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United States Court of Appeals for the District of Columbia Circuit
April 15, 2005, Argued ; June 21, 2005, Decided
[**354] [*136] On Petition for Review of an Order of the Securities and Exchange Commission.
GINSBURG, Chief Judge: The Chamber of Commerce of the United States petitions for review of a rule promulgated by the Securities and Exchange Commission under the Investment Company Act of 1940 (ICA), 15 U.S.C. § 80a-1 et seq. The challenged provisions of the rule require that, in order to engage in certain transactions otherwise prohibited by the ICA, an investment company -- commonly referred to as a mutual fund -- must have a board (1) with no less than 75% independent directors and (2) an independent chairman. The Chamber argues [***2] the ICA does not give the Commission authority to regulate "corporate governance" and, in any event, the Commission promulgated the rule without adhering to the requirements of the Administrative Procedure Act, 5 U.S.C. § 551 et seq.
We hold the Commission did not exceed its statutory authority in adopting the two conditions, and the Commission's rationales for the two conditions satisfy the APA. We agree with the Chamber, however, that the Commission did violate the APA by failing adequately to consider the costs mutual funds would incur in order to comply with the conditions and by failing adequately to consider a proposed alternative to the independent chairman condition. We therefore grant in part the Chamber's petition for review.
A mutual fund, which is "a pool of assets … belonging to the individual investors holding shares in the fund," Burks v. Lasker, 441 U.S. 471, 480, 60 L. Ed. 2d 404, 99 S. Ct. 1831 (1979), is operated by an "investment company" the board of directors of which is elected by the shareholders. Although the board is authorized to operate the fund, it typically delegates that management role to an "adviser," which [***3] is a separate company that may have interests other than maximizing the returns to shareholders in the fund. In enacting the ICA, the Congress sought to control "the potential for abuse inherent in the structure of [funds]" arising from the conflict of interests between advisers and shareholders, id.; to that end, ] the ICA prohibits a fund from engaging in certain transactions by which the adviser might gain at the expense of the shareholders. See generally 15 U.S.C. § 80a-12(a)-(g). Pursuant to the Commission's long-standing Exemptive Rules, however, a fund that satisfies certain conditions may engage in an otherwise prohibited transaction. See, e.g., Rule 10f-3, [**355] [*137] 17 C.F.R. § 270.10f-3 (2004) (when conditions are satisfied, fund may purchase securities in primary offering although adviser-affiliated broker-dealer is member of underwriting syndicate).
Early in 2004 the Commission proposed to amend ten Exemptive Rules by imposing five new or amended conditions upon any fund wishing to engage in an otherwise prohibited transaction. See Investment Company Governance, Proposed Rule, 69 Fed. Reg. 3472 (Jan. 23, 2004). [***4] Although the Commission had amended the same ten rules in 2001 to condition exemption upon the fund having a board with a majority of independent directors (that is, directors who are not "interested persons" as defined in § 2(a)(19) of the ICA), see Role of Independent Directors of Investment Companies, Final Rule, 66 Fed. Reg. 3734 (Jan. 16, 2001), by 2004 the Commission had come to believe that more was required. "Enforcement actions involving late trading, inappropriate market timing activities and misuse of nonpublic information about fund portfolios" had brought to light, in the Commission's view, "a serious breakdown in management controls," signaling the need to "revisit the governance of funds." 69 Fed. Reg. at 3472. Accordingly, the Commission proposed to condition the ten exemptions upon, among other things, the fund having a board of directors (1) with at least 75% independent directors and (2) an independent chairman. Id. at 3474.
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412 F.3d 133 *; 366 U.S. App. D.C. 351 **; 2005 U.S. App. LEXIS 11805 ***; Fed. Sec. L. Rep. (CCH) P93,279
CHAMBER OF COMMERCE OF THE UNITED STATES OF AMERICA, PETITIONER v. SECURITIES AND EXCHANGE COMMISSION, RESPONDENT
Subsequent History: Rehearing denied by Chamber of Commerce of the United States v. SEC, 2005 U.S. App. LEXIS 19602 (D.C. Cir., Sept. 9, 2005)
Appeal after remand at, Remanded by Chamber of Commerce of the United States v. SEC, 2006 U.S. App. LEXIS 8403 (D.C. Cir., Apr. 7, 2006)
Prior History: Chamber of Commerce of the United States v. SEC, 2004 U.S. App. LEXIS 21685 (D.C. Cir., Oct. 18, 2004)
conditions, Exemptive, funds, disclosure, investment company, costs, shareholders, transactions, regulation, conflicting interest, mutual fund, rulemaking, adviser, boards, abuses, argues, estimate, staff, corporate governance, purposes, cases
Securities Law, Investment Companies, Activities, Exclusions & Exemptions, Transactions With Affiliates, Constitutional Law, The Judiciary, Case or Controversy, General Overview, Administrative Law, Separation of Powers, Legislative Controls, Boards of Directors, Judicial Review, Standards of Review, Abuse of Discretion, Arbitrary & Capricious Standard of Review, Business & Corporate Compliance, Regulators, US Securities & Exchange Commission, Rules & Regulations, Distributions, Redemptions & Repurchases, Agency Rulemaking, Informal Rulemaking, Capital Structure, Proxies & Voting Trusts, Declarations & Findings, Registration & Reporting