollar, annually to the fund's aggregate brokerage aggregate operating would be required to report directed brokerage arrangements, revenue sharing, board on (1) payments commission disclosure expenses disclosures annually to the fund's board as defined. The SEC is and directed made to promote sale of required by Sec. 2(b). mandated by Sec. 101. regarding all payments authorized to refine the statutory brokerage the fund's shares received and services definition of these terms by rule, arrangements ("revenue sharing"), (2) provided (including or otherwise tailor the services or payments to research). A summary of proscriptions in this section, if it the fund by a broker in these reports would be is in the interest of fund exchange for brokerage included in the fund's shareholders, or if such business ("directed annual report to modifications reduce conflicts of brokerage"), and (3) shareholders. interest or increase transparency research services obtained (Sec. 102) and competition in trade by the adviser from a executions. broker in exchange for (Sec. 311) securities transactions ("soft dollar arrangements"). A summary of this annual report must be included in the annual report to shareholders. (Sec. 102) Fiduciary duty of Directors shall have a No provision. SEC shall issue regulations No provision. No provision: such arrangements mutual fund fiduciary duty to review establishing a fiduciary duty would be prohibited by Sec. 311. directors such arrangements to for directors to demonstrate regarding soft ensure that they comply that all management, dollar, revenue with law and regulation marketing, and investment sharing, and and are in the best advisory fees paid by the directed interests of fund fund are reasonable and in brokerage shareholders. the best interests of fund arrangements (Sec. 102) shareholders. (Sec. 101(g)) CRS-7 Provision H.R. 2420 S. 1822 S. 1958 S. 1971 S. 2059 (Rep. Baker) (Sen. Akaka) (Sen. Kerry & Kennedy) (Sens. Dodd & Corzine) (Sen. Fitzgerald, et al.) Record keeping SEC shall by rule require No provision. No provision. No provision. No provision: such arrangements requirements that all such arrangements would be prohibited (see above). regarding soft involving research service dollar, revenue be documented by written sharing, and contracts that describe the directed nature and value of brokerage services provided. arrangements (Sec. 102) Mutual Fund Governance. Independent At least 2/3 of a mutual At least 75% of a mutual At least 75% of a mutual At least 75% of a mutual At least 75% of a mutual fund's directors and fund's directors must be fund's directors must be fund's directors must be fund's directors must be directors must be independent, chairmen independent (versus 40% independent, including independent. The chairman independent. The chairman including the chairman of the under current law). the chairman of the of the board must be of the board must be board. (Sec. 103(a)) board. independent. independent. (Sec. 101(e)) (Sec. 201) Interested persons who serve as Interested persons who board members must be serve as board members approved by shareholder vote at must be approved by least every five years. shareholder vote at least (Sec. 110) every five years. (Sec. 3(a)) Prohibition on No provision. No action taken by the No provision. No provision. No provision. actions requiring board may require the the vote of non- vote of a non- independent independent director. directors (Sec. 3(b)) Termination of No provision. No provision. No provision. No provision. SEC is directed to make a rule investment facilitating the termination of an adviser investment adviser by a fund's independent directors, without undue exposure to financial or litigation risk. (Sec. 114) CRS-8 Provision H.R. 2420 S. 1822 S. 1958 S. 1971 S. 2059 (Rep. Baker) (Sen. Akaka) (Sen. Kerry & Kennedy) (Sens. Dodd & Corzine) (Sen. Fitzgerald, et al.) Nomination of No provision. A committee made up No provision. A committee made up A committee made up entirely of directors entirely of independent entirely of independent independent directors shall select directors shall select directors shall select persons to be nominated to the persons to be nominated persons to be nominated to board, adopt qualification to the board and adopt the board and adopt standards, and set compensation qualification standards qualification standards for for directors. for directors. directors. (Sec. 110) (Sec. 3) (Sec. 201) Definition of A member of a class of Includes any person with A member of a class of Includes any person with a Includes any person with a "interested persons whom the SEC by a material business or persons whom the SEC by material business or family material business or family person" (i.e., not rule deems to be unlikely family relationship with, rule deems to be unlikely to relationship with, or who relationship with, or who was independent) to exercise an