April 12, 2006

SEC Must Reevaluate Mutual Fund Board Rule

D.C. Appellate Court orders Commission to reconsider independent directors rule

On April 7, a Washington D.C. appeals court said that a 2004 rule requiring mutual fund boards to be independent must be reexamined by the Securities and Exchange Commission,

The ruling adds fuel to the already contentious debate over the rule and puts SEC

Chairman Christopher Cox in the driver's seat to change or drop the rule, which currently holds that 75% of mutual fund board members be independent of fund company management.

The U.S. Chamber of Commerce has made several attempts to eliminate the rule, which was passed by a 3-2 vote in 2004 under former SEC chairman William Donaldson. In a lawsuit, the Chamber argued that the SEC had not given enough consideration to compliance costs or regulation alternatives.

The court sided with the Chamber and said that the SEC had not looked at the rule closely enough and did not seek sufficient public opinion.

The 2004 rule was allegedly pushed through by Donaldson days before his departure as chairman. This is now the second time the mutual fund independence rule must be reexamined, only this time it comes during Cox's tenure.

In a written statement Cox said: "The commission will comply with the court's decision in every respect. We take seriously our responsibility to subject all of the commission's proposed rules to public notice and comment, and to appraise ourselves, the public, and to apprise ourselves, the public, and the Congress of the economic consequences of proposals, before we decide whether to adopt them."

The SEC has 90 days to receive public comment on the cost of the rule.

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