The US Court of Appeals for the District of Columbia has ruled that the Securities and Exchange Commission (SEC) violated the law by not taking into account the costs of rules regulating the management of mutual funds. It also reaffirmed the rights of consumers to sue the federal government when they are harmed by the effects of regulation.
In a unanimous decision, the court held that the SEC’s rulemaking had violated the Administrative Procedures Act by failing consider the costs to mutual funds and their clients and giving inadequate consideration to alternatives to the proposed rule. The court was petitioned by the US Chamber of Commerce, which presented its case as a consumer of mutual funds that had been disadvantaged by the SEC’s management rules.
“With stocks and mutual funds, there is little evidence to suggest that so-called independent directors produce better returns for shareholders. There is, in fact, some data that super-majority independent boards perform worse than other boards,” says Competitive Enterprise Institute (CEI) Fellow John Berlau. “Feel good corporate governance measure do not help investors if they raise fees or reduce returns. Corporate governance should not be one-size-fits-all. Individual companies and their shareholders should decide what the best structures are for their boards, and ultimately the free market will determine what the best governance structures are. That’s the way capitalism works.”
The court also cited the precedent of CEI v. NHTSA, in which the Competitive Enterprise Institute sued the National Highway Traffic Safety Administration for not acknowledging the deadly impact of the federal government’s vehicle fuel efficiency regulations.
“It’s important that the rights of consumers to show they have been harmed by the adverse effects of regulations have been upheld,” says Frances B. Smith, Competitive Enterprise Institute Adjunct Scholar and former Executive Director of Consumer Alert, which joined CEI in the NHTSA case. “The decision affirms the rights of consumers.”
In a separate but related development, Investment Company Institute President Paul Schott Stevens welcomed the decision by the SEC to review its rule requiring a mutual funds to have independent chairman at its meeting on 29 June. “The Court of Appeals decision this week confirms not only the SEC’s broad rulemaking authority but also its administrative obligations,” says Schott Stevens. “We believe it is incumbent upon the Commission, when it considers the matters remanded to it by the court, to explore carefully the range of foreseeable costs of, and all reasonable alternatives to, its proposed rules. Especially in light of the court’s decision, it would be appropriate for the SEC to invite additional public comment and collect additional data for this purpose, to assure a thoughtful and deliberative process.”
CEI is a public policy group dedicated to the principles of free enterprise and limited government.