appropriate or who was employed by exercise an appropriate was employed by a fund's employed by a fund's investment degree of independence a fund's investment degree of independence investment adviser, adviser, principal underwriter, or because of a business, adviser, underwriter, or because of a business, underwriter, or who served who served as an officer or professional, or family who served as an officer professional, or family as an officer or director of a director of a "significant service relationship with fund or director of a relationship with fund "significant service provider" (to be defined by the management or "significant service management or investment provider" (to be defined by SEC) within the last 10 years. investment advisers. provider" (to be defined advisers. the SEC) within the last 10 (Sec. 110) (Sec. 103(b)) by the SEC) within the (Sec. 101(f)) years. (If one was merely last 10 years. (If one was employed by the significant merely employed by the service provider, the term significant service of restriction is five years.) provider, the term of (Sec. 201) restriction is five years.) (Sec. 3) CRS-9 Provision H.R. 2420 S. 1822 S. 1958 S. 1971 S. 2059 (Rep. Baker) (Sen. Akaka) (Sen. Kerry & Kennedy) (Sens. Dodd & Corzine) (Sen. Fitzgerald, et al.) Fiduciary duties No provision. No provision. Directs the SEC to make Board of directors shall Directs the SEC to make rules of independent rules specifying that the have a fiduciary duty to clarifying the fiduciary duties of directors and board of directors shall have ensure that soft dollar, independent directors, which investment a fiduciary duty to directed brokerage, and shall include (1) evaluation of advisers demonstrate that all revenue sharing the relationship between fees and negotiated fees are arrangements adhere to the actual costs, the quality of reasonable and in the fund's stated policies and management and disclosures, the shareholders' interest, and to are in the shareholders' best size and suitability of the fund's disclose any business or interests. portfolio, costs and benefits of professional links between (Sec. 102) marketing plans, and other directors and providers of matters, and (2) implementation advisory, investment, or and monitoring of policies to other services to the fund. ensure compliance with (Sec. 101) securities laws, and policies with respect to predatory trading practices. (Sec. 113) For investment advisers, fiduciary duty shall include supplying independent directors with material information and may require reference to the adviser's actual costs with respect to compensation received from the fund. (Sec. 114) CRS-10 Provision H.R. 2420 S. 1822 S. 1958 S. 1971 S. 2059 (Rep. Baker) (Sen. Akaka) (Sen. Kerry & Kennedy) (Sens. Dodd & Corzine) (Sen. Fitzgerald, et al.) Audit committee A mutual fund's board No provision. No provision. Audit committees would The audit committees would composition and shall include an audit consist entirely of consist entirely of independent responsibilities committee, made up independent directors, and directors, and would be entirely of independent would be responsible for responsible for hiring, directors, which shall be hiring, compensating, and compensating, and overseeing responsible for selection, overseeing outside auditors. the fund's outside auditor. compensation, and The audit committee will Selection of an auditor would be oversight of the fund's also establish procedures subject to ratification by independent auditor, and for receiving and shareholder vote. The audit for procedures for encouraging complaints committee will also establish monitoring complaints about auditing and procedures for receiving and from investors and fund accounting matters. encouraging complaints about employees regarding (Sec. 202) auditing and accounting matters. questionable accounting (Sec. 115) and auditing practices. (Sec. 104) Financial expert No provision. No provision. No provision. Each mutual fund board No provision. shall include a financial expert, to be defined by the SEC. (Sec. 201) Exemption from SEC may exempt mutual No provision. No provision. No provision. SEC may exempt mutual fund in-person fund directors from the directors from the requirement meeting requirement that they be that they be physically present to requirements physically present to cast cast a vote, if their presence is a vote, if their presence is impractical. impractical, and if this (Sec. 115) exemption is consistent with the public interest. (Sec. 108) CRS-11 Provision H.R. 2420 S. 1822 S. 1958 S. 1971 S. 2059 (Rep. Baker) (Sen. Akaka) (Sen. Kerry & Kennedy) (Sens. Dodd & Corzine) (Sen. Fitzgerald, et al.) Notice of If an SEC inspection No provision. No provision. Significant deficiencies in a No provision. regulatory discovers deficiencies in a fund or its advisers and deficiencies fund's operations, fund underwriters found by SEC management