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Securities Regulation Keyed to Coffee
Chamber of Commerce of the United States of America v.Securities and Exchange Commission
Facts
A rule was enacted under the ICA by the SEC that, in order to participate in sales that are banned by the ICA, required an investment company (mutual fund) to have a board with at least 75% independent directors and an independent chairman. A review of the rule was petitioned by the Chamber of Commerce of the United States (Chamber) contending that authority was never given to the SEC by the ICA to regulate “corporate governance” and regardless, the rule was promulgated by the SEC without conforming to the conditions of the APA. The Chamber insisted it had standing for two reasons; it was an investor and some of its members would be affected by the rule because they were mutual fund advisers. The rule was implemented by the SEC in hopes of shrinking conflicts of interest between mutual fund shareholders and advisers. A mutual fund is defined as a pool of assets that belong to individual investors holding shares in the fund, is run by an “investment company” and the board of directors is elected by shareholders. The management role in charge of the fund is usually delegated to an “adviser”, which is a company not affiliated with the fund that may have conflicting interests than those of the shareholders, even though the board is authorized to operate the fund. Even though funds that participate in specific transactions where the adviser could gain at the shareholders expense are banned by the ICA, pursuant to the SEC’s long-standing Exemptive Rules a fund that satiates specific requirements is permitted to participate in transactions that are otherwise banned. Adopting the corporate governance requirements that it promulgated would aide in the reduction of abuses, the SEC determined, seeing as requirements would grow the independent judgment and analysis of directors by increasing the percentage of independent directors. The SEC found the independent directors vital to keeping the natural conflicts betwixt the mutual fund shareholders and advisers in check and justified the independent chairman requirement on the ground that a “a fund board is in a better position to protect the interests of the fund, and to fulfill the board's obligations under the Act and the Exemptive Rules, when its chairman does not have the conflicts of interest inherent in the role of an executive of the fund adviser." The dissenters alleged that current statutory and regulatory controls were sufficient and that these new requirements would up the costs for shareholders. The court of appeals granted review.
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