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D.C. Circuit Again Rules Against SEC Fund Governance Requirements

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  • Baker, John
    The U.S. Court of Appeals for the D.C. Circuit has again ruled against the Securities and Exchange Commission in the U.S. Chamber of Commerce s challenges to
    Message 1 of 1 , Apr 7, 2006
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      The U.S. Court of Appeals for the D.C. Circuit has again ruled
      against the Securities and Exchange Commission in the U.S. Chamber of
      Commerce's challenges to the SEC's fund governance rules. Chamber of
      Commerce of the United States of America v. SEC, No. 05-1240 (D.D.C.
      Apr. 7, 2006). The challenged provisions would require most registered
      investment companies to have a board of directors with at least 75%
      independent directors and an independent chairman. The court previously
      ruled, on June 21, that the SEC failed to consider the cost of
      compliance and failed to give adequate consideration to an alternative
      proposal. The SEC held a meeting only eight days later, on June 29, and
      made new findings in response to the court's concerns.

      The court ruled on this second appeal that the SEC improperly
      relied on materials outside the record in arriving at its cost
      estimates. In particular, the court criticized the SEC's reliance on
      privately produced Management Practice Inc. Bulletins and on a nonpublic
      survey of compensation and governance practices in the mutual fund
      industry that was summarized in one of those bulletins. The court said
      the SEC instead should have reopened the record for comment. The court
      acknowledged that the SEC's decision to rely upon extra-record data
      without reopening the rulemaking record for comment does not, of itself,
      indicate that the SEC was wrong in its cost estimates or its weighting
      of costs against benefits.

      The court's resolution of the case is confusing. The court
      noted that many mutual funds have already come into compliance with the
      fund governance rules and expressed uncertainty whether immediately
      vacating the challenged provisions might risk substantial disruption to
      the mutual fund industry. Accordingly, it vacated the challenged
      requirements, but said it is withholding the issuance of its mandate for
      90 days. The court said that this approach will afford the SEC an
      opportunity to reopen the record for comment on the costs of
      implementing the two provisions and that "Within ninety days the
      Commission shall file a status report with the court, unless the
      Commission shall have prevailed on a motion to modify, accelerate, or
      postpone the mandate, and upon further order the mandate will issue."

      The court's ruling creates a dilemma for SEC Chairman
      Christopher Cox, who until now has avoided taking a position on the fund
      governance rules on the basis that he does not want to revisit settled
      SEC decisions. The substantive dispute over the fund governance
      provisions is over their benefit, not their cost, with Commissioner
      Campos of the view that their benefit is greater than any costs that are
      likely to be found in the notice and comment process and Commissioners
      Glassman and Atkins of the view that their benefit is questionable at
      best. Now the resolution will depend on the course taken by Chairman
      Cox and Commissioner Nazareth.

      The court's opinion is available online at


      For my post on the prior D.C. Circuit opinion, see


      John M. Baker <JMB@...>
      Stradley Ronon Stevens & Young, LLP http://www.stradley.com
      1220 19th Street NW, Suite 600
      Washington DC 20036
      202.822.0140 fax
      FundLaw Listowner http://groups.yahoo.com/group/fundlaw
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