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June 19, 2006

Part III

Securities and
17 CFR Part 270
Investment Company Governance;
Proposed Rule
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35366 Federal Register / Vol. 71, No. 117 / Monday, June 19, 2006 / Proposed Rules

SECURITIES AND EXCHANGE Paper Comments June 21, 2005, the Court remanded to
COMMISSION • Send paper comments in triplicate the Commission for consideration of
to Nancy M. Morris, Secretary, two deficiencies that it identified in the
17 CFR Part 270 Securities and Exchange Commission, rulemaking.5 After considering those
[Release No. IC–27395; File No. S7–03–04] 100 F Street, NE., Washington, DC two issues at a public meeting on June
20549. 29, 2005, the Commission issued a
RIN 3235–AJ05 release announcing its decision not to
All submissions should refer to File
modify the rule amendments (‘‘Remand
Investment Company Governance Number S7–03–04. The Commission
Release’’).6 The June 29 action was then
will post all comments on the
AGENCY: Securities and Exchange challenged, and the Court on April 7,
Commission’s Internet Web site (http://
Commission. 2006, issued an opinion holding that the
ACTION: Request for additional comment. Commission violated the Administrative
Comments are also available for public
Procedure Act 7 by failing to seek
inspection and copying in the
SUMMARY: On April 7, 2006, a Federal comment on the data used to estimate
Commission’s Public Reference Room,
appeals court invalidated certain the costs of the two conditions.8 The
100 F Street, NE., Washington, DC
amendments adopted by the Securities Court vacated the two conditions, but
20549. All comments received will be
and Exchange Commission withheld its mandate for 90 days to
posted without change; we do not edit
(‘‘Commission’’) to rules under the afford the Commission an opportunity
personal identifying information from
Investment Company Act of 1940 to reopen the record for comment.9
submissions. You should submit only
(‘‘Act’’). The Court found that the
information that you wish to make II. Discussion
Commission had failed to seek comment
available publicly. The 75 percent condition and the
on the data used to estimate the costs of
the amendments, but suspended issuing FOR FURTHER INFORMATION CONTACT: independent chair condition have been
its mandate in order to give the Vincent Meehan, Staff Attorney, or extensively discussed in the prior
Commission an opportunity to request Penelope Saltzman, Branch Chief, Office Commission releases,10 and commenters
further comment. Because the Court’s of Regulatory Policy, (202) 551–6792, are referred to the discussion in those
decision called into question the Division of Investment Management, releases for a detailed treatment of them.
regularity of our proceedings, the Securities and Exchange Commission, The Commission requests comment on
Commission now invites further 100 F Street, NE., Washington, DC the costs associated with the two
comment on the amendments, including 20549. conditions, and suggestions for
particularly their costs. The SUPPLEMENTARY INFORMATION: additional provisions designed to
amendments, first proposed on January achieve the underlying purpose of the
I. Background amendments, which is the protection of
15, 2004, would impose two conditions
on investment companies (‘‘funds’’) On July 27, 2004, the Commission funds and fund shareholders.
relying on certain exemptive rules. First, adopted amendments to ten exemptive The Court found the Commission’s
fund boards would have to be rules under the Investment Company discussion of costs, together with an
comprised of at least 75 percent Act 1 (‘‘Exemptive Rules’’) to require expressed expectation that these costs
independent directors. Second, the funds that rely on one or more of those would be ‘‘minimal,’’ to be inadequate.
boards would have to be chaired by an rules to adopt certain governance To address this, the Commission
independent director. In addition to the practices.2 The conditions were part of particularly seeks reliable cost data in
costs of the two conditions, commenters a package of amendments designed to support of commenters’ assertions.
may address any issue related to the protect the interests of funds and the For example, in the Remand Release
underlying purpose of the two fund shareholders they serve. Among we attempted to identify all of the
conditions, which is the protection of other things, the amendments added potential costs associated with the 75
funds and fund shareholders. As two conditions for funds relying on the percent and independent chair
required by section 2(c) of the Exemptive Rules. First, such a fund conditions when we assigned an
Investment Company Act, the must have a board of directors with no estimate of direct and indirect costs to
Commission specifically seeks comment less than 75 percent independent each of them; we seek comment on all
on whether the proposed rule directors.3 Second, such a fund must be of these and any other potential costs.
amendments will promote efficiency, chaired by an independent director. The In addition, while the Remand Release
competition, and capital formation. reasons for the Commission’s adoption acknowledged that these costs would
DATES: Comments must be received on of these conditions, as well as other likely vary depending upon which of
or before August 21, 2006. amendments to the Exemptive Rules, various methods funds chose to come
were set forth at length in the Adopting into compliance with the conditions,
ADDRESSES: To help us process and
review your comments more efficiently, Release issued July 27, 2004.4
The two conditions were challenged 5 Chamber of Commerce v. Securities and
comments should be sent by one Exchange Commission, 412 F.3d 133 (D.C. Cir.
in the United States Court of Appeals
method only. 2005).
for the District of Columbia Circuit. On 6 See Investment Company Governance,
Electronic Comments Investment Company Act Release No. 26985 (June
• Use the Commission’s Internet
1 15 U.S.C. 80a. 30, 2005) [70 FR 39390 (July 7, 2005)] (‘‘Remand
2 Investment Company Governance, Investment Release’’).
comment form ( Company Act Release No. 26520 (July 27, 2004) [69 7 5 U.S.C. 553(c).
rules/proposed.shtml); or FR 46378 (Aug. 2, 2004)] (‘‘Adopting Release’’). The 8 Chamber of Commerce v. Securities and
• Send an e-mail to rule-
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Exemptive Rules are listed in the Adopting Release Exchange Commission, 443 F.3d 890 (D.C. Cir. Please include File at footnote 9. 2006).
3 In this Release, we are using ‘‘independent 9 Id. at 909.
Number S7–03–04 on the subject line;
director’’ to refer to a director who is not an 10 Investment Company Governance, Investment
or ‘‘interested person’’ of the fund, as defined by the Company Act Release No. 26323 (Jan. 15, 2004) [69
• Use the Federal eRulemaking Portal Act. See section 2(a)(19) of the Act [15 U.S.C. 80a– FR 3472 (Jan. 23, 2004)] (‘‘Proposing Release’’);
( Follow the 2(a)(19)]. Adopting Release, supra note 2; Remand Release,
instructions for submitting comments. 4 See Adopting Release, supra note 2. supra note 6.

