(b) It shall be unlawful for any diversified investment company to act as underwriter, whenever the amount of its outstanding underwriting commitments, plus the value of its investments in securities other than marketable securities and in securities of issuers of which it owns more than 5 per centum of any class of securities outstanding, exceeds 15 per centum of the value of its total assets.

(c) It shall be unlawful for any registered investment company to purchase or otherwise acquire any security issued by, or any other interest in the business of —

(1) any other investment company, except (A) in connection with a plan of reorganization or offer of exchange for which a declaration is effective under section 25, or (B) with the proceeds of payments on periodic payment plan certificates, pursuant to the terms of the trust indenture under which such certificates are issued; or

(2) any person who is a broker, dealer, underwriter, manager, or investment adviser, unless (A) such person is a corporation all of the outstanding securities of which (other than short-term paper) are, or after such acquisition will be, owned by such registered company; and (B) the business of such person is confined to activities in which such registered company itself may lawfully engage.

CHANGES IN INVESTMENT POLICY

SEC. 13. (a) No registered diversified investment company shall become a securities trading company or securities finance company, unless such change is authorized by the vote of a majority of its outstanding voting securities.

(b) No registered investment company shall change any fundamental investment or management policy unless each such change is authorized by the vote of a majority of its outstanding voting securities. The Commission, by rules and regulations or order, shall designate those investment and management policies which are fundamental, giving due weight, among other things, to the representations made in selling the outstanding securities of the company or companies concerned, to the representations made in their registration statements and reports filed under this title and in their reports to security holders, to the history of their investment and managerial policies, and to their financial condition.

SIZE OF INVESTMENT COMPANIES

SEC. 14. (a) No registered investment company or principal underwriter therefor shall sell any security of which such company is the issuer (other than shortterm paper), if such company has, or upon completing such sale will have, total assets the value of which exceeds the following maxima:

(1) if such company is a diversified investment company or a unit investment trust, $150,000,000;

(2) if such company is a securities trading or securities finance company, $75,000,000;

(3) if such company is a face-amount certificate company, $200,000,000. (b) The provisions of subsection (a) shall not apply to

(1) the sale of a security by an open-end management investment company, if the proceeds received by the issuer from all such sales during the fiscal quarter within which such sale is made do not exceed such issuer's total disbursements for redemptions during the same fiscal quarter; or

(2) a sale made pursuant to an offer required by any rule, regulation, or order of the Commission under paragraph (2) of section 19 (a).

(c) No person who regularly serves or acts as manager or investment adviser of a registered investment company, and no affiliated person of such a person, shall enter into, renew, or consent to the renewal of, any contract to receive remuneration for serving or acting as manager or investment adviser of another investment company, if the value of the combined total assets of such companies exceeds the following maxima:

(1) if either of such companies is a securities trading or securities finance company, $75,000,000;

(2) if both such companies are face-amount certificate companies, $200,000,000;

(3) under any circumstances other than those described in paragraphs (1) and (2), $150,000,000.

d No registered investment company organized after March 1, 1940, and no principal underwriter for such a company, shall make a public offering of securities of which such company is the issuer, unless

(1) such company has a net worth of at least $100,000; or

(2) such company has previously made a public offering of its securities, and at the time of such offering had a net worth of at least $100,000.

COMPENSATION OF MANAGEMENT; MANAGEMENT AND UNDERWRITING CONTRACTS SEC. 15. (a) After one year from the effective date of this title, it shall be unlawful for any person regularly to serve or act as officer, director, manager, investment adviser, or employee of any registered investment company, unless such person's compensation from such company is determined on one or more of the following bases, and no other:

(1) a definite sum of money per year, month, or other definite period; (2) a sum of money representing a definite percentage of such company's income from interest and dividends during a definite period; or

(3) a sum of money representing a definite percentage of the value of the net assets of such company as of a definite date or averaged over a definite period.

(b) After one year from the effective date of this title it shall be unlawful for any person regularly to serve or act as manager or investment adviser of a registered investment company, except pursuant to a written contract with such company, approved by the vote of a majority of the outstanding voting securities of such company, which contract

(1) precisely describes all compensation to be paid thereunder;

(2) by its terms expires not later than two years from the date of its execution, and is renewable thereafter only by the specific approval annually of the board of directors or the security holders of such registered company; (3) provides, in substance, that it may be terminated at any time, without the payment of any penalty, by the board of directors of such registered company or by vote of a majority of the outstanding voting securities of such company on not more than sixty days' written notice to the manager or investment adviser; and

(4) provides, in substance, for its automatic termination in the event of its assignment or attempted assignment by the manager or investment adviser.

(c) After one year from the effective date of this title, it shall be unlawful for any principal underwriter for a registered open-end management investment company or registered unit investment trust to offer for sale, sell, or deliver after sale any security of which such company is the issuer, except pursuant to a written contract with such company which—

(1) by its terms expires not later than one year from the date of its execution, and is renewable thereafter only by the specific approval annually of the board of directors or of the security holders of such registered company;

and

(2) provides, in substance, for its automatic termination in the event of its assignment or attempted assignment by such underwriter.

