William H. Donaldson — in a highly contentious meeting that lasted several hours — cast his final votes as the chairman of the SEC to uphold a rule requiring mutual fund companies to have an independent chairman and fill at least three-quarters of the board with outside directors.
As expected, the two Democratic commissioners — Harvey Goldschmid and Roel Campos — voted with Mr. Donaldson in favor of the rule and the two Republican commissioners — Cynthia Glassman and Paul Atkins — dissented.
The SEC first approved the rule a year ago, but on June 21 the U.S. Appeals Court for the District of Columbia sent the rule back to the agency, telling it to consider the costs mutual funds would incur in compliance. The court also asked the agency to consider an alternative that would allow mutual funds to simply disclose to investors whether they have independent chairmen.
Mr. Donaldson noted that in the week since the court's ruling, the agency's staff conducted a cost-benefit analysis, as laid down by the court, and determined that the cost of compliance by mutual funds would be "minimal when compared to the substantial benefits that these governance rules can bring in terms of reducing conflicts of interest and protecting investors." Mr. Donaldson also rejected a proposal by Ms. Glassman and Mr. Atkins to require mutual fund companies to disclose the presence or absence of an independent chairman and board to investors, noting that just disclosure alone would allow "a flawed governance structure to continue … to the detriment of fund shareholders."
But Ms. Glassman said the hastily planned meeting "makes a mockery of the process" by which the SEC considers proposals and holds meeting, and she charged Mr. Donaldson with engineering the meeting to push the rule through before his departure and the imminent departure of Mr. Goldschmid. Mr. Atkins handed out a color-coded timeline that he said showed that the agency railroaded the rule through just 196 hours after the court's ruling last week.
Mr. Atkins noted that the SEC has not satisfied the two shortcomings in the rule pointed out by the court and said until that happens, "the rule is not in effect." Instead, he said, "today what we are talking about is a broken, flawed rule, and this is the saddest day in the 71-year history of the commission."
SEC lawyers already anticipate the Chamber of Commerce will ask an appellate court to strike down the rule.