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SEC Reaffirms Independent Fund Oversight

A week after a court told it to reconsider the rule, the agency again says chairmen and 75% of the directors must be free of ties to the companies.

June 30, 2005|Jonathan Peterson | Times Staff Writer

WASHINGTON — Refusing to back down, a divided Securities and Exchange Commission on Wednesday passed for the second time a rule requiring independent stewardship of the nation's mutual funds -- just one week after an appeals court had ordered the agency to reconsider the measure.

The SEC's swift answer to the court came over the objections of business groups and was among the final official actions of Chairman William H. Donaldson, who is leaving the commission today after a tenure that earned respect from shareholder activists but angered industry lobbyists who viewed him as an overly zealous regulator.

"I think at this point, after 2 1/2 years, we've accomplished a lot," Donaldson told reporters after the sometimes heated session. "There's a lot that still needs to be done."

Donaldson called the rule approved on a 3-2 vote Wednesday "the capstone" in a series of mutual fund reforms prompted by revelations of widespread trading abuses in 2003.

The rule requires mutual funds to have chairmen who are free of business ties to the fund company, and 75% of a fund's directors must be similarly independent. It was originally approved last year over the objections of the U.S. Chamber of Commerce and other groups.

On June 21, the U.S. Court of Appeals for the District of Columbia Circuit affirmed that the SEC had the authority to pass the rule, but ordered regulators to review its potential costs and to consider the alternative measure of disclosing a fund chairman's potential conflicts of interest.

The Chamber of Commerce asserted Wednesday that the SEC had defied the appellate court by failing to seriously examine the financial ramifications of the rule. The group vowed to continue its legal challenge.

"After a seven-day secret process, the SEC has recklessly readopted its flawed rule," Thomas Donohue, the chamber's president, said in a statement. "This attempt to circumvent our legal and regulatory process will not stand up in court."

Donaldson, however, maintained that the SEC had already gathered the required information before it first passed the rule last year.

"I have the greatest respect for the court," Donaldson said after the meeting. "Without question, we had the facts."

The flap comes at a pivotal moment for the commission, which oversees the nation's securities markets.

The White House has nominated Rep. Christopher Cox (R-Newport Beach) to succeed Donaldson, although his confirmation hearing has not yet been scheduled. Meanwhile, Democrat Harvey J. Goldschmid plans to leave the SEC this summer, and the term of Democrat Roel C. Campos is ending.

The Bush administration has not revealed whether it will go along with Democrats' wishes to renominate Campos and name SEC staffer Annette Nazareth, a Goldschmid protege, to fill his seat.

Donaldson, a Republican appointee of President Bush, became controversial in some GOP and business circles for siding with Goldschmid and Campos on several high-profile votes, including the mutual fund independence rule.

The outgoing chairman said he had "no concern about Congressman Cox." Donaldson said his goal for the mutual fund rules was to take "a 90-million-person investment vehicle and make it so it can grow as it should grow. Clearly, I would hope that Congressman Cox will agree with that."

Critics of the mutual fund rule Wednesday accused Donaldson of rushing it through while the three-member majority remained in place.

Republican Commissioner Paul S. Atkins held up a multicolored poster of a timeline starting with the June 21 court ruling, mockingly titled "SEC's Race to Beat the Clock."

"The ink on the court's opinion was not even dry when the die was cast for today's preordained result," Atkins said.

Critics also said the SEC should have solicited more public comment and further evidence to adequately meet the court's demand.

"Today's action is nothing more than window dressing," Republican Commissioner Cynthia A. Glassman said. She added, "It strains all credibility to believe that the commission has mystically within the past week been able to conclusively estimate costs associated with the rule."

When the SEC first passed the rule in July, Donaldson and others maintained that it would help reduce a conflict of interest now faced by board members of fund companies -- that is, the pressure to put the profits of the fund company ahead of the best interests of fund shareholders.

Making the fund company chairman independent was considered especially important because the chairman has the power to set the agenda at board meetings.

The U.S. Chamber of Commerce filed suit soon after the measure was passed, alleging that the SEC had overreached its regulatory authority and failed to consider sufficiently the costs and consequences of such a requirement.

The recent appeals court decision seemed to offer something to both sides, remanding the rule on certain technical grounds but affirming the SEC's authority.

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