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Donaldson's Swan Song

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At an open meeting one day before his departure on June 30, SEC Chairman William Donaldson remained steadfast in backing the SEC’s rule requiring registered investment companies to have a board comprising at least 75% independent directors and an independent chairman, and pushed the rule through once again with help from the two Democratic commissioners, Roel Campos and Harvey Goldschmid.

The U.S Court of Appeals for the D.C. Circuit ruled June 21 that the SEC violated the Administrative Procedures Act with the ruling, stating the securities regulator failed to consider the compliance costs associated with the rule as well as an alternative proposal put forth by the two Republican commissioners, Cynthia Glassman and Paul Atkins. The court told the SEC to reconsider the 75% independent director and independent chairman requirements, and urged the SEC to look again at the proposal put forth by Glassman and Atkins that each fund should instead be required to disclose whether it has an inside or an independent chairman. The U.S Chamber of Commerce, which sued the SEC over the rule, plans to march back to court with charges that the SEC acted too hastily.

“The SEC didn’t meet their legal requirements the first time around and today’s effort is no different,” said Thomas Donohue, Chamber president and CEO, in a prepared statement. “It’s outrageous that a regulatory agency would deliberately ignore the orders of a U.S. Court of Appeals and disregard calls for a reasoned rulemaking process.” Donohue went on to charge that, “After a seven-day secret process, the SEC has recklessly re-adopted its flawed rule. This attempt to circumvent our legal and regulatory process will not stand up in court.”

During the nearly four-hour open meeting on June 29, Donaldson said the court ruled that the SEC’s fund governance rule is a “reasonable response” in strengthening the role of fund directors, and that the rules “fall within the SEC’s authority.” The court ordered the SEC to only reconsider the aforementioned issues, confirming that “the rule does not have to be reversed” or that the rule-making process be started over again. Donaldson said “it’s not uncommon for the Commission to act swiftly,” noting that the SEC staff mulled the ruling for a year before bringing it up for a vote.

Both Glassman and Atkins were incensed with Donaldson’s hasty handling of the ruling, stating that a “prudent response” would be to seek public comment. But Donaldson shot back that the court did not require the agency to seek additional public comment.


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