Appeals Judges Consider Independent Fund Director Rule Challenge

April 15, 2005 ( - As part of a business lobbying group's legal challenge to a new rule mandating more independence among mutual fund directors, a government lawyer was repeatedly quizzed Friday about how the rule was developed.

>It was Giovanni Prezioso, general counsel for the US Securities and Exchange Commission (SEC) on the hot seat before the US Court of Appeals for the District of Columbia Circuit about the director independent regulation approved in June, according to a Reuters report. The rule is under challenge from the US Chamber of Commerce, which sued to block the rule in September on behalf of unnamed members, arguing that the SEC had exceeded its authority and violated legal procedures.

During oral arguments Friday in Washington, Chief Judge Douglas Ginsburg asked Prezioso repeatedly whether the SEC adequately had considered hard data, alternative solutions and dissenting views before adopting the rule, according to Reuters, Prezioso told Ginsburg that the SEC “did speak to the economic information in front of it.” Moreover, he replied, dissenting views were aired.

The rule being challenged requires that the chairmen of mutual fund boards, as well as 75% of a board’s directors to have no direct ties to the company that manages the fund’s assets (See  SEC to Consider Independent Director, Broker Rule Changes ). The regulation was adopted amid a wave of scandals involving improper trading in the shares of many mutual funds that cheated average fund investors out of profits.

During Friday’s proceedings, Judge David Tatel questioned the Chamber’s challenge of the SEC’s authority, saying that the law empowering the commission to write rules and regulations “is awfully broad language.”

Chamber attorney Eugene Scalia told reporters after the court adjourned that the SEC’s rule-making, from a procedural standpoint, was still arbitrary and capricious. He said the SEC did not sufficiently consider some studies about mutual fund directors and making them more independent.

To bolster his argument, Scalia pointed to what he said was a remark by SEC Chairman William Donaldson that “There are no empirical studies that are worth much … It’s very difficult to find any studies that aren’t biased in one way or another.”

Ginsburg asked Prezioso   whether the court should be concerned about the remark. Prezioso said there was no cause for worry. He said Donaldson was suggesting only that studies can be made to say many things and that this may have been true in the debate over the director independence rule.