Chamber of Commerce of U.S. v. S.E.C., No. 05-1240.

CourtUnited States Courts of Appeals. United States Court of Appeals (District of Columbia)
Writing for the CourtRogers
Citation443 F.3d 890
Docket NumberNo. 05-1240.
Decision Date07 April 2006
PartiesCHAMBER OF COMMERCE OF THE UNITED STATES of America, Petitioner v. SECURITIES AND EXCHANGE COMMISSION, Respondent.
443 F.3d 890
CHAMBER OF COMMERCE OF THE UNITED STATES of America, Petitioner
v.
SECURITIES AND EXCHANGE COMMISSION, Respondent.
No. 05-1240.
United States Court of Appeals, District of Columbia Circuit.
Argued January 6, 2006.
Decided April 7, 2006.

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On Petition for Review of an Order of the Securities and Exchange Commission.

Eugene Scalia argued the cause for petitioner. With him on the briefs were John F. Olson, Douglas R. Cox, Cory J. Skolnick, Stephen A. Bokat, Robin S. Conrad, and Amar D. Sarwal.

Giovanni P. Prezioso, General Counsel, Securities & Exchange Commission, argued the cause for respondent. With him on the brief were Jacob H. Stillman, Solicitor, John W. Avery, Special Counsel, and Michael L. Post, Senior Counsel.

Mercer Bullard was on the brief for amici curiae Fund Democracy, Inc. and Consumer Federal of America in support of respondent.

Before: HENDERSON, ROGERS and BROWN, Circuit Judges.

Opinion for the Court filed by Circuit Judge ROGERS.

ROGERS, Circuit Judge.


This appeal concerns the continuing challenge by the Chamber of Commerce of the United States to the rule promulgated on July 27, 2004 ("the Rule") by the Securities and Exchange Commission amending the Exemptive Rules under the Investment Company Act of 1940 ("ICA"), 15 U.S.C. § 80a-1 et seq. (2000). The Rule requires that mutual funds relying on the Exemptive Rules adopt certain governance practices, including those set forth in two conditions: a fund must have (1) a board with no less than 75% independent directors and (2) an independent chair. See Investment Company Governance, Release No. 26,520, 69 Fed.Reg. 46,378, 46,381 (Aug. 2, 2004) ("Adopting Release"). In Chamber of Commerce v. SEC, 412 F.3d

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133 (D.C.Cir.2005) ("Chamber I"), the court held that the Chamber had standing to challenge the Rule, the Commission had authority to promulgate the Rule, and the Commission had not violated the Administrative Procedure Act ("APA"), 5 U.S.C. § 551 et seq., except when it failed, as required by the ICA, to determine the costs of the two conditions and when it failed to address a proposed alternative to the independent chair condition. The court remanded the case to the Commission.

The Chamber now challenges the Commission's decision not to modify the two conditions in response to Chamber I. See Investment Company Governance, Release No. 26,985, 70 Fed.Reg. 39,390, 39,398 (July 7, 2005) ("Response Release"). We again hold that the Chamber has standing, and we hold that the Commission had authority to consider whether to modify the Rule prior to issuance of the mandate in Chamber I. We further hold that, although the Commission was not constrained by Chamber I in how to estimate the costs of the conditions, the Commission failed to comply with section 553(c) of the APA, 5 U.S.C. § 553(c), by relying on materials not in the rulemaking record without affording an opportunity for public comment, to the prejudice of the Chamber. On August 10, 2005, the court stayed the two conditions.

I.

Section 2(c) of the ICA requires that when the Commission "engage[s] in rulemaking and is required to consider or determine whether an action is consistent with the public interest, [it] shall . . . consider. . . whether the action will promote efficiency, competition, and capital formation." 15 U.S.C. § 80a-2(c). In Chamber I, the court held:

With respect to the 75% independent director condition, the Commission, although describing three methods by which a fund might comply with the condition, claimed it was without a "reliable basis for determining how funds would choose to satisfy the [condition] and therefore it [was] difficult to determine the costs associated with electing independent directors." 69 Fed.Reg. at 46,387. That particular difficulty may mean the Commission can determine only the range within which a fund's cost of compliance will fall, depending upon how it responds to the conditions but, as the Chamber contends, it does not excuse the Commission from its statutory obligation to determine as best it can the economic implications of the rule it has proposed.

