SEC Loses In Court on the Mutual Fund Rules

Everyone in the securities business has to get a chuckle out of the latest SEC loss in the D.C. Circuit Court in Chamber of Commerce v SEC (3-0!).  The federal appeals court held that the SEC had not complied with procedural rules for adopting valid agency rules when it adopted two very controversial mutual fund regulations -- 75 percent of a mutual fund board must be independent and the chair of the board cannot come from the funds investment adviser.  The Court held that the SEC should have given a better explanation for the cost basis of its rules and should have given groups opposing the rules time to comment on the cost calculations.  Why the chuckle??  The SEC had for over seventy years regulated the technical, procedural side of the securities industry -- from public and private offerings, to securities markets, and brokerage operations.  The agency is a stickler for procedural rules;  taking the position that better procedure means better results.  Time and time again the SEC has held market participants to have violated procedural rules and turned a deaf ear to results based defenses.   Now the agency is getting a dose of its own medicine -- it failed procedural rules even though the agency was convinced the outcome was justified.

We have over-proceduralized market regulations for decades and the SEC is now discovering the sting of excessive over-proceduralization in our administrative procedure rules.