SEC Affirms Rejected Fund Rule as Donaldson Departs

William Donaldson, in one of his last acts as chairman of the U.S. Securities and Exchange Commission, cast the deciding vote to push through a mutual fund governance rule rejected eight days ago by a federal court.Mr. Donaldson, a Republican who is leaving the agency today, joined with the two Democrats on the commission to approve a measure requiring mutual funds to have independent chairmen. He ignored criticism from lawmakers, ex-SEC officials, and business groups that the SEC was rushing the vote to prevent his successor from reconsidering the rule he championed.“Our failure to act would, I fear, throw the future of this rulemaking into an uncertain limbo until a new chairman is confirmed,” Mr. Donaldson said at a meeting in Washington yesterday. “Today, however, we have intact the full complement of commissioners who have spent the last year and a half thinking about the issues raised in this rulemaking.”The 3-2 vote sets the stage for another legal showdown over the rule, which also requires mutual fund boards to have 75% outside directors. The U.S. Chamber of Commerce, which successfully challenged the initial regulation, immediately said it would take the agency back to court.Mr. Donaldson has touted the rule as one of the most important initiatives passed during his tenure at the SEC. It was adopted last year on the same split vote over the objection of most of the $7.9 trillion mutual fund industry.Commissioners Paul Atkins and Cynthia Glassman, the chairman’s two Republican colleagues, voted against the rule again yesterday, saying more than a week was needed to address the concerns raised by the court in its June 21 decision. Mr. Atkins said the action heralded “one of the saddest days in the commission’s 71-year history.”The internecine fight over the independent chairman requirement overshadowed the commission’s approval of a final rule modernizing securities offering guidelines that were written in the 1930s. The measure, adopted unanimously, scraps the so-called quiet period and will allow companies issuing stock or bonds to promote them by distributing information to investors.Ms. Glassman called yesterday’s reconsideration of the fund rule “a rush to judgment” and said the commissioners were voting on “an assembly of false statements, unsupported assumptions, flawed analysis, and misinterpretations.”She also apologized to the court, the public, and to some of the SEC’s staff, who she said were uncomfortable with the revote. “Today’s action is nothing more than window dressing,” Ms. Glassman said. “It violates the spirit, if not the letter, of the court’s opinion.”Commissioners Harvey Goldschmid and Roel Campos sided with Mr. Donaldson in adopting the rule yesterday.Mr. Goldschmid said the agency was able to respond to the court’s narrow concerns. The decision, which upheld the agency’s legal authority to require the governance changes, has been mischaracterized by opponents of the rule, he said.“This matter will be quickly back before those judges,” he said. “If we are wrong about being fully responsive, the court will certainly tell us so.”Mr. Campos said yesterday’s vote was “legitimate” and that the rule’s critics have “a desire to have a different commission deal with this.”The independent chairman rule was one of a dozen the agency put forth to combat trading and sales abuses in the fund industry, which was beset by scandal two years ago. Mr. Donaldson and other supporters said the boards, which are supposed to represent shareholder interests, will be strengthened by having fewer ties to the companies that run the mutual funds.“The independent chair condition is the capstone of our series of mutual fund governance reforms that will help foster a culture in fund boardrooms based on transparency, arm’s length dealing, and above all, protection of the interests of fund shareholders,” Mr. Donaldson said.About 80% of mutual fund companies, including Fidelity Investments and Vanguard Group, the two biggest, will be forced to change chairmen if the rule is enacted.Vincent Loporchio, a Fidelity spokesman, said the rule “limits the discretion of the board to exercise their informed business judgment to appoint any individual of their choosing to serve as chairman.” John Woerth, a spokesman for Vanguard, declined to comment. A unanimous three-judge panel of the U.S. Court of Appeals for the D.C. Circuit sent the rule back to the SEC last week. The judges said the agency didn’t properly consider the requirement’s costs and failed to weigh an alternative plan posed by the dissenting Republicans.Chamber President Thomas Donohue said in a statement issued 30 minutes after yesterday’s SEC meeting that the group will take the agency back to court.

SEC Affirms Rejected Fund Rule as Donaldson Departs

SEC Affirms Rejected Fund Rule as Donaldson Departs

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