Federal court overturns SEC rule

A Securities and Exchange Commission (SEC) rule requiring mutual-fund chairmen to be independent of management was unanimously overturned by a federal appeals court yesterday, handing the U.S. Chamber of Commerce a major victory.

William Donaldson, who has resigned as SEC chairman effective at the end of June, sided with commission Democrats to pass the mutual-fund rule over the objections of the country’s largest mutual funds. The rule, which also mandated independence from at least 75 percent of mutual-fund directors, was a cornerstone of the agency’s regulatory platform. The Chamber filed suit against the rule in September.

Stephen Bokat, vice president of the Chamber’s litigation center, hailing the court’s decision in a statement. “Regulatory agencies must give serious consideration to public comments during rulemakings and cannot ignore important information about the costs — and the consequences — of their rules,” Bokat said.

The U.S. Court of Appeals for the District of Columbia ordered the SEC to reexamine the cost burden that the rule imposes on mutual funds. The three-judge panel also found that the SEC did not sufficiently examine alternative proposals from the two Republican commissioners who opposed the rule.

The SEC can still revise and resubmit a similar version of the rule after consulting the mutual-fund industry, but such a move would take time and could be derailed by new leadership at the agency. The White House has nominated Rep. Christopher Cox (R-Calif.) to replace Donaldson, and there was speculation earlier this month that Cox might settle with the Chamber and roll back the mutual-fund rule.

The rule, which would have forced the majority of mutual funds to choose new chairmen, had a compliance deadline of 2006. The Chamber was represented in its suit by Eugene Scalia, son of Supreme Court Justice Antonin Scalia.

Elana Schor

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