text: SECTION 1. SHORT TITLE.
  
      This Act may be cited as the ``Mutual Fund Transparency Act of 
  2005''.
  
  SEC. 2. DISCLOSURE OF FINANCIAL RELATIONSHIPS BETWEEN BROKERS AND 
                MUTUAL FUND COMPANIES.
  
      (a) In General.--Section 15(b) of the Securities Exchange Act of 
  1934 (15 U.S.C. 78o(b)) is amended by adding at the end the following:
              ``(13) Confirmation of transactions for mutual funds.--
                      ``(A) In general.--Each broker shall disclose in 
                  writing to customers that purchase the shares of an 
                  open-end company registered under section 8 of the 
                  Investment Company Act of 1940 (15 U.S.C. 80a-8)--
                              ``(i) the amount of any compensation 
                          received or to be received by the broker in 
                          connection with such transaction from any 
                          sources; and
                              ``(ii) such other information as the 
                          Commission determines appropriate.
                      ``(B) Revenue sharing.--The term `compensation' 
                  under subparagraph (A) shall include any direct or 
                  indirect payment made by an investment adviser (or any 
                  affiliate of an investment adviser) to a broker or 
                  dealer for the purpose of promoting the sales of 
                  securities of an open-end company.
                      ``(C) Timing of disclosure.--The disclosure 
                  required under subparagraph (A) shall be made to a 
                  customer not later than as of the date of the 
                  completion of the transaction.
                      ``(D) Limitation.--The disclosures required under 
                  subparagraph (A) may not be made exclusively in--
                              ``(i) a registration statement or 
                          prospectus of an open-end company; or
                              ``(ii) any other filing of an open-end 
                          company with the Commission.
                      ``(E) Commission authority.--
                              ``(i) In general.--The Commission shall 
                          promulgate such final rules as are necessary to 
                          carry out this paragraph not later than 1 year 
                          after the date of enactment of the Mutual Fund 
                          Transparency Act of 2005.
                              ``(ii) Form of disclosure.--Disclosures 
                          under this paragraph shall be in such form as 
                          the Commission, by rule, shall require.
                      ``(F) Definition.--In this paragraph, the term 
                  `open-end company' has the same meaning as in section 5 
                  of the Investment Company Act of 1940 (15 U.S.C. 80a-
                  5).''.
      (b) Disclosure of Brokerage Commissions.--Section 30 of the 
  Investment Company Act of 1940 (15 U.S.C. 80a-29) is amended by adding 
  at the end the following:
      ``(k) Disclosure of Brokerage Commissions.--The Commission, by 
  rule, shall require that brokerage commissions as an aggregate dollar 
  amount and percentage of assets paid by an open-end company be included 
  in any disclosure of the amount of fees and expenses that may be 
  payable by the holder of the securities of such company for purposes 
  of--
              ``(1) the registration statement of that open-end company; 
          and
              ``(2) any other filing of that open-end company with the 
          Commission, including the calculation of expense ratios.''.
  
  SEC. 3. MUTUAL FUND GOVERNANCE.
  
