In July 2004, the SEC issued final regulations to improve the governance of mutual funds. This regulatory action--and many other proposed and final rules--followed the initiation of numerous Federal and state investigations into improper market timing and late trading activities involving more than 30 mutual fund complexes.
One of the new governance rules required that independent directors comprise no less than 75 percent of a mutual fund board. Another new governance rule required that each mutual fund board be chaired by an independent director.
These two SEC final rules were challenged by the Chamber of Commerce in the U.S. Court of Appeals for the D.C. Circuit. On June 21, 2005, the Court remanded to the SEC for its consideration two deficiencies it identified in the rulemaking. The SEC responded a few days later by re-issuing the same provisions as final rules without modification. On April 7, 2006, the Court issued an opinion holding that the SEC violated the Administrative Procedures Act, by failing to seek comment on the data used to estimate the costs of these two governance rules.
The SEC re-opened its public comment process for this rulemaking in June 2006, and again in December 2006. Since that time, the SEC has not issued a final rule regarding either of these two issues, although many mutual fund boards have moved voluntarily to require that independent directors comprise at least 75 percent of a fund board. A substantial majority of fund boards also have moved voluntarily to elect a chairman who is an independent director.