Business Groups Win Second Fund Director Independence Rule Challenge

April 7, 2006 ( - A federal appellate court has given the US Securities and Exchange Commission (SEC) 90 days to consider public input about the costs of implementing the SEC's proposed rule mandating that 75% of mutual fund board members be independent.

In a ruling issued Friday , the US Court of Appeals for the DC Circuit effectively threw out the independent director mandate, but postponed the effectiveness to give regulators time to more properly consider the implications of their action.

The ruling, based on a challenge by the US Chamber of Commerce and the National Chamber Litigation Center (NCLC), a business law lobbying group, stems from a 2004 SEC rule that that mutual funds have an independent chair of the board of directors, and that 75% of board members be independent (See Appeals Judges Consider Independent Fund Director Rule Challenge ).

In the business groups’ first challenge to the rule, appellate judges determined that the SEC failed to examine the costs of implementing the proposed changes and the adequacy of available alternatives, such as disclosure. The court instructed the SEC to carefully consider these issues.

In the latest challenge, NCLC argued (SeeChamber Again Battles SEC Fund Independence Rule ) that the SEC considered materials on which the public was not given the opportunity to comment and that the SEC ignored the court’s instructions to consider a disclosure alternative to the independent chair provision (See SEC to Add More Detail to Independent Fund Director Rule ).

In a Web statement , the NCLC applauded Friday’s ruling. “The court had a simple message for the SEC today: you can’t run roughshod over the rulemaking process,” said Steve Bokat, NCLC’s executive vice president. “The SEC rushed to reissue the mutual fund rule without conducting the thorough review requested by the Court.”

The Chamber called the court’s decision to allow the SEC 90-days to reconsider the rule in light of additional public comments “appropriate” and pledged to work with the commission.  “We look forward to sharing our views with the SEC as they decide how to address the issues raised during these proceedings,” said Bokat in the statement.

SEC Chairman Christopher Cox released a statement saying, “We take seriously our responsibility to subject all of the Commission’s proposed rules to public notice and comment, and to apprise ourselves, the public, and the Congress of the economic consequences of proposals before we decide whether to adopt them. I am confident that the result of the process that the court has prescribed will be final mutual fund governance rules that protect the interests of the funds and the fund shareholders they serve.”