Court of Appeals Vacates SEC Fund Governance
In the latest round of the ongoing saga of Chamber of Commerce v. SEC, the U.S. Court of Appeals for the District of Columbia ruled today to vacate the two conditions of an SEC regulation mandating that both the chairman and 75 percent of the directors of a mutual fund must be independent from management. However, before entering its order, the court gave the SEC 90 days to reopen the rulemaking record for comment on the costs of implementing the two conditions. The SEC was ordered to file a status report with the court within that 90-day period. Presumably, after reviewing the SEC’s report, the court will decide whether to rescind its vacation order, allow it to go into effect, or take some other action. In explaining its decision not to vacate the conditions immediately, the court noted that a "significant portion of the mutual fund industry appears to have come into substantial compliance" with the rules, and that an immediate vacation might risk "substantial disruption to the mutual fund industry because of the resultant inconsistent governance practices that would arise within the industry, which also might sow confusion in the investing public."
The court stated that the SEC violated the Administrative Procedures Act, which requires critical data relied upon by an agency be made available to the public for comment. Specifically, certain data considered by the SEC regarding costs to the industry in implementing the rule came from a privately produced "Management Practice Inc. Bulletin[s]" and a non-public survey of compensation and governance practices in the industry.
The events over the last two years have afforded the public a unique insight into the inner workings of the SEC’s rulemaking process. It began when the SEC adopted the controversial rule in a divisive 3-2 vote. The U.S. Chamber of Commerce then petitioned the court last year to overturn the rule. The court ruled that the SEC failed to determine the costs of implementing the two conditions and to address the adequacy of disclosure as an alternative. In just eight days, again with a divisive 3-2 vote, the SEC reissued the rule stating "the information in the existing record, together with publicly available information on which we may rely, is a sufficient base on which to consider the deficiencies identified by the court." The Chamber again petitioned the court, which has now effectively sent the rule back to the SEC for the second time in less than a year.
As you might recall, the SEC adopted the rule under former Chairman William Donaldson, who stepped down in June. Today’s court decision gives the SEC its first opportunity to review the rule under its new chairman, Christopher Cox.