Commerce Lawsuit Challenges New Governance Requirements

Washington, DC, September 3, 2004 – A  lawsuit recently filed by the U.S. Chamber of Commerce would require the SEC to overturn a recently adopted rule requiring that 75 percent of a mutual fund’s board of directors be composed of directors that are independent of the fund’s management company and that the board’s chairman also be independent.

In July 2004, the SEC  adopted amendments to the Investment Company Act to improve the governance standards of investment companies and provide for greater independence of fund boards, particularly boards of funds that rely upon certain exemptive rules allowing them to engage in transactions that would otherwise be prohibited under the Investment Company Act and that present conflicts of interest between the fund and its management company. Investment companies must comply with the final rules by January 16, 2006.

The lawsuit filed by the Chamber of Commerce alleges that the new governance requirements exceed the SEC’s federal statutory mandate and infringe upon state law. The suit also alleges that the SEC did not provide evidence supporting the need for the new governance rule. Therefore, the Chamber of Commerce is seeking an order that the independent chair requirement and the 75 percent independent director requirement are unlawful and that the SEC be prohibited from implementing and enforcing the requirements.

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