Closely divided SEC retains mutual-fund rule

Defying a warning from eight Republican senators and amid partisan tension, the Securities and Exchange Commission voted 3-2 yesterday to retain its mutual-fund independence rule, which a federal court asked the agency to reexamine eight days ago.

Yesterday’s vote was the last for SEC Chairman William Donaldson, who has resigned as of today. Donaldson sided with commission Democrats to champion the rule’s initial passage and its reacceptance yesterday. After the U.S. Chamber of Commerce prevailed in its lawsuit seeking the SEC’s reconsideration and possible modification of the rule, Donaldson quickly scheduled the new vote amid protest letters from business groups and eight members of the Senate Banking Committee.

Republican Commissioners Cynthia Glassman and Paul Atkins blasted Donaldson for his hastiness and expressed unease about whether the agency was complying with the court’s order to consider the costs of imposing the rule, which requires mutual funds to hire chairmen who are independent from management. The rule would affect an estimated 80 percent of U.S. mutual funds in 2006.

Atkins addressed SEC staffers who scrambled this week to compile necessary research, asking: “You’ve all worked so hard to put this together … but should you have been directed to do so?” Democratic Commissioner Roel Campos, who is seeking an extension of his term, lashed out at those who questioned the SEC’s swift judgment and what he called misleading media coverage of the rule. “The commission is not doing anything under the cover of darkness,” Campos said.

President Bush’s nominee to replace Donaldson, Rep. Christopher Cox (R-Calif.), has a pro-business record that suggests to many he might not have supported retaining the mutual-fund rule. The rule also states that 75 percent of all mutual-fund directors must be independent from management and was intended to protect investors from mutual fund trading abuses.

In addition to condemnation from the two Republican commissioners and the senators who called the quick meeting inappropriate, the Chamber said it would sue the SEC again as soon as possible.

“Our plans are to refile,” general counsel Steven Bokat said. In a statement, Chamber President Thomas Donohue called the SEC’s vote “outrageous” and “reckless.”