SEC Readopts Fund Governance Rules

Washington, DC, July 8, 2005 - The SEC voted 3 to 2 on June 29 to readopt fund governance rules requiring that 75 percent of a mutual funds directors, and the board chairman, be independent.

Background
In July 2004, the SEC adopted amendments to the Investment Company Act designed to improve the governance standards of investment companies and provide for greater independence of fund boards. Investment companies were required to comply with the final rules by January 16, 2006. In September 2004, the U.S. Chamber of Commerce challenged the governance rules in a lawsuit alleging, among other things, that the SEC did not provide evidence supporting the need for the new governance rule.

In June 2005, the U.S. Circuit Court ruled on the Chamber's suit, stating that the SEC did not consider the impact on funds of the costs of complying with the new rule, and did not adequately consider alternatives to the independent chairman requirement. The Court remanded the matter to the SEC on June 21.

As required, the SEC reconsidered the rule at an open meeting on June 29 and ultimately voted to readopt the rules. Earlier this week, the Chamber of Commerce announced its intention to challenge the rule a second time.

ICI Position
Following the Court's decision and in advance of the SEC's June 29 meeting, ICI President Paul Schott Stevens reiterated that ICI believes the choice of who serves as a chair of a mutual fund board is best left to a fund's directors to decide and should not be dictated by SEC rule. In a subsequent letter, ICI recommend that the Commission take the present opportunity to invite additional public comment and collect additional data to ensure a thoughtful and deliberative rulemaking process.

Related Links
A section of this website is devoted to director and fund governance issues.