SEC Faces Lawsuit over Independent Fund Director Rule

The U.S. Chamber of Commerce has gone to federal court to stop a requirement that mutual fund boards have independent chairmen and majorities of independent directors.

The group, representing 3 million businesses, says the SEC's requirements go too far. The 1940 Investment Company Act says that only 40 percent of directors must be independent, the court papers say. The suit was filed last Thursday in U.S District Court for the District of Columbia and the U.S. Court of Appeals for the D.C. Circuit.

“There's no empirical evidence that an independent chairman or a 75 percent majority will have a positive effect on the performance of mutual funds,” said Stephen Bokat, the general counsel of the U.S. Chamber of Commerce, according to the Wall Street Journal. “To the contrary, there's evidence in the records that those who have independent chairmen actually don't perform quite as well.”

The SEC approved the rule on independent fund directors in June, and companies have until January 2006 to conform. At the time, SEC Chairman William Donaldson said the rule would help eliminate conflicts of interest when a fund director tries to please investors and managers at the same time. Critics say the insiders can provide excellent advice, and they question whether outsiders add any benefits.

A Chamber official told CBS MarketWatch that investors seek out fund companies based on the reputations of fund managers, not for hiring outsiders who are less familiar with the company.

The SEC's general counsel, Giovanni P. Prezioso, said the agency would fight the lawsuit, according to the New York Times. "The commission carefully complied with its legal obligations in adopting these rules and we expect to defend them vigorously in court," he said.

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