United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued April 15, 2005 Decided June 21, 2005
No. 04-1300
CHAMBER OF COMMERCE OF THE UNITED STATES OF
AMERICA,
PETITIONER
v.
SECURITIES AND EXCHANGE COMMISSION,
RESPONDENT
On Petition for Review of an Order of the
Securities and Exchange Commission
Eugene Scalia argued the cause for petitioner. With him on
the briefs were John F. Olson, Douglas R. Cox, Cory J.
Skolnick, Stephen A. Bokat, and Robin S. Conrad.
Giovanni P. Prezioso, General Counsel, Securities &
Exchange Commission, argued the cause for respondent. With
him on the brief were Meyer Eisenberg, Deputy General
Counsel, Jacob H. Stillman, Solicitor, and John W. Avery,
Special Counsel.
Before: GINSBURG, Chief Judge, and ROGERS and TATEL,
Circuit Judges.
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Opinion for the Court filed by Chief Judge GINSBURG.
GINSBURG, Chief Judge: The Chamber of Commerce of the
United States petitions for review of a rule promulgated by the
Securities and Exchange Commission under the Investment
Company Act of 1940 (ICA), 15 U.S.C. § 80a-1 et seq. The
challenged provisions of the rule require that, in order to engage
in certain transactions otherwise prohibited by the ICA, an
investment company – commonly referred to as a mutual fund
– must have a board (1) with no less than 75% independent
directors and (2) an independent chairman. The Chamber argues
the ICA does not give the Commission authority to regulate
“corporate governance” and, in any event, the Commission
promulgated the rule without adhering to the requirements of the
Administrative Procedure Act, 5 U.S.C. § 551 et seq.
We hold the Commission did not exceed its statutory
authority in adopting the two conditions, and the Commission’s
rationales for the two conditions satisfy the APA. We agree
with the Chamber, however, that the Commission did violate the
APA by failing adequately to consider the costs mutual funds
would incur in order to comply with the conditions and by
failing adequately to consider a proposed alternative to the
independent chairman condition. We therefore grant in part the
Chamber’s petition for review.
I. Background
A mutual fund, which is “a pool of assets ... belonging to
the individual investors holding shares in the fund,” Burks v.
Lasker, 441 U.S. 471, 480 (1979), is operated by an “investment
company” the board of directors of which is elected by the
shareholders. Although the board is authorized to operate the
fund, it typically delegates that management role to an
“adviser,” which is a separate company that may have interests
3
other than maximizing the returns to shareholders in the fund.
In enacting the ICA, the Congress sought to control “the
potential for abuse inherent in the structure of [funds]” arising
from the conflict of interests between advisers and shareholders,
id.; to that end, the ICA prohibits a fund from engaging in
certain transactions by which the adviser might gain at the
expense of the shareholders. See generally 15 U.S.C. § 80a-
12(a)-(g). Pursuant to the Commission’s long-standing
Exemptive Rules, however, a fund that satisfies certain
conditions may engage in an otherwise prohibited transaction.
See, e.g., Rule 10f-3, 17 C.F.R. § 270.10f-3 (2004) (when
conditions are satisfied, fund may purchase securities in primary
offering although adviser-affiliated broker-dealer is member of
underwriting syndicate).
Early in 2004 the Commission proposed to amend ten
Exemptive Rules by imposing five new or amended conditions
upon any fund wishing to engage in an otherwise prohibited
transaction. See Investment Company Governance, Proposed
Rule, 69 Fed. Reg. 3472 (Jan. 23, 2004). Although the
Commission had amended the same ten rules in 2001 to
condition exemption upon the fund having a board with a
majority of independent directors (that is, directors who are not
“interested persons” as defined in § 2(a)(19) of the ICA), see
Role of Independent Directors of Investment Companies, Final
Rule, 66 Fed. Reg. 3734 (Jan. 16, 2001), by 2004 the
Commission had come to believe that more was required.
“[E]nforcement actions involving late trading, inappropriate
market timing activities and misuse of nonpublic information
about fund portfolios” had brought to light, in the Commission’s
view, “a serious breakdown in management controls,” signaling
the need to “revisit the governance of funds.” 69 Fed. Reg. at
3472. Accordingly, the Commission proposed to condition the
ten exemptions upon, among other things, the fund having a
board of directors (1) with at least 75% independent directors
4
and (2) an independent chairman. Id. at 3474.
After a period for comment and a public meeting, the
Commission unanimously adopted three of the proposed new
conditions and, by a vote of three to two, adopted the two
corporate governance conditions challenged here. See
Investment Company Governance, Final Rule, 69 Fed. Reg.
46,378 (Aug. 2, 2004). The Commission majority adopted those
two conditions in light of recently revealed abuses in the mutual
fund industry, reasoning that the Exemptive Rules
rely on the independent judgment and scrutiny of directors,
including independent directors, in overseeing activities
that are beneficial to funds and fund shareholders but that
involve inherent conflicts of interest between the funds and
their managers. ... These further amendments provide for
greater fund board independence and are designed to
enhance the ability of fund boards to perform their
important responsibilities under each of the rules.
Id. at 46,379. Raising the percentage of independent directors
from 50% to 75%, the Commission anticipated, would
“strengthen the independent directors’ control of the fund board
and its agenda,” id. at 46,381, and “help ensure that independent
directors carry out their fiduciary responsibilities,” id. at 46,382.
