The investor advocacy groups Fund Democracy and Consumer Federation of America are seeking the dismissal of a controversial new fund governance rule that's mired in the U.S. Court of Appeals process.

The U.S. Chamber of Commerce is suing the Securities and Exchange Commission over the independent chairman rule, which says the chairman of a fund's board of directors must be independent form the firm. Three quarters of the board's members must also be independent, the rule says. But the chamber doesn't like how former SEC Chairman William H. Donaldson pushed the rule through in the eleventh hour of his tenure, nor does it think the rationale behind the rule is adequate. The latter point of whether the Commission fully considered the costs of the rule and its alternatives is being argued before the court.

But Mercer Bullard, founder and president of Fund Democracy, said the rule protects investors and an amicus brief filed late last week seeks dismissal of the Chamber's claim.

"More than 90 million Americans have trusted their financial security to mutual funds - a trust that was betrayed in recent years as dozens of fund managers permitted market timing and late trading that cost fund shareholders million of dollars," Bullard said. "These abuses can be traced directly to failure of a fund's governance and, in many of the cases to fund boards dominated by executives of the fund's manager.

"The Commission rules to strengthen the independence of fund oversight are an appropriate response to evidence of a systematic failure among fund managers to fulfill their fiduciary obligations to fund share holders," said Barbara Roper, director of Investment Protection at Consumer Federation of American. She added that the rules are necessary to prevent additional abuses, conflicts of interest and to restore shareholders' piece of mind.

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