(d) It shall be unlawful for any registered investment company having a board of directors to enter into or perform any contract or agreement, written or oral, whereby a person undertakes regularly to serve or act as manager, investment adviser, underwriter, or broker for such company, unless the terms of such contract or agreement have been approved by a majority of such directors, exclusive of any director who is himself a party to such contract or agreement or who is an affiliated person of such a party.

(e) If any registered investment company, or any company controlled by or under common control with such a company, is serving or acting, or proposes to serve or act, as manager or investment adviser of another company or companies in the same investment company system with such registered company, the Commission shall require, by such rules and regulations or orders as it finds necessary or appropriate in the public interest or for the protection of investors, that such manager or investment adviser serve such other company or companies at cost, and that such cost be equitably allocated between and among such registered company and such other company or companies.

CHANGES IN BOARD OF DIRECTORS

SEC. 16. No person shall serve as director of a registered investment company unless elected to that office by the holders of the outstanding voting securities of such company, at the annual or a special meeting of such security holders duly called for that purpose; except that vacancies occurring between such meetings. not exceeding in the aggregate one-third of the whole number of the board of directors, may be filled in any otherwise legal manner.

TRANSACTIONS OF CERTAIN AFFILIATED PERSONS AND UNDERWRITERS

SEC. 17. (a) It shall be unlawful for any affiliated person of or principal underwriter for a registered investment company, or any affiliated person of such a person or underwriter, acting as principal

(1) knowingly to sell any security or other property to such registered company or an affiliated company thereof (unless such sale consists solely of (A) the redemption of redeemable securities by their issuer, or (B) the deposit of securities with the trustee of a unit investment trust or periodic payment plan by the depositor thereof);

(2) knowingly to purchase from such registered company or any affiliated company thereof any security or other property (except securities of which the seller is the issuer);

(3) to borrow money or other property from such registered company or an affiliated company thereof (unless the borrower is controlled by the lender); or

(4) to effect any transaction in which such registered company or an affiliated company thereof is a joint or a joint and several participant with such person, underwriter, or affiliated person, in contravention of such rules and regulations as the Commission may prescribe for the purpose of (A) limiting or preventing participation by such company on a basis different from or less advantageous than that of such other participant, and (B) protecting the independent investment and managerial judgment of such company.

(b) Notwithstanding subsection (a), a company which controls or is controlled by a registered investment company or which, with such registered company, is under the common control of another company, may file with the Commission an application for an order exempting a proposed transaction of the applicant from one or more provisions of that subsection. The Commission shall grant such application and issue such order of exemption if it find that

(1) the terms of the proposed transaction, including the consideration to be paid or received, are reasonable and fair and do not involve overreaching on the part of any person concerned;

(2) the proposed transaction is consistent with the investment and management policies of each registered investment company concerned as recited in its registration statement and reports filed under this title; and

(3) the proposed transaction is consistent with the purposes of this title. (c) Notwithstanding subsection (a), a person may sell merchandise in the ordinary course of business to any affiliated company of a registered investment company if such affiliated company is not itself an investment company. (d) It shall be unlawful for any affiliated person of a registered investment company, or any affiliated person of such a person-

(1) acting as agent, to accept from any source any compensation (other than a regular salary or wages from such registered company) for the purchase or sale of any property to or for such registered company or any affiliated company thereof, except in the course of such person's business as an underwriter or broker; or

(2) acting as broker, to sell any security to or for such registered company or any affiliated company thereof, if such person receives from any source a commission, fee, or other remuneration for effecting such transaction which exceeds the usual and customary broker's commission for effecting similar transactions on a national securities exchange.

(e) Any gross misconduct or gross abuse of trust in respect of a registered investment company, on the part of any person registered under section 9 as an affiliated person of or principal underwriter for such company, shall be unlawful. (f) After one year from the effective date of this title, it shall be unlawful for the charter, certificate of incorporation, articles of association, bylaws, or trust

indenture of any registered investment company, for any employment management, underwriting, or brokerage contract or agreement to which such a company is a party, or for any other instrument pursuant to which such a company is organized or administered, to contain any provision which

(1) authorizes, or purports to authorize, the violation of any provision of this title or of any rule, regulation, or order hereunder; or

(2) relieves, or purports to relieve, any affiliated person of or principal underwriter for such company from any duty or liability to such company or the security holders thereof to which such person or underwriter would otherwise be subject.

(g) The Commission is authorized to require, by rules and regulations or order in the public interest or for the protection of investors

(1) that securities and other investments of a registered management investment company be placed in the custody of an institution having the qualifications required by paragraph (1) of section 26 (a) for the trustees of unit investment trusts; and

(2) that any person or class of persons registered under section 9 be required to be bonded by a reputable fidelity insurance company in such minimum amount as the Commission may prescribe.

(h) Every person registered under section 9 as a distributor of periodic payment plan certificates shall be subject, in his transactions with the issuer of such certificates, to the same duties and liabilities as those imposed by this section upon affiliated persons of registered investment companies in their transactions with such companies.

