US Chamber Of Commerce Attacks SEC Mutual Funds Rule

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

10 September 2004

The United States Chamber of Commerce has filed suit in a federal court in an attempt to prevent the Securities and Exchange Commission (SEC) from requiring mutual funds to appoint independent chairmen from the end of next year. The SEC says that mutual funds must pick a chairman without ties to the industry.

The SEC vote to introduce this rule, last June, was only the second non-unanimous vote since the appointment of William Donaldson as chairman of the US regulator last year, 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 two Republican Commission members who opposed the move, Cynthia Glassman and Paul Atkins argued 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." He has been supported by all seven living former chairmen of the SEC.

Stephen Bokat, the Chamber of Commerce’s general counsel, says however: “The SEC has over-reached its authority, resulting in a rule that is bad for investors and contrary to the intent of Congress.” Bokat says that the rule contravenes the 1940 Investment Company Act, and removes investors’ right to put their money into funds run in affiliation with a known adviser. It also claims that the SEC “failed to satisfy basic rulemaking requirements by not giving serious consideration to public comments during the rulemaking”.

The SEC's general counsel Giovanni Prezioso says: “The Commission carefully complied with its legal obligations in adopting these rules and we expect to defend them vigorously in court.”

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