Donaldson Set To Defy Federal Court Over Mutual Funds

by Glen Shapiro, LawAndTax-News.com, New York

28 June 2005

In a move which infuriated the US Chamber of Commerce, SEC Chairman William Donaldson has set a new vote for Wednesday on the agency's proposals for mutual fund governance, sent back to the SEC last week by a federal appeals court.

That's one day before Donaldson leaves the SEC, and any vote is likely to mean that the regulations will again be approved, since they will go before the same five commissioners who adopted them in a contentious 3-2 vote last June.

"We think it's outrageous, just an outrageous attempt to short-circuit the administrative process," said Stephen Bokat, executive vice president of the chamber's legal center. "They will see us back in court if they are going to give the instructions from the D.C. Circuit short shrift."

The US Court of Appeals for the District of Columbia Circuit voted unanimously last week to send back to the SEC its ruling that chairmen of mutual funds should be independent from the companies managing the funds. The United States Chamber of Commerce had filed a suit against the SEC's rules last year.

The SEC vote to introduce this rule was only the second non-unanimous vote since the appointment of William Donaldson as chairman of the US regulator in 2003, and the Commission additionally approved proposals requiring that 75% of fund boards be comprised of independent directors, who must hold separate meetings without the presence of fund management.

The SEC must now examine the proposed rule for the costs that mutual funds would incur to comply and for consideration of alternatives to the requirement of independent fund chairmen. The SEC will certainly have moved quickly if it follows this process before Wednesday, but Donaldson appears set on keeping his treasured ruling in place.

Donaldson's chosen replacement, congressman Christopher Cox, R-Calif., is a free-market conservative and is thought unlikely to support the mandate for independent fund chairmen.

Paul Atkins, one of the two Republican commissioners who voted against the change, said after the appeals court's ruling, "We should undertake a thorough, public reconsideration of alternatives and costs in accordance with the court's decision. It's disappointing that we had to be forced to take this step."

The two Republican Commission members who opposed the rules last year, Cynthia Glassman and Paul Atkins, argued at the time that it would not have a significant effect on fund governance, and would likely drive costs up for investors. But Mr Donaldson stressed that the change is necessary in order to remedy "inherent" conflicts in the fund industry: "This requirement provides independent directors the leadership that they need to be truly effective day-in, day-out into the future. The leadership of an independent chairman will be the critical pivot point for avoiding potential conflicts of interest that can, in the future, lead to new forms of mismanagement, noncompliance and even fraud."

Recommended