SECTION 5(c), AMENDING SECTION 10(c)—CORRECTING INCONSISTENCY IN PROHIBITING PERSONS FROM SERVING AS DIRECTORS OF INVESTMENT COMPANY

Section 10(c) of the act prohibits a registered investment company from having a majority of its board of directors consist of officers or directors of any one bank. Section 5(c) of the bill would add the word "employee" to the first clause of section 10(c). The second clause of section 10(c) provides a limited exception from the prohibition for any registered investment company which on March 14, 1940, had as a majority of its board of directors, the officers, directors, or employees of any one bank. While the first clause does not include employees, the second clause does include them. The proposed amendment would correct this apparent inconsistency.

SECTIONS 8(c) And 8(d), amenDING SECTIONS 15(c) AND 15(d)—ELIMI

NATION OF OUTDATED REFERENCE AND SECTION

In addition to the substantive changes described under the heading "Management-Shareholder Relationships".

Section 8(c) of the bill would delete the words "except a written agreement which was in effect prior to March 15, 1940," in section 15(c) of the act. Section 8(d) of the bill would delete section 15(d) from the act. (See "Costs of Mutual Fund Investments" for explanation of new section 15(d).) That section prohibits any person after March 15, 1945, from acting as investment adviser to, or principal underwriter for, any registered investment company pursuant to a written contract in effect prior to March 15, 1940, unless such contract was renewed prior to March 15, 1945, in such form as to make it comply with sections 15(a) or 15(b). The 1940–45 period mentioned in sections 15(c) and 15(d) passed long ago, and references to it are meaningless today. There are no persons who are or will hereafter be affected by section 15(d) or the above clause of section 15(c).

SECTION 12(c), AMENDING SECTION 22(d)—DELETION OF LANGUAGE REQUIRED BY PROPOSED AMENDMENTS

Section 12(c) of the bill would amend section 22(d) of the act to conform that section to the proposed amendment to section 11(b) of the act by deleting reference to clause (2) of section 11(b) in section 22(d) of the act. Section 22(d) of the act provides, in relevant part, that it shall not prevent a sale made "pursuant to an offer of exchange permitted by section 11 hereof including any offer made pursuant to clause (1) or (2) of section 11(b)." Section 6 of the bill would delete clause (2) of section 11(b) from the act.

SECTION 13, AMENDING SECTION 24(d)-UPDATING OF A STATUTORY

REFERENCE

Section 13 of the bill would amend section 24(d) to refer to section 4(3) of the Securities Act of 1933. Among other things, section 24(d) of the act states that the exemption provided by clause 3 of section 4(1) of the Securities Act of 1933 shall not be applicable to face amount certificate companies, open-end management companies, or unit investment trusts.

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SECTIONS 21 And 22, amendING SECTIONS 43(a) AND (44)—UPDATING STATUTORY REFERENCES

Sections 21 and 22 or the bill amends sections 43(a) and 44, respectively, to conform references to the Judicial Code with the present designation of the sections involved. Section 43(a) of the act provides for court review of Commission orders. It refers to sections 239 and 240 of the Judicial Code which have been redesignated section 1254 of title 28 of the United States Code, as amended. Similarly, section 44 of the act, which gives the district courts of the United States jurisdiction of violations of the act or rules and regulations thereunder, refers to sections 128 and 240 of the Judicial Code, as amended, which have been redesignated as sections 1254 and 1291–1294 of title 28 of the United States Code.

