## Facts

- The Securities and Exchange Commission (SEC) amended several exemptive rules under the Investment Company Act of 1940 (ICA) that permit mutual funds to engage in transactions otherwise restricted by the statute.
- The amendments conditioned access to those exemptions on board-governance requirements: (1) at least 75% independent directors and (2) an independent board chair.
- The SEC adopted the conditions in response to concerns about conflicts between mutual fund advisers and shareholders, asserting that greater independence would improve oversight.
- The Chamber of Commerce petitioned for review, asserting standing both as a mutual fund investor affected in its investment choices and as a trade association whose members would bear compliance burdens.
- The Chamber argued the SEC lacked statutory authority under the ICA to impose governance conditions and, in any event, acted arbitrarily and capriciously by failing to assess costs and alternatives, including a disclosure-based approach.

## Issues

1. Whether the Chamber of Commerce had Article III standing to seek judicial review of the SEC rule.
2. Whether the ICA authorizes the SEC to condition exemptive relief on mutual fund board-composition and independent-chair requirements.
3. Whether the SEC’s adoption of the independent-chair condition was arbitrary and capricious under the Administrative Procedure Act (APA) due to insufficient consideration of costs and reasonably apparent alternatives.

## Decision

- The court held the Chamber had standing as an investor affected by the rule and as an association representing regulated members.
- The court held the SEC had authority under the ICA to impose governance-related conditions as part of exemptive relief aimed at mitigating conflicts of interest.
- The court held the SEC violated the APA by failing to adequately evaluate the costs of the independent-chair requirement and by failing to meaningfully consider a disclosure alternative discussed by the SEC.
- The court remanded the rule to the SEC for further consideration without vacating it.

## Legal Principles

- An investor has standing to challenge an agency rule that constrains the investor’s ability to invest free of the rule’s conditions, and a trade association may also proceed on associational standing when members are directly affected.
- The ICA permits the SEC to attach conditions to exemptive relief, including corporate-governance conditions, when reasonably related to investor protection and the conflicts the ICA targets.
- Under APA arbitrary-and-capricious review, an agency must evaluate significant economic consequences in a reasoned manner and address reasonably obvious alternatives; a stated inability to quantify costs does not excuse failing to seek data or otherwise support the agency’s assessment.

## Conclusion

The D.C. Circuit upheld the SEC’s power under the ICA to condition exemptive relief on mutual fund governance requirements, but remanded because the SEC did not provide a reasoned analysis of the independent-chair requirement’s costs or explain why it rejected a disclosure-based alternative.


Chamber of Commerce of the U.S. v. SEC, 412 F.3d 133 (D.C. Cir. 2005)