The Securities and Exchange Commission today voted again to approve the rule requiring mutual funds to have an independent chairman, but not before some explosive fireworks.
Following a heated exchange involving SEC commissioners and members of the division of investment management staff, the agency's top dogs voted 3-2 to move ahead with plans to implement the controversial fund governance rule.
The rule was bounced back to the Commission after the U.S. Court of Appeals ruled last Tuesday that the regulatory agency did not adequately consider the costs of implementation and any possible alternatives to the rule. Immediately following the court ruling, the SEC issued a "sunshine notice," calling for an emergency meeting.
The dissenting opinions once again came from Republicans Cynthia Glassman and Paul Atkins, who blasted Chairman William Donaldson for "rushing to judgment" in order to get the rule on the books before he steps down tomorrow.
While the outcome of the vote didn't come as much of a surprise, the two opposing Commissioners had some choice words for the other Commissioners and those favoring the independence rule on the manner in which the critical issue was addressed.
"The ink on the court decision was not even dry when the die was cast," Atkins said, referring to the swift manner in which a vote was scheduled and a release urging approval was issued. It represents a "profound disrespect for the rule of law," he said. "This is one of the saddest days in the Commission's 71-year history."
Glassman said that passing this meeting off as an expedited decision to protect investors is "completely disingenuous" and that it was nothing more than "window dressing." The oft-outspoken Commissioner reiterated her staunch opposition to the rule, calling it "an assembly of false statements, flawed analysis and misinterpretations."
Glassman and Atkins also took issue with the fact that they did not have sufficient time to comment on a 27-page release drawn up to satisfy the court's directive, suggesting that they were intentionally left in the dark on the matter and that standard procedure was not followed.
SEC General Counsel Giovanni Prezioso argued that the SEC had, indeed, followed procedure and that it took adequate steps to appease the court.
Commissioner Harvey Goldschmid also countered Glassman's and Atkins' arguments, saying, "Crocodile tears are being shed over the need to respect the Court of Appeals." He also said that reopening the comment period would carry a heavy cost burden and lead to "a period of great uncertainty" for mutual funds and their shareholders.
In summation, Goldschmid concluded: "The benefits [of the rule] plainly and overwhelmingly outweigh the costs."
Donaldson defended his position to his peers as well, saying that the timing of the vote was "fully consistent with the Court of Appeals decision" and that it is not unusual for the Commission to act swiftly on such matters.
The SEC chair stressed that it was urgent to move forward with the rule in order to address the "conflicts of interest, truly egregious and unethical behavior and systemic breakdowns" in the mutual fund industry, touting it as a "capstone" of a series of fund reforms.
The rule is expected to take effect in January 2006.