412 F.3d at 143 (citing Pub. Citizen v. Fed. Motor Carrier Safety Admin., 374 F.3d 1209, 1221 (D.C.Cir.2004)). With respect to the independent chair condition, the court noted that the Commission had stated that an independent chair may decide to hire more staff, but that it had no "reliable basis for estimating . . . th[ose] costs." Id. at 144 (citing Adopting Release, 69 Fed.Reg. at 46,387 n. 81) The court held that "[a]lthough the Commission may not have been able to estimate the aggregate cost to the mutual fund industry of additional staff . . . it readily could have estimated the cost to an individual fund, which estimate would be pertinent to its assessment of the effect the condition would have upon efficiency and competition, if not upon capital formation." Id. The court also held that the Commission could not ignore a "facially reasonable" alternative suggested by the two dissenting Members of the Commission. See id. at 145 (citing standard set forth in Laclede Gas Co. v. FERC, 873 F.2d 1494, 1498 (D.C.Cir.1989)).

The Commission responded within a matter of days to the release of Chamber I. The Commission explained that prompt action was required to avoid postponing

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the January 15, 2006 date for compliance with the Rule in order to ensure protection of fund investors "in the wake of the discovery of serious wrongdoing at many of the nation's largest fund complexes and by officials at the highest levels of those complexes." Response Release, 70 Fed.Reg. at 39,391. This occurred, the Commission explained, because "[f]und managers acted in their own interests rather than in the interests of fund investors (which they are required to do), resulting in substantial investor losses that were well documented at the time [the Commission] adopted the [Rule]," and left investor confidence severely shaken, id.; see Adopting Release, 69 Fed.Reg. at 43,378. In the Commission's view, prompt action could best be accomplished by having the same five Commissioners who had been considering mutual fund governance issues for more than a year and a half "bring the[ir] collective judgment and learning" to the issues identified by the court. See Response Release, 70 Fed.Reg. at 39,391. Because the Chairman was scheduled to resign on June 30, 2005, the Commission decided to respond to Chamber I at its previously scheduled public meeting on June 29, 2005. See id. at 39,391; see also id. at 39,403 (Glassman, Comm'r, dissenting); id. at 39,408 (Atkins, Comm'r, dissenting).

The Commission decided it was unnecessary to reopen the rulemaking record for further comment. Observing that it had previously given notice and called for comment on the costs of complying with the two conditions, the Commission concluded that "the information in the existing record, together with publicly available information on which we may rely, is a sufficient base on which to rest the Commission's consideration of the deficiencies identified by the Court." Id. at 39,390-91 (emphasis added). Based on materials not in the rulemaking record, including what the Commission described as a "widely used industry survey" of mutual fund directors' compensation, the Commission determined a range of costs for each of the options that a fund might use to meet the 75% independent director condition. See id. at 39,392 n. 28, 39,391-94. The Commission viewed the costs to an individual fund of the independent chair condition to derive principally from the increased compensation for the independent chair and the costs of additional staff, the latter cost estimated based on extra-record salary surveys by the Securities Industry Association, a source on which the Commission stated it "commonly rel[ies] in its rulemakings." Id. at 39,394. The Commission stated that it did not expect small funds would hire additional staff. See id.

The Commission concluded, based on these cost estimates, that the costs of complying with the two conditions "are extremely small relative to the fund assets for which fund boards are responsible, and are also small relative to the expected benefits of the two conditions." Id. at 39,395. "Whether the two conditions are viewed separately or together," the Commission stated, "even at the high end of the ranges, the costs of compliance are minimal." Id. This was true as well for small funds. See id. at 39,396 n. 77. Accordingly, regarding section 2(c) of the ICA, the Commission concluded: "[W]e do not expect the amendments to the Exemptive Rules to have a significant adverse effect on efficiency, competition or capital formation because the costs associated with the amendments are minimal and many funds have already adopted the required practices." Id. at 39,396. The Commission noted that as of the time it proposed the Rule, it estimated that "nearly sixty percent of all funds currently me[t] [the 75% independent director] requirement." Adopting Release, 69 Fed.Reg. at 46,387 n. 78; see Response Release, 70 Fed.Reg. at 39,391 & n. 18.

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The Commission also set forth its reasons for rejecting the alternative proposal to the independent chair condition: "[I]n light of the nature of investment companies and the purposes of the statutory prohibitions to which the Exemptive Rules apply," the Commission concluded that the condition requiring an independent chair was superior to an expansion of disclosure requirements. See Response Release, 70 Fed.Reg. at 39,396-97. The Commission explained that mutual funds are "unique" because they are managed "by people whose primary loyalty and pecuniary interests lie outside the enterprise," which presents "inherent conflicts of interest and potential for abuses." Id. at 39,396. The Commission reasoned that disclosure alone would not prevent self-dealing...

