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Statement of the chairman...

Analysis of the bill:


Cross reference tables...

Part A-Costs of mutual fund investment..

Section 8, adding new section 15 (a), (c), and (d) to the act-

standard of reasonableness for management compensation..

Section 12, amending section 22-sales charges.

Section 16, amending section 27—periodic payment plans.--.

Section 17, amending section 28 of the act-face amount cer-


Section 6, amending section 11(b)(2)-deletion of sales charge

in exchange of series shares...

Part B-Banks and insurance companies.

Section 2(4), adding new subsection 2(a)(37)—definition of

separate account.

Section 3(b)(5), amending redesignated section 3(c)(11) —

exclusions for certain bank collective trust funds and insurance

company separate accounts

Section 5(d) amending section 10(d)—certain exemptions for

bank collective funds for managing agency acts..

Section 9(b), amending section 17(g)-custody of assets of bank

collective funds for managing agency accounts.

Section 12(d), adding new subsection 22(h)-permitting banks

to engage in certain investment company activities -

Section 27(a), adding new subsections 27 (a) (13) and 27(a) (14)

to the Securities Act-definitions of "insurance company''

and "separate account”.

Section 27(d) adding new subsection 25(b) of the Securities Act,

grant of jurisdiction to Federal banking authorities.

Section 28(a), amending section 3(a)(12) of the Securities Ex-

change Act-exemptions for certain bank common and col-

lective trust funds and insurance company separate accounts.-

Section 28(b), adding new subsection 3(a)(19) of the Securities

Exchange Act-definition of investment company, affiliated

person, insurance company, and separate account.

Section 28(c), adding new subsection 12(g)(2)(H) of the Securities

Exchange Act-exemption for certain bank common and col-

lective trust funds and insurance company separate accounts..

Section 28(d), amending section 12(i) of the Securities Exchange

Act-grant of jurisdiction to Federal banking authorities---

Section 29(c), amending section 3(a)(5) of the Securities Act,

updating exemptions for securities issued by savings and loan


Section 27(b), amending section 3(a)(2) of the Securities Act-

exemption for certain bank common and collective trust funds

and insurance company separate accounts

Part C—Portfolio transactions --

Section 9(c), adding new section 17(j)-insider trading in invest-

ment company portfolio securities.

Section 11, adding new section 19(b)-distributions of long-term

capital gains..





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21 22





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Analysis of the bill—Continued
Part D-Fund holding companies -
Section 7, amending section 12(d)(1)-preventing the creation

and enlargement of fundholding companies.---
Part E-Strengthening independent checks on investment company
Sections 2(3), 5, 8(c), 8(d), and 18, amending sections 2(a), 10,

15, and 32(a)—adding the term "interested person” Part F-Administrative and other proceedings-

Section 4, amending section 9-providing for administrative ac

tion against certain persons serving investment companies... Section 20, amending section 36-enjoining breach of fiduciary

duty involving personal misconduct-
Part 6 Coverage-
Section 3(a), amending section 3(b)(2)-requirement of good

Section 3(b)(2) amending section 3(c)(8)—deletion of exclusion
for company 90 percent or more of whose securities are those

of certain single issuers--
Section 3(b)(3) amending section 3(c)(6)-modification of ex-

clusion for companies engaged in factoring, discounting, and

real estate businesses..
Section 3(b)(4), amending section 3(c)(10)-clarification of
exemption for holding company registered under Public Utility

Holding Company Act of 1935..
Section 10, amending section 18(f)(2)—modification of definition

of senior security
Part H—Management-shareholder relationships-
Section 8(c) and 18, amending sections 15(c) and 32(a)-attend-

ance at directors' meetings..
Section 8(a) and 8(b), amending sections 15(a)(4) and 15(b)(2)-

assignment of advisory and underwriting contracts--
Section 9(a), amending section 17(f)—cash assets included under

bank custody-
Section 14, amending section 25(c)-reorganization standards--
Section 15(a), amending section 26-substitution of underlying

investments of unit investment trust.-.
Section 19, amending section 33—transmission to the commission

of papers filed in shareholder actions. Part 1-Formal...

Section 2 (a), amending section 2(a)(5)—change in reference to

another statute which has been amended....
Sections 3(b)(1) and 3(b)(2), amending sections 3(c)—deletion of

superfluous reference and renumbering-
Section 5(c), amending section 10(c)—correcting inconsistency

in prohibiting persons from serving as directors of investment

Sections 8(c) and 8(d), amending sections 15(c) and 15(d) —

elimination of outdated reference and section.---
Section 12(d), amending section 24(d)-deletion of language

required by proposed amendments.
Section 13, amending section 24(d)—updating of a statutory

Sections 21 and 22, amending sections 43(a) and(44)—up dating

statutory references..
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.---Sections 23 and 24 amending the act by strengthening disciplinary

controls over investment advisers.. Comparative print showing changes in the law which would be made by


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26 26







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the bill.. Copy of the bill (S. 34).

31 55



(S. 34), IN THE SENATE, JANUARY 15, 1969 Mr. President, I introduce a bill to amend the Investment Company Act of 1940, the Investment Advisers Act, the Securities and Exchange Act, and the Securities Act of 1933.

