Chamber Of Commerce Of The United States Of America v. Securities And Exchange Commission

412 F.3d 133 (D.C. Cir. 2005)

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Nature of the Case

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Facts

A mutual fund, which is 'a pool of assets … belonging to the individual investors holding shares in the fund.' It is operated by an 'investment company' the board of directors of which is elected by the shareholders. The board of directors typically delegates that management role to an 'adviser,' which is a separate company that may have interests other than maximizing the returns to shareholders in the fund. Congress enacted the ICA to control 'the potential for abuse inherent in the structure of [funds]' arising from the conflict of interests between advisers and shareholders. The ICA prohibits a fund from engaging in certain transactions by which the adviser might gain at the expense of the shareholders. Pursuant to D's long-standing Exemptive Rules, a fund that satisfies certain conditions may engage in an otherwise prohibited transaction. D proposed to amend ten Exemptive Rules by imposing five new or amended conditions upon any fund wishing to engage in an otherwise prohibited transaction. 'Enforcement actions involving late trading, inappropriate market timing activities and misuse of nonpublic information about fund portfolios' had brought to light, in D's view, 'a serious breakdown in management controls,' signaling the need to 'revisit the governance of funds.' D proposed to condition the ten exemptions upon, among other things, the fund having a board of directors (1) with at least 75% independent directors and (2) an independent chairman. After a period for comment and a public meeting, D unanimously adopted three of the proposed new conditions and, by a vote of three to two, adopted the two corporate governance conditions. The dissenting Commissioners were concerned the two disputed conditions would come at 'a substantial cost to fund shareholders,' and they believed the existing statutory and regulatory controls ensured adequate oversight by independent directors. They faulted D for not giving 'any real consideration to the costs' of the 75% condition, for failing adequately to justify the independent chairman condition, and for not considering alternatives to that condition. P timely petitioned for review of the new rules. P claims that D had no authority under the ICA to adopt the two conditions. The court of appeals granted review.