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[18867]
May 19, 2005
TO: ACCOUNTING/TREASURERS MEMBERS No. 8-05
BOARD OF GOVERNORS No. 23-05
CLOSED-END INVESTMENT COMPANY MEMBERS No. 31-05
FEDERAL LEGISLATION MEMBERS No. 3-05
INVESTMENT COMPANY DIRECTORS No. 13-05
PRIMARY CONTACTS - MEMBER COMPLEX No. 21-05
PUBLIC COMMUNICATIONS COMMITTEE No. 6-05
SEC RULES MEMBERS No. 66-05
SMALL FUNDS MEMBERS No. 46-05
UNIT INVESTMENT TRUST MEMBERS No. 11-05
RE: PROPOSED MUTUAL FUND LEGISLATION
Senator Daniel K. Akaka (D-HI), the Ranking Member of the Subcommittee on Financial
Management, the Budget, and International Security of the Senate Committee on Governmental
Affairs, recently introduced S. 1037, the “Mutual Fund Transparency Act of 2005” (the “Act”).
The bill, which is attached and summarized below, is a modified version of the mutual fund bill
(S. 1822) that Senator Akaka introduced in 2003.1 Provisions that were not in the earlier bill are
highlighted.2
Disclosure of Financial Relationships Between Brokers and Mutual Fund Companies
Section 2(a) of the bill would direct the SEC, within one year of enactment of the Act, to
promulgate rules requiring brokers to disclose in writing to customers who purchase mutual
fund shares the amount of compensation received or to be received by the broker in connection
with the transaction. In a change from the earlier bill, this provision expressly would require
such disclosure to include the amount of revenue sharing payments. The disclosure would
1 For a summary of S. 1822, the “Mutual Fund Transparency Act of 2003,” see Memorandum to Board of Governors
No. 60-03, Closed-End Investment Company Members No. 89-03, Federal Legislation Members No. 22-03, Investment
Company Directors No. 15-03, Primary Contacts – Member Complex No. 96-03, Public Information Committee No.
38-03, SEC Rules Members No. 153-03, Small Funds Members No. 64-03, and Unit Investment Trust Members No. 41-
03, dated November 10, 2003 [16751].
2 Two provisions of the earlier bill were dropped. The first would have required a study of whether to create a
Mutual Fund Oversight Board. The second would have required disclosure concerning portfolio managers’
compensation and their ownership of fund shares.
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have to be made no later than the date of the completion of the transaction. The bill specifies
that the disclosure may not be made exclusively in a fund’s registration or any fund filing with
the SEC.
Section 2(b) of the bill would direct the SEC to adopt rules requiring disclosure of fund
brokerage commissions, both as an aggregate dollar amount and as a percentage of assets, “ in
any disclosure of the amount of fees and expenses that may be payable” by fund shareholders
for purposes of the fund’s registration statement and any other filing of that fund with the SEC,
“including the calculation of expense ratios.”
Mutual Fund Governance
Section 3(a) of the bill would amend Section 10(a) of the Investment Company Act of
1940 to require 75% of a fund’s board to be independent and to require that the chairman of the
board be independent. In addition, no interested person of the fund could serve as a fund
director unless (1) he or she was approved or elected by fund shareholders at least once every 5
years and (2) a majority of the independent directors make an annual finding that the director
does not have any material business or familial relationship with the fund, a “significant service
provider” to the fund (to be defined by the SEC within 270 days of enactment of the Act), or a
person who controls, is controlled by, or is under common control with such service provider,
that is likely to impair the director’s independence.
Section 3(b) of the bill provides that no action taken by a fund board may require the
vote of an interested director. In addition, a fund’s independent directors would be required to
form a committee comprised solely of independent directors with responsibility for selecting
nominees for election to the board and adopting qualification standards for the nomination of
directors. The qualification standards would have to be disclosed in the fund’s registration
statement. Also, the bill would expand the definition of “interested person” in Section 2(a)(19)
of the Investment Company Act.
Financial Literacy Among Mutual Fund Investors Study
Section 4 of the bill would require the SEC to conduct a study of the financial literacy of
mutual fund investors and to report on the study to the Senate Banking Committee and the
House Financial Services Committee within one year after enactment of the Act.
Study Regarding Mutual Fund Advertising
Section 5 of the bill would require the Comptroller General of the United States to
conduct a study on mutual fund advertising and to report on the study to the Senate Banking
Committee and the House Financial Services Committee within one year after enactment of the
Act.
Point-of-Sale Disclosure
Section 6(a) of the bill is new. It would direct the SEC, within one year of enactment of
the Act, to promulgate rules requiring brokers to disclose in writing to customers who purchase
mutual fund shares the source and amount, in dollars and as a percentage of assets, of
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compensation (including revenue sharing payments) received or to be received by the broker in
connection with the transaction. Also, the bill would require brokers to provide customers with
information on the differential payments and average fees for comparable transactions. The
disclosures would have to be made to permit the person purchasing the shares to evaluate such
disclosures before deciding to engage in the transaction. The bill specifies that the disclosures
may not be made exclusively in a fund’s registration or any fund filing with the SEC.
Section 6(b) of the bill also is new. It would direct each national securities association to
adopt rules requiring that a broker that provides individualized investment advice to a person
will (1) have a fiduciary duty to that person; (2) act solely in the best interests of that person;
and (3) fully disclose all potential conflicts of interests and other material information prior to
the time that the investment advice is first provided to the person and at least annually
thereafter.
Jane G. Heinrichs
Assistant Counsel
Attachment (in .pdf format)
Note: Not all recipients receive the attachment. To obtain a copy of the attachment, please visit our members
website (http://members.ici.org) and search for memo 18867, or call the ICI Library at (202) 326-8304 and request the
attachment for memo 18867.