Court Says SEC Violated APA

By: Cydney Posner

Although we don't focus on the area of mutual funds, you might be interested in this article from the Financial Times, describing a court order requiring the SEC to reexamine its recently enacted mutual fund reform regulations. The court said that chairman Donaldson, who is on the eve of his departure from the SEC, had shown a "dismissive attitude" toward the value of empirical data in considering the cost of compliance and that the SEC had failed to give adequate consideration to alternative proposals as required under the Administrative Procedure Act. The suit was brought by the U.S. Chamber of Commerce. Could this be the start of a trend?

Financial Times

Court Orders SEC To Review Reform Corporate Governance
June 22, 2005

The Securities and Exchange Commission was yesterday ordered to review its flagship reform to fight abuses in the mutual fund industry, marking a significant victory for business and its complaints of regulatory over-reach.

The ruling, by the US Court of Appeals for the district of Columbia, could lead to a re-examination of mutual fund governance, just as William Donaldson, Republican chairman of the regulator and champion of the reform, prepares to step down.

Mr Donaldson warned this month against any "legalistic rollback" of the measures introduced under his leadership.

President George W. Bush has nominated Christopher Cox, a Republican lawmaker with a business-friendly record, to replace Mr Donaldson.

The court found the SEC had the authority to draw up its rule on mutual fund governance, but had failed properly to consider an alternative proposal.

Mr Donaldson, it added, had shown a "dismissive attitude" to the value of empirical data in policymaking deliberations last year.

The US Chamber of Commerce, which legally challenged the SEC rule, said the court had given Mr Donaldson a "slap".

The SEC rule was approved in June 2004 amid fears about conflicts of interest and trading abuses in the mutual fund industry. It requires that mutual fund boards have independent chairmen and that at least 75 per cent of their directors be independent.

The court agreed with the chamber of commerce that the SEC violated the Administrative Procedure Act by not adequately considering the costs to funds of complying with the rule.

Chief judge Douglas Ginsburg said the SEC had an obligation to do what it could to apprise itself - and hence the public and the Congress - of the economic consequences of a proposed regulation before adoption. The court said it also agreed with the chamber of commerce that the SEC violated the law by not properly examining an alternative proposal to the requirement for independent chairmen. The alternative promoted by Paul Atkins and Cynthia Glassman, Republican commissioners, was that funds disclose whether they had independent chairmen.

The SEC welcomed the court's finding that it had acted within its authority by devising the rule, and that it adhered to the Administrative Procedure Act in its rationale for the reform. It said it would "review how best to respond to concerns identified by the court".

The SEC rule that will enable it to inspect hedge funds also faces a legal challenge.

This content is provided for general informational purposes only, and your access or use of the content does not create an attorney-client relationship between you or your organization and Cooley LLP, Cooley (UK) LLP, or any other affiliated practice or entity (collectively referred to as “Cooley”). By accessing this content, you agree that the information provided does not constitute legal or other professional advice. This content is not a substitute for obtaining legal advice from a qualified attorney licensed in your jurisdiction and you should not act or refrain from acting based on this content. This content may be changed without notice. It is not guaranteed to be complete, correct or up to date, and it may not reflect the most current legal developments. Prior results do not guarantee a similar outcome. Do not send any confidential information to Cooley, as we do not have any duty to keep any information you provide to us confidential. This content may be considered Attorney Advertising and is subject to our legal notices.