must inform inspectors must be the board of directors. disclosed to the fund's (Sec. 107) board. The 10 most common deficiencies in mutual funds would be made public annually by the SEC. (Sec. 203) Insider Short-term transactions in No provision. No provision. Share purchases by senior Short-term transactions by fund transactions in fund shares by insiders, executive officers of mutual insiders, affiliates, advisers, or fund shares advisers, or underwriters funds must be disclosed and underwriters would be prohibited. shares must be held at least prohibited. The prohibition (Sec. 203) six months. excludes money market funds. (Sec. 307) The SEC would define short- term trading. (Sec. 314) CRS-12 Provision H.R. 2420 S. 1822 S. 1958 S. 1971 S. 2059 (Rep. Baker) (Sen. Akaka) (Sen. Kerry & Kennedy) (Sens. Dodd & Corzine) (Sen. Fitzgerald, et al.) Certification of Independent directors No provision. No provision. Board chairman would be Fund advisers would be required financial shall certify in disclosure required to certify the to certify that net asset values of statements and/or documents that procedures accuracy of disclosure fund shares were calculated operational are in place to oversee the documents, and that appropriately, that different procedures setting of net asset values, procedures were in place to classes of shares (if offered) are the flow of funds in and oversee the setting of net in shareholders' interest, that out of the mutual fund, the asset values, the flow of portfolio information is not provision of discounts to funds in and out of the improperly disclosed, that the eligible investors, that mutual fund, the provision independent directors have different classes of mutual of discounts to eligible reviewed the compensation of fund shares are investors, that different the fund's portfolio manager, and appropriate for investors, classes of mutual fund that the code of ethics is in place disclosure of the fund's shares are appropriate for and enforced. portfolio, compensation of investors, disclosure of the (Sec. 116) portfolio managers, and fund's portfolio, the fund's code of ethics compensation of portfolio and antifraud policies. managers, and that the fund (Sec. 201) has established and enforces a code of ethics. (Sec. 204) Ethics Requires funds and No provision. Directs the SEC to require Requires funds and Requires funds, advisers, and compliance investment advisers to funds to appoint a investment advisers to principal underwriters to adopt adopt a code of ethics and compliance officer, who will adopt a code of ethics and codes of ethics to prevent policies and procedures to report only to independent policies and procedures to fraudulent, deceptive, or prevent violations of law directors. prevent violations of law manipulative conduct. Funds and SEC regulations, to (Sec. 101(j)) and SEC regulations, to must adopt policies and review those policies review those policies procedures reasonably designed annually, and to appoint a annually, and to appoint a to prevent violations of law and compliance officer. compliance officer, who regulation, to review such Independent directors would certify that policies annually, and to appoint shall certify that such appropriate internal a chief compliance officer, procedures and policies controls existed.. reporting only to the independent are in force. (Sec. 301) directors. Funds must also adopt (Sec. 201) rules to protect whistleblowers. (Sec. 116) CRS-13 Provision H.R. 2420 S. 1822 S. 1958 S. 1971 S. 2059 (Rep. Baker) (Sen. Akaka) (Sen. Kerry & Kennedy) (Sens. Dodd & Corzine) (Sen. Fitzgerald, et al.) Restrictions on Late Trading, Market Timing, and Other Forms of Trading. Late trading rules SEC directed to write No provision. Amends the Investment SEC directed to write rules SEC directed to issue rules to rules to prevent after- Company Act to prohibit to prevent and detect after- prevent late trading and to hours trading. late trading. hours trading. regulate the processing of late (Sec. 205) (Sec. 101(a)) (Sec. 306) orders received through intermediaries at the previous day's price. (Sec. 315) SEC directed to issue rules requiring intermediaries to provide funds with sufficient customer information to allow them to enforce their trading policies. (Sec. 216) Increased No provision. No provision. Increases civil and criminal No provision. No provision. penalties penalties. (Sec. 101) CRS-14 Provision H.R. 2420 S. 1822 S. 1958 S. 1971 S. 2059 (Rep. Baker) (Sen. Akaka) (Sen. Kerry & Kennedy) (Sens. Dodd & Corzine) (Sen. Fitzgerald, et al.) Market timing Short-term transactions in No provision. Requires disclosure of Short-term transactions in The SEC would require rules fund shares by affiliated market timing policies and fund shares by affiliated disclosure of a fund's market persons (fund managers, steps taken to prevent abuse persons (fund managers, timing policy (or lack of such a