Part J-Amendments to the Investment Advisers Act of 1940

SECTIONS 24, 25, AND 26, AMENDING SECTIONS 203 AND 205 AND ADDING NEW SECTION 206A-EXEMPTIONS FROM PROVISIONS OF THE ACT

Amending section 203— removal of exemptions for investment advisers to investment companies

Section 24(a) of the bill would amend paragraphs (2) and (3) of section 203(b) of the Investment Advisers Act to make inapplicable to investment advisers to investment companies the exemptions from registration under the Advisers Act now available to most of them. Section 203(b) (2) of the Advisers Act now exempts any investment advisor whose only clients are investment companies from the registration requirements of that statute, while section 203(b)(3) of that act provides a similar exemption for any investment adviser who during the course of the preceding 12 months has had fewer than 15 clients and who does not hold himself out generally to the public as an investment adviser. Some mutual fund advisers are registered under the Advisers Act, but most of them, particularly those that serve the large funds and fund complexes, fall within these two exemptions from registration. Amending section 205-Removal of exemption for advisory contracts with investment companies

Section 25 of the bill would amend section 205 of the Investment. Advisers Act to delete the exemption for advisory contracts with investment companies from the prohibition against contracts that provide for compensation to the investment adviser on the basis of a share of capital gains upon or capital appreciation of the funds or any portion of the funds of the client.

This proposed extension of section 205(1) to investment company advisory contracts would prohibit a contract which provides that any part of the adviser's fee shall be a specified amount of the company's capital appreciation. The section also provides for an exemption from this restriction for an advisory contract with an investment company which provides for proportionate increases and decreases in compensation on the basis of the investment performance of the company as measured against an appropriate index of securities prices or such other measure of investment performance as the Commission may specify. For purposes of this section, an index of securities prices

would be deemed appropriate unless the Commission determines otherwise by order after notice and opportunity for hearing.

Section 205(1) of the Advisers Act forbids only those sharing arrangements which involve a sharing of capital appreciation. The proposed amendment will not invalidate contracts under which the adviser's fee consists of a percentage of the investment company's ordinary investment income, provided that the adviser's compensation meets the reasonableness test of proposed section 8 of this bill. Proposed section 206A-Commission exemptive authority

Section 26 of the bill would add a new section 206A to the Investment Advisers Act. It would empower the Commission by rule, regulation, or order to exempt conditionally or unconditionally any person or transaction from any or all provisions of the act if and to the extent such action is necessary or appropriate in the public interest and consistent with the purposes fairly intended by the policy and provisions of the Act.

The proposed amendment would be the counterpart of section 6(c) of the Investment Company Act, which gives the Commission broad power to exempt any person, transaction, or security from any provision of that statute. The flexibility which this amendment would introduce into the administration of the Advisers Act is appropriate in view of the broader coverage provided for by this bill. Under proposed section 206A, the Commission would in appropriate cases be able to exempt persons from the registration requirements of proposed section 203 and from the ban on performance-based advisory compensation in proposed section 205(1) of the Advisers Act if and to the extent such action is appropriate in the public interest and consistent with the protection of investors and the policy of the act.

SECTIONS 23 AND 24 AMENDING THE ACT BY STRENGTHENING DISCIPLINARY CONTROLS OVER INVESTMENT ADVISERS

Amending section 202(a)-Definition of person associated with investment adviser; amending section 203(ƒ)—Administrative action against such associated persons; and amending section 203 (e)—Disciplinary proceedings

Section 23 of the bill would amend section 202(a) of the Investment Advisers Act to add a new paragraph (17) thereto, which would define the term "person associated with an investment adviser." (Pars. (17) through (20) of existing sec. 202(a) would be redesignated paragraphs (18) through (21), respectively.)

This amendment would be a counterpart to section 3(a) (18) of the Securities Exchange Act and would add a purely definitional section. to the classes of persons now referred to in clause (F) of existing section 203(c)(1) and pargraphs (2) and (3) of existing section 203 (d) of the Advisers Act. In addition, the new term would be used in proposed section 203 (f) of the Advisers Act (see sec. 24(e) of the bill), which would give the Commission, after making the required findings, authority to bar or suspend individuals from associating with an investment adviser. This express reference to employee would make no change in present law, since an employee is considered a controlled person.

The proposed definition specifically would exclude from its terms employees whose functions are clerical or ministerial, except that under proposed section 203 (f) a person guilty of misconduct could be barred from associating with an investment adviser even in a clerical or ministerial capacity. Under the proposed definition the Commission would have authority to classify for statutory purposes persons, including employees, controlled by an investment adviser.

