The U.S Court of Appeals for the D.C. Circuit ruled June 21 that the SEC violated the Administrative Procedures Act with its rule requiring registered investment companies to have a board composed of at least 75% independent directors and an independent chairman. The court told the SEC to reconsider the two requirements, which the securities regulator says it will do at an open meeting on June 29--one day before SEC Chairman William Donaldson is to give up his post.
The court said the SEC failed to perform an adequate cost-benefit analysis when considering the compliance burden of the 75% independent director and independent chairman rules, and failed adequately to consider an alternative to the independent chairman condition. The court ruled that the SEC failed to consider the alternative proposal endorsed by the two dissenting Republican SEC commissioners, Cynthia Glassman and Paul Atkins, that each fund be required to disclose whether it has an inside or an independent chairman, thereby allowing investors to make an informed choice.
Donaldson pushed the original proposal through with the help of the two Democratic commissioners, Roel Campos and Harvey Goldschmid. Industry officials speculate that Donaldson wants to reconsider the ruling before he exits the Commission so that he can again achieve a three-to-two vote favoring the ruling. At the open meeting, "Donaldson is likely to say, 'we've reconsidered [the ruling], here's the cost/benefit analysis and here's the reason we reject the alternative from the dissenting commissioners. Let's vote,'" says David Tittsworth, executive director of the Investment Adviser Association in Washington. Atkins and Glassman will likely cry foul, arguing that the SEC couldn't properly perform a cost/benefit analysis in five days. Donaldson's nominated successor, Rep. Christopher Cox (R-California)--whose record suggests that he would side with the two Republican commissioners--could reopen the ruling once he's aboard and either overturn it completely, or institute Glassman and Atkins's alternative disclosure proposal.