      (a) Independent Fund Boards.--Section 10(a) of the Investment 
  Company Act of 1940 (15 U.S.C. 80a-10(a)) is amended--
              (1) by striking ``shall have'' and inserting the following: 
          ``shall--
              ``(1) have'';
              (2) by striking ``60 per centum'' and inserting ``25 
          percent'';
              (3) by striking the period at the end and inserting a 
          semicolon; and
              (4) by adding at the end the following:
              ``(2) have as chairman of its board of directors an 
          interested person of such registered company; or
              ``(3) have as a member of its board of directors any person 
          that is an interested person of such registered investment 
          company--
                      ``(A) who has served without being approved or 
                  elected by the shareholders of such registered 
                  investment company at least once every 5 years; and
                      ``(B) unless such director has been found, on an 
                  annual basis, by a majority of the directors who are 
                  not interested persons, after reasonable inquiry by 
                  such directors, not to have any material business or 
                  familial relationship with the registered investment 
                  company, a significant service provider to the company, 
                  or any entity controlling, controlled by, or under 
                  common control with such service provider, that is 
                  likely to impair the independence of the director.''.
      (b) Action by Independent Directors.--Section 10 of the Investment 
  Company Act of 1940 (15 U.S.C. 80a-10) is amended by adding at the end 
  the following:
      ``(i) Action by Board of Directors.--No action taken by the board 
  of directors of a registered investment company may require the vote of 
  a director who is an interested person of such registered investment 
  company.
      ``(j) Independent Committee.--
              ``(1) In general.--The members of the board of directors of 
          a registered investment company who are not interested persons 
          of such registered investment company shall establish a 
          committee comprised solely of such members, which committee 
          shall be responsible for--
                      ``(A) selecting persons to be nominated for 
                  election to the board of directors; and
                      ``(B) adopting qualification standards for the 
                  nomination of directors.
              ``(2) Disclosure.--The standards developed under paragraph 
          (1)(B) shall be disclosed in the registration statement of the 
          registered investment company.''.
      (c) Definition of Interested Person.--Section 2(a)(19) of the 
  Investment Company Act of 1940 (15 U.S.C. 80a-2) is amended--
              (1) in subparagraph (A)--
                      (A) in clause (iv), by striking ``two'' and 
                  inserting ``5''; and
                      (B) by striking clause (vii) and inserting the 
                  following:
                              ``(vii) any natural person who has served 
                          as an officer or director, or as an employee 
                          within the preceding 10 fiscal years, of an 
                          investment adviser or principal underwriter to 
                          such registered investment company, or of any 
                          entity controlling, controlled by, or under 
                          common control with such investment adviser or 
                          principal underwriter;
                              ``(viii) any natural person who has served 
                          as an officer or director, or as an employee 
                          within the preceding 10 fiscal years, of any 
                          entity that has within the preceding 5 fiscal 
                          years acted as a significant service provider 
                          to such registered investment company, or of 
                          any entity controlling, controlled by, or under 
                          the common control with such service provider;
                              ``(ix) any natural person who is a member 
                          of a class of persons that the Commission, by 
                          rule or regulation, determines is unlikely to 
                          exercise an appropriate degree of independence 
                          as a result of--
                                      ``(I) a material business 
                                  relationship with the investment 
                                  company or an affiliated person of such 
                                  investment company;
                                      ``(II) a close familial 
                                  relationship with any natural person 
                                  who is an affiliated person of such 
                                  investment company; or
                                      ``(III) any other reason determined 
                                  by the Commission.'';
              (2) in subparagraph (B)--
                      (A) in clause (iv), by striking ``two'' and 
                  inserting ``5''; and
                      (B) by striking clause (vii) and inserting the 
                  following:
                              ``(vii) any natural person who is a member 
                          of a class of persons that the Commission, by 
                          rule or regulation, determines is unlikely to 
                          exercise an appropriate degree of independence 
                          as a result of--
                                      ``(I) a material business 
                                  relationship with such investment 
                                  adviser or principal underwriter or 
                                  affiliated person of such investment 
                                  adviser or principal underwriter;
                                      ``(II) a close familial 
                                  relationship with any natural person 
                                  who is an affiliated person of such 
                                  investment adviser or principal 
                                  underwriter; or
                                      ``(III) any other reason as 
                                  determined by the Commission:''.
      (d) Definition of Significant Service Provider.--Section 2(a) of 
  the Investment Company Act of 1940 (15 U.S.C. 80a-2(a)) is amended by 
  adding at the end the following:
              ``(53) Significant service provider.--
                      ``(A) In general.--Not later than 270 days after 
                  the date of enactment of the Mutual Fund Transparency 
                  Act of 2005, the Securities and Exchange Commission 
                  shall issue final rules defining the term `significant 
                  service provider'.
                      ``(B) Requirements.--The definition developed under 
                  paragraph (1) shall include, at a minimum, the 
                  investment adviser and principal underwriter of a 
                  registered investment company for purposes of paragraph 
                  (19).''.
  
  SEC. 4. FINANCIAL LITERACY AMONG MUTUAL FUND INVESTORS STUDY.
  
      (a) In General.--The Securities and Exchange Commission shall 
  conduct a study to identify--
              (1) the existing level of financial literacy among 
          investors that purchase shares of open-end companies, as that 
          term is defined under section 5 of the Investment Company Act 
          of 1940, that are registered under section 8 of that Act;
              (2) the most useful and understandable relevant information 
          that investors need to make sound financial decisions prior to 
          purchasing such shares;
              (3) methods to increase the transparency of expenses and 
          potential conflicts of interest in transactions involving the 
          shares of open-end companies;
              (4) the existing private and public efforts to educate 
          investors; and
              (5) a strategy to increase the financial literacy of 
          investors that results in a positive change in investor 
          behavior.
      (b) Report.--Not later than 1 year after the date of enactment of 
  this Act, the Securities and Exchange Commission shall submit a report 
  on the study required under subsection (a) to--
              (1) the Committee on Banking, Housing, and Urban Affairs of 
          the Senate; and
              (2) the Committee on Financial Services of the House of 
          Representatives.
  
  SEC. 5. STUDY REGARDING MUTUAL FUND ADVERTISING.
  
      (a) In General.--The Comptroller General of the United States shall 
  conduct a study on mutual fund advertising to identify--
              (1) existing and proposed regulatory requirements for open-
          end investment company advertisements;
              (2) current marketing practices for the sale of open-end 
          investment company shares, including the use of unsustainable 
          past performance data, funds that have merged, and incubator 
          funds;
              (3) the impact of such advertising on consumers; and
              (4) recommendations to improve investor protections in 
          mutual fund advertising and additional information necessary to 
          ensure that investors can make informed financial decisions 
          when purchasing shares.
      (b) Report.--Not later than 1 year after the date of enactment of 
  this Act, the Comptroller General of the United States shall submit a 
  report on the results of the study conducted under subsection (a) to--
              (1) the Committee on Banking, Housing, and Urban Affairs of 
          the United States Senate; and
              (2) the Committee on Financial Services of the House of 
          Representatives.
  
