The Investment Company Act, 15 U.S.C.S. § 80a-1 et seq., mandates that when the Securities and Exchange Commission engages in rulemaking and is required to consider or determine whether an action is consistent with the public interest it shall consider whether the action will promote efficiency, competition, and capital formation.
The Chamber of Commerce of the United States petitioned a review of a rule promulgated by the Securities and Exchange Commission under the Investment Company Act of 1940. The challenged provisions of the rule require that, in order to engage in certain transactions otherwise prohibited by the ICA, an investment company must have a board (1) with no less than 75% independent directors and (2) an independent chairman. The Chamber argues 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.
Did the SEC exceed its authority in promulgating a rule under the Investment Company Act of 1940?
The Court held that 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. In partially granting the petition, the court determined that the Chamber showed that it had suffered an injury in fact because it was unable to buy a desired product; therefore, the case was reviewable under U.S. Const. art. III. Next, it held that the Commission did not exceed its broad authority in adopting the two conditions. In addition, the conditions imposed did not conflict with the intent of Congress for Section 10(a). Section 10(a) implied that more than 40 percent of the directors could have been independent. However, the court determined that the Commission did not comply with its obligation under the ICA to consider whether the conditions promoted efficiency, competition, and capital formation because it did not consider the costs of the conditions it was imposing. Finally, the Commission failed to consider the alternatives available.