directors, advisers, or of such policies. directors, advisers, or policy). underwriters) are (Sec. 101(d)) underwriters) are (Sec. 312) prohibited. prohibited. Prohibits short-term Short-term transactions by fund SEC directed to make transactions in fund shares Directs the SEC to require insiders, affiliates, advisers, or rules permitting funds to by interested persons (fund funds that do not allow underwriters would be charge redemption fees in managers, directors, market timing trading to prohibited. The prohibition excess of 2% to prevent advisers, or underwriters). charge a redemption fee for excludes money market funds. short-term trading that the (Sec. 101(i)) short-term trades. The SEC would define short- SEC deems unfair to (Sec. 303) term trading. shareholders. (Sec. 314) (Sec. 203) Directs the SEC to require funds that do not allow market timing trading to charge a redemption fee for short-term trades, and permits such fees to exceed 2%. (Sec. 314) Directs the SEC to require by rule that intermediaries provide mutual funds with the identities of their customers so that the fund can enforce its trading and fee policies. (Sec. 216) CRS-15 Provision H.R. 2420 S. 1822 S. 1958 S. 1971 S. 2059 (Rep. Baker) (Sen. Akaka) (Sen. Kerry & Kennedy) (Sens. Dodd & Corzine) (Sen. Fitzgerald, et al.) Elimination of SEC directed to make No provision. No provision. SEC directed to make rules The SEC would by rule require stale prices rules governing the use of governing the use of fair the adoption of fair value fair value pricing to set value pricing to set net asset pricing, when market quotations net asset values when values when market do not accurately reflect portfolio market quotations are quotations are unavailable value. unavailable or out of date. or out of date. Funds and (Sec. 313) (Sec. 204) advisers would be required to adopt formal policies regarding price-setting procedures and certify that they were being adhered to. (Sec. 304) Suspension of Mutual funds may not No provision. No provision. No provision. No provision. redemptions suspend investors' right of redemption unless the primary stock market is closed or other emergency exists. SEC is directed to make rules specifying the conditions under which trading may be restricted. (Sec. 105) CRS-16 Provision H.R. 2420 S. 1822 S. 1958 S. 1971 S. 2059 (Rep. Baker) (Sen. Akaka) (Sen. Kerry & Kennedy) (Sens. Dodd & Corzine) (Sen. Fitzgerald, et al.) Other Provisions. Disclosure of Codifies SEC rules that No provision. No provision. No provision. Requires funds to report annually proxy votes require funds to disclose on their proxy voting record, and how they voted in proxy to make this information contests of companies available via the Internet or a whose shares they hold. toll-free telephone number. (Sec. 109) (Sec. 215) Hedge funds Prohibits persons from No provision. No provision. Prohibits persons from Prohibits investment advisers and serving as advisers or serving as advisers or portfolio managers from managers of both mutual managers of both mutual providing services to both mutual funds and hedge funds. funds and hedge funds. funds and hedge funds, except as (Sec. 202) (Sec. 302) permitted by SEC exemption. (Sec. 316) Selective No provision. No provision. No provision. No provision. Directs the SEC to make rules to disclosure prevent selective disclosure of mutual fund portfolio contents. (Sec. 317) Arbitration of SEC directed to study No provision Directs the SEC to adopt SEC directed to study SEC directed to study trends in investor disputes trends in mutual fund rules giving complainants in trends in mutual fund mutual fund arbitration claims arbitration claims, and the mutual fund disputes the arbitration claims, and the since 1995, and alternative reasons for the increase in right to have their reasons for the increase (if means to settle such disputes out such claims since 1995. complaints heard in an any) in such claims since of court. (Sec. 112) independent arbitration 1995 (Sec. 413) forum. (Sec. 406) (Sec. 209) Whistleblowers A mutual fund's audit No provision. No provision. Requires funds to establish Funds must adopt rules to protect committee shall be policies and procedures to whistleblowers who report responsible for monitoring protect whistleblowers from violations of law, regulation, or complaints from fund retaliation. ethical standards. employees and others (Sec. 301) (Sec. 116) regarding questionable accounting and auditing practices. (Sec. 104) CRS-17 Provision H.R. 2420 S. 1822 S. 1958 S. 1971 S. 2059 (Rep. Baker) (Sen. Akaka) (Sen. Kerry & Kennedy) (Sens. Dodd & Corzine) (Sen. Fitzgerald, et al.) Fund advertising No provision. No provision. No provision. No provision. Directs the SEC to establish standards and benchmarks for claims regarding investment performance contained in fund advertising. (Sec. 217) Studies and Reports Called For. Investment No provision. No