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Federal Register / Vol. 71, No. 117 / Monday, June 19, 2006 / Proposed Rules 35367

such as whether a fund came into With respect to the 75 percent additional staff, without allowing
compliance with the 75 percent condition, we request comment sufficient comment on these matters.
condition as a result of the resignation generally on both the monetary and Are there other costs that should be
of one or more interested directors or non-monetary costs that funds taken into account? Are there better
the selection of one or more new experienced specifically relating to sources of information than those upon
independent directors,11 the Court was compliance. What were the costs of which the Commission relied?
critical of the fact that we based those hiring and recruiting independent Comment on costs may be made on an
estimates in part on data from an directors? 13 Has the increased industry-wide basis or on an individual
industry survey that was not a part of percentage resulted in the hiring of fund basis. Comments that are
the rulemaking record. We specifically additional legal or other resources to accompanied by supporting data and
solicit comment, therefore, on the support the independent directors? If so, analysis are of greatest assistance.15
adequacy of those estimates and on what are the associated costs? Finally, we note that the underlying
other appropriate measures of costs. What were the monetary and non- purpose of the two conditions was, and
The Court directed our attention to monetary costs to funds of complying remains, the protection of funds and
gaps in the rulemaking record. We now with the independent chair fund shareholders, and that, as we have
solicit comment regarding current cost condition? 14 What were the costs of been reminded by the Court, we are
data, including such items as hiring and compensating an bound in this rulemaking under the
implementation data for funds that have independent chair? Do independent Investment Company Act to consider
voluntarily complied with either or both chairs, as we anticipated they might, use ‘‘whether the action will promote
of the conditions. We also request additional legal services? If so, how efficiency, competition, and capital
comment on any other costs that funds much? Did they hire additional staff? If formation.’’ For these reasons we solicit
may incur, in coming into compliance so, what are the associated costs? The comment on any issue related to the
with the two conditions, that were not Court, in discussing the two conditions underlying purpose of the two
identified in the Remand Release. We in its April 7 opinion, found that the conditions, and any issue related to our
are particularly interested in the costs Commission viewed the costs to an required determination whether the
incurred by small fund groups.12 individual fund of the independent amendments promote efficiency,
chair condition to derive principally competition, and capital formation.
11 In the Adopting Release we estimated that
from the increased compensation for the
approximately 60 percent of funds met the 75 By the Commission.
percent condition at the time we adopted the rule.
independent chair and the costs of
Dated: June 13, 2006.
Adopting Release, supra note 2, at n.78. Of those
that subsequently came into compliance, our staff comment on the potential impact of the conditions Nancy M. Morris,
estimates that, based upon filings made with the on the U.S. economy on an annual basis. 5 U.S.C. Secretary.
Commission during the last year, 49 percent did so 804(2). In addition, we incorporate the Regulatory
Flexibility Act analyses contained in the prior
[FR Doc. 06–5493 Filed 6–16–06; 8:45 am]
solely as a result of one or more interested directors
resigning from the board of directors, and 14 Commission releases, including the solicitation of BILLING CODE 8010–01–P
percent did so solely as a result of adding one or comments therein.
more independent directors. Thirty-seven percent 13 Our staff estimates that, based upon filings 15 The Commission considers costs in connection
of funds coming into compliance with the 75 made with the Commission during the last year, 54 with its obligations under section 2(c) of the
percent condition experienced a change in the percent of funds that came into compliance with Investment Company Act, which requires the
composition of their boards as a result of (i) the the 75 percent condition solicited a shareholder Commission, when engaging in rulemaking that
addition of independent directors and the vote to elect directors.
requires it to consider or determine whether an
resignation or retirement of interested directors, (ii) 14 See Adopting Release, supra note 2, at n.81.
the resignation or retirement of both independent action is necessary or appropriate in the public
Our staff estimates, based upon filings made with
and interested directors, or (iii) the addition of both the Commission during the last year, 97 percent of interest, to consider whether the action will
independent and interested directors. newly selected independent chairmen were promote efficiency, competition, and capital
12 For purposes of the Small Business Regulatory selected from among the incumbent independent formation. See 15 U.S.C. 80a–2(c). We solicit
Enforcement Fairness Act of 1996, we request directors. comment on any other aspect of the conditions that
would affect this consideration.
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