On April 7, 2006, the United States Court of Appeals for the District of Columbia Circuit rendered a decision in the ongoing litigation challenging two aspects of the Securities and Exchange Commission's governance rule for mutual funds. Under that rule, mutual funds relying on commonly used exemptions must satisfy governance requirements including: (i) the fund board must have no fewer than 75% independent directors (two-thirds if the board has only three members), and (ii) the board must have an independent chair. These conditions had previously been stayed by the Court.
The Court determined that, in adopting these requirements, the Commission violated the Administrative Procedure Act by relying on information outside its rulemaking record without affording an opportunity for public comment. The Court was not persuaded by the Commission’s argument that the imminent departure of two Commissioners was a sufficiently exigent circumstance to dispense with normal notice and comment requirements.
The information relied upon by the Commission related to the costs and benefits of the rule. A greater judicial focus on the Commission’s cost-benefit analysis is a potentially significant development.
The Court stated that it will vacate the 75% independent director and independent chair conditions of the governance rule, but will withhold the issuance of its mandate for 90 days. This is intended to afford the Commission an opportunity to reopen the record for public comment on the cost of implementing the two conditions. The Commission is to file a status report with the Court within the 90 days, unless the Commission prevails on a motion to modify, accelerate or postpone the mandate.
In the meantime, these two conditions remain stayed.
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