The Securities and Exchange Commission and the U.S. Chamber of Commerce filed their final legal briefs last week in the U.S. Court of Appeals, shedding some light on how each camp will argue their side of the independent chairman rule when the case's oral proceedings begin next year.

Last year, the SEC approved a rule that requires fund companies to install an independent chairman on each of their mutual fund boards. In addition, 75% of the directors who sit on those boards must be independent from the fund. The rule's intent is to mitigate circumstances where a fund-affiliated board member might put the interests of the fund ahead of the investor. Previously, the rule called for 40% of the board to be independent. There was no independent chairman requirement.

But as early as September 2004, the three million-member U.S. Chamber began legal maneuvers to defeat the rule. Its first lawsuit claimed that the regulator overstepped its authority by implementing a rule that doesn't keep with the spirit or intent of the Investment Company Act of 1940. It also said the cost would sink smaller fund shops. In June of this year, a Washington court ruled in favor of the SEC, saying that it was within its jurisdiction, but it also ordered the regulator to further examine whether the governance benefits of the rule truly outweigh the costs fund companies would have to bear.

Just days later, the rule's champion, then-SEC Chairman William Donaldson, called a seemingly impromptu, second vote on the rule on the eve of his departure. It passed by a 3-2 margin, despite heated objections from Republican commissioners Cynthia Glassman and Paul Atkins. That brought a second lawsuit from the Chamber, arguing that the SEC acted too hastily. It also filed for a stay on the rule's Jan. 16, 2006 compliance date, which was granted.

Atkins reiterated his opposition in a speech earlier this month and sharply criticized how the SEC's lawyers are handling the lawsuit, blasting them for ignoring the opinions of the current commission, which include a new Republican chairman, Christopher Cox. Cox has not offered a stated position on the rule, but some of the industry's heaviest hitters agree with Atkins.

"We're still not in favor of it," said Steve Norwitz, a spokesman for T. Rowe Price in Baltimore. Norwitz said last week that the firm is awaiting the court's final ruling before it makes accommodations for the rule.

Boston-based Fidelity Investments is also awaiting the court's decision before it proceeds on preparing for the rule. "We believe the SEC should have refrained from enacting the rule," Vin Loporchio, a Fidelity spokesman, reiterated last week. "We don't believe it is in the best interest of shareholders."

Valley Forge, Pa.-based Vanguard Group, which previously indicated that it opposes the rule, could not provide comment prior to deadline.

Separate SEC filings from Denver-based Janus Capital and Dodge & Cox of San Francisco indicate that they're prepared to shuffle the make-up of their fund boards through the resignation of "interested" board members to accommodate the rule. In both cases, an independent chairman would be elected from the group of independents that remain, the filings revealed.

Judging by the final legal brief it submitted last week, the SEC's primary argument is that the Chamber has no standing in the case. The Chamber claims that, as an investor in mutual funds, the rule would leave it without the ability to choose a management-chaired mutual fund and cause "legally cognizable injury," which therefore gives it standing. But citing precedent, the SEC says the Chamber must prove "concretely" that it would suffer injury beyond loss of choice.

The regulator also counters the Chamber's claim that it represents mutual funds that will be harmed by the rule by arguing that the association has not provided evidence that any of those members has been injured by the rule, "much less evidence of concrete and particularized harm."

The Chamber also argues in its final brief that the SEC "raced through, slap-dash, rigged procedures to re-adopt the challenged provisions." The Chamber defends that assertion by citing statements delivered by Glassman and Atkins prior to the vote that they had not been given enough time to reconsider the facts of the case. On this point, the regulator argues, "engaging in further notice and comment procedures would not only be unnecessary but the resulting delay risked significant harm to investors without significant corresponding benefits."

The Chamber also claims that additional facts that were gathered by the SEC are "an unreliable assemblage of stale data, capricious guesstimates and unexaminable Olympian pronouncements" about the quality of its judgment. The SEC simply counters that its facts cannot be proven incorrect.

But the authenticity of these arguments will ultimately be left to three, randomly selected judges of the appeals court to decide. According to James Martin, a partner and appellate court specialist with the law firm Reed Smith in Pittsburgh, the judges will use the briefs to form a tentative opinion and will come to the oral proceedings armed with questions. Both sides will be allotted between 10 and 30 minutes to respond to the questions collectively.

The judges typically hear more than one case each day, Martin said, so a decision is expedited once the judges retire to chamber. One judge will be assigned to draft their opinion, which will take anywhere between 30 and 60 days. The judges will be asked to sign-off on the final opinion, capping what should be about a three-month process.

If either side is unhappy with the outcome, two options exist: they can petition for a rehearing before the same three judges, or they can request what's known as a "rehearing en banc," where all active judges in the court would hear the arguments again.

"Either way, it is an extreme long shot, because both would require some sort of revelation or epiphany on behalf one of one of the judges, and that's very unlikely," Martin said.

A third option is to petition the U.S. Supreme Court to hear the case, but Martin said "the odds of that happening are about the same as getting struck by lightening."

Whatever happens, this much is sure: the industry has three more months of hand-wringing before the debate over one its most controversial reforms comes to a close.

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