provision. No provision. No provision. SEC to study and report to adviser conflicts Congress on conflicts between of interest funds and advisers, whether changes in law or regulation are needed to ameliorate such conflicts or to encourage internal investment management by mutual funds. (Sec. 410) Soft dollar SEC directed to study soft No provision. SEC to issue a concept SEC directed to study soft No study required, but Sec. 311 arrangements and dollar arrangements release and report to dollar arrangements -- prohibits soft dollar transaction costs involving fund investment Congress on portfolio trends, amounts, benefits arrangements. advisers -- trends, transaction costs, including and costs to investors, amounts, benefits and commission, spread, possible conflicts of costs to investors, possible opportunity, and market interest, and transparency. conflicts of interest, and impact costs. (Sec. 404) transparency -- and to (Sec. 101(h)) make legislative recommendations. (Sec. 111) Arbitration SEC directed to study No provision. No provision. SEC directed to study SEC directed to study trends in claims trends in mutual fund trends in mutual fund mutual fund arbitration claims arbitration claims, and the arbitration claims, and the since 1995, and alternative reasons for the increase in reasons for the increase (if means to settle such disputes out such claims since 1995. any) in such claims since of court. (Sec. 112) 1995. (Sec. 413) (Sec. 406) CRS-18 Provision H.R. 2420 S. 1822 S. 1958 S. 1971 S. 2059 (Rep. Baker) (Sen. Akaka) (Sen. Kerry & Kennedy) (Sens. Dodd & Corzine) (Sen. Fitzgerald, et al.) Creation of a No provision. SEC shall study and No provision. (Section 101 GAO to study the feasibility Directs GAO to study the Mutual Fund report to Congress on the establishes such a board.) and benefits (if any) to efficacy of the SEC's current Oversight Board creation of an entity with shareholders of establishing organizational structure as it inspection and a Mutual Fund Oversight affects the regulation of mutual enforcement authority Board with inspection, funds. over mutual fund boards examination, and (Sec. 412) of directors, funded by enforcement authority over assessments on mutual mutual fund boards of funds, and appointed by directors. the SEC. (Sec. 401) (Sec. 3(e)) Adequacy of SEC to report to Congress No provision. No provision. GAO directed to study the SEC directed to study the remedial actions on market timing and late coordination of the coordination between SEC trading, including (1) enforcement activities of headquarters, regional offices, economic harm to long- the SEC and the states. and state and local regulators and term shareholders, (2) the (Sec. 402) law enforcement. SEC's findings regarding (Sec. 411) such trading practices, (3) SEC to study the allocation when and how the SEC and adequacy of its discovered that such regulatory and enforcement trading was harming resources devoted to mutual shareholders, (4) steps funds. taken by the SEC to (Sec. 403) protect long-term shareholders, and (5) SEC to report on economic additional legislation or harm caused by late trading regulation needed to and market timing and the protect shareholders. SEC's actions since (Sec. 206) becoming aware of those practices. (Sec. 405) CRS-19 Provision H.R. 2420 S. 1822 S. 1958 S. 1971 S. 2059 (Rep. Baker) (Sen. Akaka) (Sen. Kerry & Kennedy) (Sens. Dodd & Corzine) (Sen. Fitzgerald, et al.) Hedge funds No provision. No provision. No provision. No provision. SEC directed to study whether additional regulation of hedge funds might deter trading abuses, manipulations, and distortions that affect investors in mutual funds. (Sec. 414) Financial literacy No provision. SEC shall study and No provision. SEC to study the existing SEC to study means of using the report to Congress on the level of financial literacy Internet to increase financial existing level of financial among mutual fund literacy and to improve investor literacy among mutual investors, the information access to mutual fund filings. fund investors, what most needed by investors, (Sec. 415) information they most methods to increase need, the transparency of transparency, and existing fee disclosure, and efforts and improved methods of and strategies to educate educating investors. investors. (Sec. 501) (Sec. 5) Mutual fund No provision. The GAO shall study and No provision. No provision. No study required, but Sec 217 advertising report to Congress on the directs the SEC to establish impact and regulation of standards and benchmarks for mutual fund advertising, claims regarding investment current sales practices in performance contained in fund the industry, and consider advertising. recommendations to improve investor protection. (Sec. 6) ------------------------------------------------------------------------------ For other versions of this document, see http://wikileaks.org/wiki/CRS-RL32157