The intent of this legislation is to reform, update, and modernize the sections of our securities laws relating to mutual fund activities. The only purpose of the bill is to provide adequate consumer protection for the 5 million Americans who have invested their savings in mutual funds. These consumers who comprise many of our small investors are the backbone of a healthy national economy.

On May 1, 1967, I introduced similar consumer protection legislation—S. 1659. This legislation was drafted by the Securities and Exchange Commission after 10 years of extensive research by both the Commission's staff and the Wharton School of Business and Finance of the University of Pennsylvania. During the 90th Congress the full Banking and Currency Committee held extensive hearings and executive sessions on this most important legislation. After numerous committee amendments and thorough floor debate, a bill was approved by this body, but unfortunately it was not acted upon by the House. The bill which I introduce today is identical to the one which passed the Senate by a voice vote during the 90th Congress.

This bill is not, as some of its opponents have alleged, a technical financial matter. Its major purpose is to protect consumers whose investment in mutual fund shares exceeds $50 billion and the many additional citizens who will undoubtedly invest in securities in the years to come.

The Investment Company Amendments Act has three primary objectives: First, it amends the sections of the Investment Company Act pertaining to investment company management fees, mutual fund sales commissions, and periodic payment plan sales commissions. Second, it amends various provisions of the securities laws to permit banks to operate commingled managed agency accounts in competition with mutual funds. In this area, the bill would also clarify the status of bank collective funds and separate accounts established by insurance companies. Third, the bill contains a large number of amendments to the Federal securities laws, which would facilitate, update, and improve the administration and enforcement of these acts.

All of these objectives except those which would allow mutual fund shareholders to sue in Federal court to determine the reasonableness of their management fees and those which limit the “front-end load” on periodic payment plans have widespread support throughout the securities industry. And I would hope that after careful reconsideration these remaining two sections will receive similar support.

The Banking and Currency Committee of which I am chairman intends to give these proposals prompt consideration so that a bill may be reported to the Senate at the earliest possible date. The committee wilf, however, be receptive to all points of view. In addition to considering the specific proposals encompassed in this bill, we will also seek suggestions and alternative courses of action. For example, the committee intends to consider carefully the repeal of section 22(d) of the Investment Company Act and thereby open mutual fund sales commissions to the normal competitive operations of the marketplace. This section now makes it a Federal crime for anyone to sell mutual fund shares at a price lower than that fixed by the fund's distributor. We will, of course, welcome other suggestions from investors and members of the mutual fund community as well as from the entire securities industry. As I have previously stated: “Legislation will be recommended to the Senate only after the most careful consideration of all points of view and the effect of such legislation on the national economy.”

This proposed legislation is a moderate measure intended to deal with the serious problems which have arisen in the investment company industry over the last 29 years. It embodies a program of governmental regulation which is the bare minimum needed to provide adequate consumer protection and to update our investment company laws to the needs of today's economy.

This bill together with its explanation adds up to almost 100 pages. For this reason, I am not asking to have these documents printed in the Record as is my usual custom. Instead, I am having the explanation of the bill printed as a committee print together with a photographic reproduction of the proposed legislation, which will make it possible to refer to the bill's pages and lines. This will make a most useful document for the Senators and the industry representatives working on the bill. I expect that it will be available in 3 or 4 days, thanks to the outstanding work of the Government Printing Office.



This statement explains the legislative proposals contained in S. 34, a bill to amend the Investment Company Act of 1940, the Investment Advisers Act of 1940, the Securities Exchange Act of 1934, and the Securities Act of 1933. The provisions of the legislation are identical to S. 3724, which was passed by the Senate during the 90th Congress on July 26, 1968.

These legislative proposals would to a large degree implement the recommendations proposed by the Securities and Exchange Commission in its report entitled “Public Policy Implications of Investment Company Growth” (H. Rept. 2337,89th Cong., second sess.)

The bill deals primarily with the costs of management and sales commissions which are borne by mutual fund investors. Part A of this analysis explains proposed amendments to the Investment Company Act which would expressly require that managerial compensation be reasonable. Under these provisions the enforcement of this standard would be in the courts. Part A also explains the amendments to section 22 of the Investment Company Act which provides for the regulation of mutual fund sales charges through the existing industry-government framework of self-regulation. In addition, part A discusses the proposed amendment to section 27 of the Investment Company Act which provides for a substantial reduction in the percentage of an investor's payments which may legally be deducted for contractual plan sales charges during the early years of the plan. Section 28 contains comparable provisions with respect to face amount certificates.

Part B explains various amendments to the Federal securities laws which would permit banks to operate commingled managed agency accounts in competition with mutual funds. These sections also clarify the status of other bank collective funds under the securities laws and places jurisdiction over them in the Federal banking authorities. Other provisions explained in part B would exempt bank collective trust funds and insurance company separate accounts for corporate pension plans from all but the antifraud provisions of the Federal securities acts. The bill also provides exemptions for bank collective trust funds and insurance company separate accounts for “SmathersKeogh” or H.R. 10 plans from the Investment Company Act of 1940, but not from the disclosure provisions of the Securities Act of 1933 or the Securities Exchange Act of 1934.

The remaining parts of this statement explain various other proposed amendments which are designed primarily to facilitate administration and enforcement of the Investment Company Act and the Investment Advisers Act, to eliminate certain anomalous situations, and to update and correct certain provisions.

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