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67 practice notes
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    • U.S. District Court — Southern District of Florida
    • July 13, 2007
    ...of an interim change (by the Court) that may later be changed (by the agency). Chamber of Commerce of the United States v. SEC, 443 F.3d 890, 908 (D.C.Cir.2006). Since this Court's prior Order already found serious deficiencies in the Defendants' actions,72 the first part of the test cannot......
  • Research v. Fed. Trade Comm'n, Civil Case No. 13–1974 (BAH)
    • United States
    • United States District Courts. United States District Court (Columbia)
    • May 30, 2014
    ...by the agency, ensuring fairness to affected parties, or enhancing the quality of judicial review.” Chamber of Commerce of U.S. v. SEC, 443 F.3d 890, 906 (D.C.Cir.2006) (internal citations omitted). Moreover, “the public availability of such information might fall into an implied exception ......
  • Blackwater v. Salazar, No. 11–5128.
    • United States
    • United States Courts of Appeals. United States Court of Appeals (District of Columbia)
    • August 17, 2012
    ...relies [in its rulemaking].’ ” Am. Radio Relay League, Inc. v. FCC, 524 F.3d 227, 236 (D.C.Cir.2008) (quoting Chamber of Commerce v. SEC, 443 F.3d 890, 899 (D.C.Cir.2006)) (alterations in original). “More particularly, ‘[d]isclosure of staff reports allows the parties to focus on the inform......
  • American Radio Relay League, Inc. v. F.C.C., No. 06-1343.
    • United States
    • United States Courts of Appeals. United States Court of Appeals (District of Columbia)
    • April 25, 2008
    ...the `technical studies and data' upon which the agency relies [in its rulemaking]." Chamber of Commerce v. SEC (Chamber of Commerce II), 443 F.3d 890, 899 (D.C.Cir.2006) (citation omitted). Construing section 553 of the APA, the court explained long ago that "[i]n order to allow for useful ......
  • Request a trial to view additional results
61 cases
  • Sierra Club v. Strock, No. 03 23427 CV.
    • United States
    • U.S. District Court — Southern District of Florida
    • July 13, 2007
    ...of an interim change (by the Court) that may later be changed (by the agency). Chamber of Commerce of the United States v. SEC, 443 F.3d 890, 908 (D.C.Cir.2006). Since this Court's prior Order already found serious deficiencies in the Defendants' actions,72 the first part of the test cannot......
  • Research v. Fed. Trade Comm'n, Civil Case No. 13–1974 (BAH)
    • United States
    • United States District Courts. United States District Court (Columbia)
    • May 30, 2014
    ...by the agency, ensuring fairness to affected parties, or enhancing the quality of judicial review.” Chamber of Commerce of U.S. v. SEC, 443 F.3d 890, 906 (D.C.Cir.2006) (internal citations omitted). Moreover, “the public availability of such information might fall into an implied exception ......
  • Blackwater v. Salazar, No. 11–5128.
    • United States
    • United States Courts of Appeals. United States Court of Appeals (District of Columbia)
    • August 17, 2012
    ...relies [in its rulemaking].’ ” Am. Radio Relay League, Inc. v. FCC, 524 F.3d 227, 236 (D.C.Cir.2008) (quoting Chamber of Commerce v. SEC, 443 F.3d 890, 899 (D.C.Cir.2006)) (alterations in original). “More particularly, ‘[d]isclosure of staff reports allows the parties to focus on the inform......
  • American Radio Relay League, Inc. v. F.C.C., No. 06-1343.
    • United States
    • United States Courts of Appeals. United States Court of Appeals (District of Columbia)
    • April 25, 2008
    ...the `technical studies and data' upon which the agency relies [in its rulemaking]." Chamber of Commerce v. SEC (Chamber of Commerce II), 443 F.3d 890, 899 (D.C.Cir.2006) (citation omitted). Construing section 553 of the APA, the court explained long ago that "[i]n order to allow for useful ......
  • Request a trial to view additional results
1 books & journal articles
  • The SEC and Climate Risk.
    • United States
    • UCLA Journal of Environmental Law & Policy Vol. 40 Nbr. 1, June 2022
    • June 22, 2022
    ...of U.S. v. SEC (Chamber of Commerce I), 412 F.3d 133 (D.C. Cir. 2005); Chamber of Commerce of U.S. v. SEC (Chamber of Commerce II), 443 F.3d 890 (D.C. Cir. 2006); Bus. Roundtable and Chamber of Commerce of U.S. v. SEC, 647 F.3d 1144 (D.C. Cir. (237.) See Chamber of Commerce I, 412 F.3d at 1......

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