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SEC Responds to Chamber of Commerce Court Petition

The SEC filed a brief in response to the Chamber of Commerce's petition for review of the SEC's adoption of an independent mutual fund chair rule and a 75 percent independent director requirement for funds that rely on certain exemptive rules under the Investment Company Act. The SEC asked the U.S. Court of Appeals for the District of Columbia Circuit to dismiss the chamber's petition for lack of standing or, alternatively, to confirm the SEC's action. The oral argument is scheduled for January 6, 2006.

The chamber sued the SEC in September 2004 seeking to overturn the rule amendments, and its petition was granted in part. The court remanded the matter to the SEC (2005 CCH Dec. 93,279) to address its failure to adequately address the costs of complying with the two conditions and its failure to adequately consider a disclosure alternative to the independent chair condition. The court did not vacate the amendments and the SEC acted promptly on the remand. Upon further consideration, the Commission determined not to modify the amendments. The chamber again filed suit, accusing the SEC of acting without proper consideration as directed by the court. The SEC stated that the costs associated with the two conditions for reliance on the exemption are minimal, as confirmed by a subsequent study, and explained why the disclosure alternative was not a better alternative than the independent chair condition.

The exemptive rules permit mutual funds to engage in transactions that otherwise would be prohibited by the Investment Company Act, conditioned upon the judgment of a fund's independent directors to oversee the conflicts of interest that are inherent in the transactions. The SEC's amendments, adopted in response to scandals in the mutual fund industry, were intended to strengthen this oversight by increasing the percentage of independent directors of a fund seeking to rely on the exemptive rules to 75 percent and by imposing the condition that the board have an independent chair.

The SEC maintained that the chamber has not shown that it has standing to seek a review of the rule amendments. The chamber cannot seriously contend that it satisfies the required element of injury-in-fact, according to the SEC, given the minimal costs of the two conditions. The SEC noted that the chamber has not provided evidence that any fund adviser member has been injured by the rule amendments.

The chamber criticized the speed with which the SEC acted on the court's remand, but failed to demonstrate that the SEC's findings and conclusions are incorrect, according to the brief. The SEC also explained that, having concluded that the costs of compliance would be minimal for any fund, also found that the amendments would have little, if any, adverse effect on efficiency, competition and capital formation.

The chamber maintained that the SEC should have undertaken a comprehensive reevaluation of the amendments and put them out for a second round of comments. The SEC noted that the court's instructions were much more limited. The court advised that part of the SEC's task could be readily accomplished. The SEC added that a quick response was not unusual for the Commission. The SEC also advised that the timing of the reconsideration of the rule amendments was not an attempt by the chairman to reach a predetermined result, as the chamber asserted, but an effort to give the five Commission members the ability to respond quickly to the court. The SEC followed all of the legal requirements in acting on the court's remand, according to its brief.