- The Washington Times - Tuesday, June 21, 2005


An effort to reshape the mutual fund industry and protect investors from abuses was thrown into doubt yesterday by a federal appeals court ruling that any changes must get new scrutiny from regulators.

The departure later this month of the head of the Securities and Exchange Commission, combined with the ruling by the U.S. Court of Appeals for the District of Columbia Circuit, cast doubt on the plan’s future.

In a 3-0 ruling, the appeals court said the regulations mandating that chairmen of mutual funds be independent from the companies managing the funds must be returned to the SEC. There, they will be examined for the costs that mutual funds would incur to comply and for consideration of alternatives to the requirement of independent fund chairmen.

The rules, adopted by a divided SEC last year, also require that at least 75 percent of the directors on mutual fund boards be independent.

They could shake up the sprawling $8 trillion mutual fund industry to which some 95 million Americans entrust their savings. The boards of 80 percent of U.S. funds — or about 3,700 funds — would have to replace their chairmen, according to SEC officials.

A champion of the regulations, SEC Chairman William Donaldson, recently announced that he is leaving June 30 and it is unclear whether the agency would be able to review the regulations and deal with the pending issues before then.

“This rule becoming effective is now highly in doubt,” said Lynn Turner, a former SEC chief accountant.

Mr. Donaldson, a former Wall Street executive, pushed for the regulations amid an industrywide scandal that brought to light trading abuses that favored big hedge funds and other customers of mutual funds at the expense of ordinary investors.

The chairman of a mutual fund board typically also is the chief executive of the investment advisory firm, an arrangement that critics say allows the fund manager to dominate the board.

In a 3-2 vote a year ago, Bush appointee Mr. Donaldson sided with the two Democrats on the panel in an unusual political alignment to get the regulations through. They are scheduled to take effect next year.

President Bush has chosen Rep. Christopher Cox, California Republican, to replace Mr. Donaldson. Mr. Cox, a free-market conservative who authored legislation that made it easier for companies to defend against some types of lawsuits by shareholders, might not support the mandate for independent fund chairmen. A Senate confirmation hearing is expected to be held next month and Mr. Cox’s confirmation appears assured.

The U.S. Chamber of Commerce had sued the SEC over the issue, putting it before the appeals court. The group and other business interests have been chafing at Mr. Donaldson’s regulatory stance during his 2-year tenure and had pressed the White House to replace him with someone friendlier.

The SEC violated the Administrative Procedures Act by “failing adequately” to consider the two matters, the ruling by Appeals Court Judge Douglas Ginsburg said. The court said the market watchdog agency was within its authority when it imposed the requirements, however.

In response, the SEC said it will review how best to respond to the concerns identified by the court.

The U.S. Chamber called the ruling a “rebuff of the agency,” saying the chamber believes it is critical that government agencies consider the costs of regulatory requirements and less burdensome alternatives.

If independence for mutual fund chairmen is required, industry experts say the new independent chairmen would replace chairmen who are more well versed in fund operations, therefore they would have to hire additional staff to assist them.

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