CAPITAL STRUCTURE

SEC. 18. (a) It shall be unlawful for any registered management investment company to issue any security (other than short-term paper or periodic payment plan certificates), or to sell any such security of which it is the issuer, unless such security

(1) is a common stock, or if such company is an unincorporated company organized prior to March 1, 1940, is a security having substantially the same incidents as the common stock of a corporation;

(2) has no preference as to distribution or dividends over any outstanding security of such company;

(3) is a voting security, and has equal voting rights with every voting security of such company issued since the effective date of this title; and

(4) if not a redeemable security, expressly provides that the holder thereof shall be given a reasonable opportunity, with other holders of the company's voting securities, to subscribe for and purchase ratably any voting securities which the company may thereafter issue, before such securities are sold to any other person or persons.

If such company is an unincorporated company organized prior to March 1, 1940, the Commission shall designate, by rules and regulations or order in the public interest and for the protection of investors, those incidents which such security must have in order substantially to comply with the requirements of this subsection.

(b) The provisions of paragraphs (1) and (2) of subsection (a) shall not apply to the issuance or sale of a preferred or special stock if the only other outstanding class of the issuer's equity securities consists of a common stock upon which no dividend (other than a liquidating dividend) is permitted to be paid and which in the aggregate represents not more than one-half of 1 per centum of the issuer's outstanding voting securities.

(c) It shall be unlawful for any registered management investment company to issue any warrant or right to subscribe to or purchase a security of which such company is the issuer, except

(1) in the form of warrants or rights to subscribe expiring not later than one hundred and twenty days after their issuance and issued exclusively and ratably to a class or classes of such company's security holders; or

(2) in the form of periodic payment plan certificates.

(d) After two years from the effective date of this title, the Commission shall, upon application by the holder of any outstanding security of a registered management investment company, and may upon its own motion, require by order that

221147-40-pt. 1- -2

such company, and every other registered investment company in the same investment company system, take such steps as are necessary or appropriate to effect an equitable redistribution of voting rights and privileges among the holders of the outstanding securities of such company or companies.

DIVIDENDS

SEC. 19. (a) It shall be unlawful for any registered investment company to declare or pay any dividend, or make any distribution in the nature of a dividend, wholly or partly from any source other than such company's aggregate undistributed net income from interest and dividends, unless

(1) the payment of a dividend from such other source is either expressly permitted by the charter, certificate of incorporation, or other instrument pursuant to which such company is organized or such payment, not being prohibited by such instrument, has been approved by the vote of a majority of such company's outstanding voting securities; and

(2) the dividend check is accompanied by a written statement, in such form as the Commission may by rules and regulations prescribe, which (A) fully discloses the source or sources of such dividend, and (B) gives the recipient such reasonable opportunity to invest in securities of said company, without the payment of any sales load, such substantial portion of said dividend paid out of a source other than net income from interest and dividends, as the Commission shall prescribe by rules and regulations or order. (b) It shall be unlawful for any registered management investment company to declare or pay a dividend on a security, unless immediately after such payment every class of the outstanding securities of such company senior to the security upon which such dividend is paid has the asset coverage hereinafter prescribed. For the purposes of this subsection, the "asset coverage" of a class of outstanding securities means the ratio which the value of the total assets of the issuer, as of the end of the period to which the dividend relates, less its liabilities not evidenced by securities, its liabilities evidenced by short-term paper and the total liquidation preferences of all outstanding securities senior to such class, bears to the total liquidation preferences of all outstanding securities of such class. The prescribed asset coverage for a class of senior securities other than evidences of indebtedness shall be 200 per centum; but the Commission, by rules and regulations or order for the protection of investors or to preserve the financial integrity of the company or companies concerned, may prescribe a higher asset coverage, in no event exceeding 300 per centum, or a lower asset coverage, in no event less than 150 per centum. The prescribed asset coverage for evidences of indebtedness shall be 300 per centum; but the Commission, by rules and regulations or order for the protection of investors or to preserve the financial integrity of the company or companies concerned, may prescribe a higher asset coverage, in no event exceeding 400 per centum, or a lower asset coverage, in no event less than 200 per centum.

(c) No provision of this section shall apply to a liquidating dividend declared or paid in connection with a plan of total or partial liquidation of the company concerned, which plan has been approved by the security holders of such company in accordance with State law.

PROXIES; VOTING TRUSTS; CIRCULAR OWNERSHIP

SEC. 20. (a) It shall be unlawful for any person to solicit or to permit the use of his or its name to solicit, by use of the mails or any means or instrumentality of interstate commerce, or otherwise, any proxy, power of attorney, consent, or authorization regarding any security of a registered investment company in contravention of such rules and regulations or orders as the Commission may prescribe for the purpose of insuring to the persons solicited

(1) a form of proxy, power of attorney, consent, or authorization which clearly presents the alternative choices available to such persons; and

(2) information sufficient to permit the exercise of an informed judgment in choosing between such alternatives.

(b) It shall be unlawful for any registered investment company or affiliated person thereof, any issuer of a voting trust certificate relating to any security of a registered investment company, or any underwriter of such a certificate, by use of the mails or any means or instrumentality of interstate commerce, or otherwise, to offer for sale, sell, or deliver after sale, in connection with a public offering, any such voting trust certificate.