The proposed amendments to section 203(e) of the Advisers Act would revise slightly the provisions relating to disciplinary proceedings. One of these revisions would make failure to supervise employees a ground for discipline. This conforms to the 1964 amendments to the Securities Exchange Act.

Proposed section 203(d)—Requirement for jurisdictional proof

Section 24(c) of the bill would amend section 203 of the Advisers Act to add a new subsection (d). This would specify that any provisions of that act (other than sec. 203(a), the provision that imposes a general requirement of registration on investment advisers), which prohibits any act or conduct if the mails or any means or instrumentality of interstate commerce are used in connection therewith also would prohibit such act or conduct by a registered investment adviser or by a person acting on behalf of such investment adviser whether or not the mails or any instrumentality of interstate commerce are used. (Existing subsec. (d) of sec. 203 would be redesignated as subsec. (e) and existing subsec. (e) through (g) would be redesignated as subsec. (g) through (i).

Various provisions of the act prohibit activities of an investment adviser only if they involve a use of the mails or means or instrumentality of interstate commerce. The effect of the proposed amendment would be to prohibit such activities by a registered investment adviser under the act irrespective of proof that the mails or instrumentalities of interstate commerce were used in connection with the particular activity.

COMPARATIVE PRINT

Changes in existing law made by the bill are shown as follows (existing law proposed to be omitted is enclosed in black brackets, new matter is printed in italic, existing law in which no change is proposed is shown in roman):

A BILL To amend the Investment Company Act of 1940 and the Investment Advisers Act of 1940 to define the equitable standards governing relationships between investment companies and their investment advisers and principal underwriters, and for other purposes

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That this Act may be cited as the "Investment Company Amendments Act of 1969".

SEC. 2. Section 2(a) of the Investment Company Act of 1940 (15 U.S.C. 80a2(a)) is amended as follows:

(1) Paragraph (5) is amended to read as follows:

"(5) 'Bank' means (A) a banking institution organized under the laws of the United States, (B) a member bank of the Federal Reserve System, (C) any other banking institution or trust company, whether incorporated or not, doing business under the laws of any State or of the United States, a substantial portion of the business of which consists of receiving deposits or exercising fiduciary powers similar to those permitted to national banks under [section 11 (k) of the Federal Reserve Act, as amended,] the authority of the Comptroller of the Currency, and which is supervised and examined by State or Federal authority having supervision over banks, and which is not operated for the purpose of evading the provisions of this title, and (D) a receiver, conservator, or other liquidating agent of any institution or firm included in clause (A), (B), or (C) of this paragraph."

(2) Paragraphs (19) through (35) are redesignated as paragraphs (20) through (36), respectively, and paragraphs (36) through (42) are redesignated as paragraphs (38) through (44), respectively.

(3) A new paragraph is inserted immediately after paragraph (18) to read as follows:

"(19) 'Interested person' of another person means—

“(A) when used with respect to an investment company—

"(i) any affiliated person of such company,

"(ii) any member of the immediate family of any natural person who is an affiliated person of such company,

"(iii) any interested person of any investment adviser of or principal underwriter for such company,

"(iv) any person or partner or employee of any person who at any time since the beginning of the last two fiscal years of such company has acted as legal counsel for such company,

"(v) any broker or dealer registered under the Securities Exchange Act of 1934 or any affiliated person of such a broker or dealer, and "(vi) any natural person whom the Commission by order shall have determined to be an interested person by reason of having had, at any time since the beginning of the last two fiscal years of such company, a material business or professional relationship with such company or with the principal executive officer of such company or with any other investment company having the same investment adviser or principal underwriter or with the principal executive officer of such other investment company:

Provided, That no person shall be deemed to be an interested person of an investment company solely by reason of (aa) his being a member of its board of directors or advisory board or an owner of its securities, or (bb) his membership in the immediate family of any person specified in clause (aa) of this proviso; and

"(B) when used with respect to an investment adviser of or principal underwriter for any investment company