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Chamber of Commerce Challenges SEC Fund Governance Rules in Court

The U.S. Chamber of Commerce has filed suit to overturn an SEC rule requiring a mutual fund’s board of directors to have an independent chairman and be composed of 75 percent independent directors. The SEC has over-reached its authority, resulting in a rule that is bad for investors and contrary to the intent of Congress, said Stephen Bokat, U.S. Chamber general counsel and head of the Chamber’s legal arm, the National Chamber Litigation Center.

Congress specifically permitted mutual fund advisers to play a significant role in governing fund investments, mandating in the Investment Company Act that only 40 percent of directors be independent, according to the Chamber’s filing, which asserts that the SEC’s rule far exceeds these Congressional requirements. The group also asserts that the rule eliminates an investor’s right to invest in funds whose leadership is affiliated with an established adviser.

The Chamber further contends that the SEC failed to satisfy basic rulemaking requirements by not giving serious consideration to public comments during the rulemaking; ignoring important information about the costs and the consequences of the rule; and failing to consider evidence that an independent chair is likely to harm rather than help fund performance.

In its earlier comment letter to the Commission, the chamber of commerce argued that the desirability of having an independent chairman should be judged on the merits by a fund's board of directors. In the case of mutual fund companies, supermajorities of the directors are independent. While some boards may choose to separate the roles of chairman and CEO, the Chamber believes that the one-size-fits-all approach contemplated by the Commission will have negative, if unintended, consequences.

To be an effective chairman, reasoned the Chamber, a person must be intimately familiar with the operations of a company. Often, a management representative is in the best position to carry out the responsibilities of a chairman. Forcing a mutual fund to utilize a chairman not familiar with the operations of a company could severely impact its progress and success. Additionally, the combination of regulatory mandates and industry corporate governance best practices make an independent chairman unnecessary.

Specifically, the SEC rule being challenged conditions the availability of ten commonly used 1940 Act exemptions on the presence of an independent fund chairman and a board composed of 75 percent independent directors. The SEC believes that greater board independence is needed if funds are to engage in the transactions permitted by the exemptive rules and effectively manage the conflicts of interest inherent in those transactions.