House Approves Legislation Affecting Mutual Funds, February 2004

Washington, DC, February 26, 2004 - On February 25, the House Financial Services Committee approved an amended version of H.R. 2179, the Securities Fraud Deterrence and Investor Restitution Act of 2003, legislation that includes provisions that will increase the SEC's ability to investigate and deter fraud, levy and collect fines and disgorgement funds, and provide for an increase in the monies available for return to defrauded investors.

an amendment that would require all mutual fund boards to appoint either a lead independent director or an independent chair;
an amendment that would prohibit the collection of 12b-1 fees by mutual funds that are closed to new investors; and
an amendment that would amend Section 15(c) of the Investment Company Act of 1940 by placing the responsibility on investment advisers and underwriters to inform the fund's board of directors of any business practices of those investment advisers and underwriters that are not in the best interests of the fund's shareholders.

ICI Position
The Institute believes that giving the mutual fund board the option of having an independent chair or a lead independent director provides the benefits of a strong source of independent leadership on the board, while providing board members the flexibility to determine which arrangement works best for their fund.

The Institute also believes that the payment of 12b-1 fees to mutual funds that are closed to new investors is entirely appropriate because these fees are used to recoup monies the fund underwriter paid upfront to third parties, such as broker-dealers and other sales professionals, for providing advice and administrative services to fund shareholders.

In addition, the Institute believes that the Investment Company Act amendment is unnecessary because the SEC's new fund compliance rule addresses the issue of communication between a fund's investment adviser and underwriters and the fund's board. In addition, the provision would subject fund advisers to an open-ended obligation that will expose them to the risk of being second-guessed. A date for House floor consideration of this legislation has not been scheduled.