  SEC. 6. POINT-OF-SALE DISCLOSURE.
  
      (a) In General.--Section 15(b) of the Securities Exchange Act of 
  1934 (15 U.S.C. 78o(b)), as amended by section 2, is amended by adding 
  at the end the following:
              ``(14) Broker disclosures in mutual fund transactions.--
                      ``(A) In general.--Each broker shall disclose in 
                  writing to each person that purchases the shares of an 
                  investment company registered under section 8 of the 
                  Investment Company Act of 1940 (15 U.S.C. 80a-8)--
                              ``(i) the source and amount, in dollars and 
                          as a percentage of assets, of any compensation 
                          received or to be received by the broker in 
                          connection with such transaction from any 
                          sources;
                              ``(ii) the amount, in dollars and as a 
                          percentage of assets, of compensation received 
                          in connection with transactions in shares of 
                          other investment company shares offered by the 
                          broker, if materially different from the amount 
                          under (i);
                              ``(iii) comparative information that shows 
                          the average amount received by brokers in 
                          connection with comparable transactions, as 
                          determined by the Commission; and
                              ``(iv) such other information as the 
                          Commission determines appropriate.
                      ``(B) Revenue sharing.--The term `compensation' 
                  under subparagraph (A) shall include any direct or 
                  indirect payment made by an investment adviser (or any 
                  affiliate of an investment adviser) to a broker or 
                  dealer for the purpose of promoting the sales of 
                  securities of a registered investment company.
                      ``(C) Timing of disclosure.--The disclosures 
                  required under subparagraph (A) shall be made to permit 
                  the person purchasing the shares to evaluate such 
                  disclosures before deciding to engage in the 
                  transaction.
                      ``(D) Limitation.--The disclosures required under 
                  subparagraph (A) may not be made exclusively in--
                              ``(i) a registration statement or 
                          prospectus of a registered investment company; 
                          or
                              ``(ii) any other filing of a registered 
                          investment company with the Commission.
                      ``(E) Commission authority.--The Commission shall 
                  promulgate such final rules as are necessary to carry 
                  out this paragraph not later than 1 year after the date 
                  of enactment of the Mutual Fund Transparency Act of 
                  2005.''.
      (b) National Securities Association Requirements.--Section 15A of 
  the Securities Exchange Act of 1934 (15 U.S.C. 78o-3) is amended by 
  adding at the end the following:
      ``(n) National Securities Association Requirements.--Each national 
  securities association registered pursuant to this section shall issue 
  such rules as necessary not later than 1 year after the date of 
  enactment of the Mutual Fund Transparency Act of 2005 to require that a 
  broker that provides individualized investment advice to a person 
  shall--
              ``(1) have a fiduciary duty to that person;
              ``(2) act solely in the best interests of that person; and
              ``(3) fully disclose all potential conflicts of interest 
          and other information that is material to the relationship to 
          that person prior to the time that the investment advice is 
          first provided to the person and at least annually 
          thereafter.''.
target: Mutual Fund Transparency Act of 2005 - Amends the Securities Exchange Act of 1934 to require broker disclosure in writing to open-end company (mutual fund) purchasers of the amount of any compensation due the broker in connection with the purchase transaction from any sources.
  
  Amends the Investment Company Act of 1940 to direct the Securities and Exchange Commission (SEC) to require that brokerage commissions as an aggregate dollar amount and percentage of assets paid by a mutual fund company be included in any disclosure of the fees and expenses that may be payable by the holder of the securities of such company.
  
  Revamps independent mutual fund board of directors membership to reduce from 60 percent to 25 percent the permissible number of interested persons serving on the board. Prohibits an interested person from being board chairman. Specifies conditions an interested person must meet to service as a board member.
  
  Directs the SEC to issue final rules defining an interested person who is a "significant service provider," including the investment adviser and principal underwriter of a registered investment company.
  
  Requires the SEC to study and report to Congress on: (1) financial literacy among mutual fund investors; and (2) mutual fund advertising.
  
  Amends the Securities Exchange Act of 1934 to require broker disclosure to each purchaser of investment company shares in a mutual fund transaction of the compensation the broker receives, in dollars and as as a percentage of assets.
  
  Requires each national securities association to issue rules requiring a broker that provides individualized investment advice to a person to: (1) have a fiduciary duty to that person; (2) act solely in the best interests of that person; and (3) fully disclose all potential conflicts of interest and other material information before the investment advice is first provided, and at least annually thereafter.
feat_title: A bill to require disclosure of financial relationships between brokers and mutual fund companies, and of certain brokerage commissions paid by mutual fund companies.