Mutual Fund Reform Bills: A Side-by-Side Comparison

Publication Date: December 2003

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Banking and finance

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Abstract:

The current mutual fund scandal began in September 2003, when New York Attorney General Eliot Spitzer brought 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. A number of 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 has 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 widespread in the industry.

The congressional response to the mutual fund investigations has included several hearings and bills. Legislative proposals include 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; and S. 1971 (Senators Dodd and Corzine), also introduced on November 25, 2003.

All four bills would require 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 would also require that funds' governing boards contain majorities of independent directors with no financial or family ties to fund management. S. 1958 would create a new mutual fund regulator to carry out registration, inspections, and disciplinary proceedings, and to make rules promoting mutual fund ethics and independence.

This report compares the provisions of these legislative proposals. It will be updated as the bills are amended, or as new bills are introduced.