Maryland's highest court last week dealt a setback to that state's legislature and the mutual fund industry in the ongoing fight over what makes a mutual fund director independent.

The Maryland Appeals Court ruled unanimously that a 1998 law that defined what makes a mutual fund director independent under Maryland law was unconstitutional. The directors' law violated a provision in the Maryland Constitution that permits the legislature to include only one subject in proposed legislation, the Appeals Court said in a 16-page decision dated March 14.

The Maryland legislature violated that so-called "one subject rule" when it added the mutual fund directors' provision to a bill that addressed a non-mutual fund topic, the court ruled. The provision said that mutual fund directors do not lose their independence by virtue of serving on more than one fund board within a single complex. The legislature added the provision about fund directors after executives from mutual fund firms met with Maryland legislators and warned them that the funds might reincorporate in another state if the directors' law was not approved, the court said.

Fund executives met with legislative leaders on Friday April 10, 1998, the court said. The directors' provision was added to an existing bill on Saturday, April 11 and passed on Monday, April 13, the last day the legislature was in session for the year, the court said.

"The evidence ... indicates to this Court that the Legislature was aware that they had engrafted an eleventh hour' measure containing a separate and distinct function to a previously single-subject bill," the court said.

The law expanded the definition of independence for fund directors, the court said.

The Appeals Court decision ultimately may have little effect on Maryland law regarding directors. The Maryland senate on Feb. 22 and general assembly March 9 passed what they described as curative legislation designed to fix the constitutional problem in the 1998 law. The bill is retroactive to 1998 and includes the same language as the 1998 law.

Gov. Parris Glendening still must sign the bill. Glendening is expected to do so, said Michelle Byrnie, a spokesperson for Glendening.

Robert Zarnoch, the Maryland assistant attorney general who has handled the constitutional dispute, said Glendening originally had been expected to sign the bill in April. The timetable might be moved up because of the Appeals Court's decision, he said.

Even if Glendening signs the current legislation into law, Zarnoch said it is likely that the shareholders who challenged the constitutionality of the 1998 law will mount a similar attack on the new law.

"It probably is not over," Zarnoch said of the fight.

Ronald Rubin of Rockville, Md., the attorney who represented the mutual fund shareholders who challenged the constitutionality of the 1998 law, said it is likely his clients will challenge the law that is before Glendening now if the governor signs it.

A spokesperson for the Investment Company Institute declined to comment on the Appeals Court's decision.

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