The Commission justified the independent chairman condition
on the ground that “a fund board is in a better position to protect
the interests of the fund, and to fulfill the board’s obligations
under the Act and the Exemptive Rules, when its chairman does
not have the conflicts of interest inherent in the role of an
executive of the fund adviser.” Id.
The dissenting Commissioners were concerned the two
disputed conditions would come at “a substantial cost to fund
shareholders,” and they believed the existing statutory and
5
regulatory controls ensured adequate oversight by independent
directors. 69 Fed. Reg. at 46,390. Specifically, they faulted the
Commission for not giving “any real consideration to the costs”
of the 75% condition, id. at 46,390-46,391; for failing
adequately to justify the independent chairman condition, id. at
46,391-46,392; and for not considering alternatives to that
condition, id. at 46,392-46,393. The Chamber timely petitioned
for review, asserting an interest in the new conditions both as an
investor and as an association with mutual fund advisers among
its members.
II. Analysis
The Chamber makes two arguments on the merits: The
Commission had no authority under the ICA to adopt the two
conditions; and the Commission violated the APA in the
rulemaking by which it promulgated the conditions. Before
addressing those arguments, we must assure ourselves of the
Chamber’s standing, and thus of our jurisdiction.
A. Jurisdiction of the Court
Under Article III of the Constitution the “judicial Power of
the United States” is limited to the resolution of “Cases” or
“Controversies,” a corollary of which is that a party invoking
our jurisdiction “must show that the conduct of which he
complains has caused him to suffer an ‘injury in fact’ that a
favorable judgment will redress.” Elk Grove Unified School
Dist. v. Newdow, 124 S.Ct. 2301, 2308 (2004). In this case the
Chamber claims it is injured by the two challenged conditions
because it would like to invest in shares of funds that may
engage in transactions regulated by the Exemptive Rules but do
not meet those conditions. See Dec’l of Stan M. Harrell ¶ 2
(Chamber currently invests in funds, intends to continue doing
so, and would like to invest in funds unconstrained by the
6
conditions).
The Chamber cites two cases for the proposition that loss of
the opportunity to purchase a desired product is a legally
cognizable injury. Consumer Fed’n of Am. v. FCC, 348 F.3d
1009, 1011-12 (D.C. Cir. 2003) (injury-in-fact where merger
would deprive plaintiff of opportunity to purchase desired
service); Competitive Enter. Inst. v. Nat’l Highway Traffic
Safety Admin., 901 F.2d 107, 112-13 (D.C. Cir. 1990) (injury-in-
fact where fuel economy regulations foreclosed “opportunity to
buy larger passenger vehicles”). The Commission argues in
response that there is no evidence a fund of the type in which the
Chamber wants to invest would perform better than a fund that
conforms to the two corporate governance conditions. In
Consumer Federation, however, we held “the inability of
consumers to buy a desired product ... constitute[d] injury-in-
fact even if they could ameliorate the injury by purchasing some
alternative product.” 348 F.3d at 1012. Under our precedent,
therefore, the Chamber has suffered an injury-in-fact and,
because a favorable ruling would redress that injury, it has
standing to sue the Commission. And so to the merits.
B. The Commission’s Authority under the ICA
The Chamber maintains the Commission did not have
authority under the ICA to condition the exemptive transactions
as it did. First the Chamber observes rather generally that
“matters of corporate governance are traditionally relegated to
state law”; and second, it maintains these particular conditions
are inconsistent with the statutory requirement that 40% of the
directors on the board of an investment company be
independent, see 15 U.S.C. § 80a-10(a). The Commission
points to § 6(c) of the ICA, 15 U.S.C. § 80a-6(c), as the source
7
of its authority.* That provision conspicuously confers upon the
Commission broad authority to exempt transactions from rules
promulgated under the ICA, subject only to the public interest
and the purposes of the ICA.
The thrust of the Chamber’s first contention is that § 6(c)
should not be read to enable the Commission to leverage the
exemptive authority it clearly does have so as to regulate a
matter, namely, corporate governance, over which the states, not
the Commission, have authority. For support the Chamber relies
principally upon two cases from this circuit concerning the
Commission’s authority under the Securities and Exchange Act
of 1934. Neither of those cases, however, arose from an
exercise of authority analogous to the rulemaking here under
review.
In Business Roundtable v. SEC, 905 F.2d 406, 416-17
(1990), we held the Commission did not have authority under
the 1934 Act to bar a stock exchange from listing common stock
with restricted voting rights. The Commission had invoked the
provision of that Act authorizing it to make rules “otherwise in
furtherance of the purposes” of the Act. Id. at 410. Reasoning
that “unless the legislative purpose is defined by reference to the
* That section provides:
The Commission, by rules and regulations upon its own
motion, or by order upon application, may conditionally or
unconditionally exempt any person, security, or transaction,
or any class or classes of persons, securities, or transactions,
from any provision or provisions of this [Act] or of any rule
or regulation thereunder, if and to the extent that such
exemption is necessary or appropriate in the public interest
and consistent with the protection of investors and the
purposes fairly intended by the policy and provisions of this
[Act].
8
means Congress selected, it can be framed at any level of
generality,” and the means the Congress selected in the 1934
Act was disclosure, id., we vacated the rule because it went
beyond disclosure to regulate “the substance of what the
shareholders may enact,” id. at 411.
Business Roundtable is of little help to the Chamber
because, as the Commission documents, the purposes of the ICA
include tempering the conflicts of interest “inherent in the
structure of investment companies,” Burks, 441 U.S. at 480; see
also 15 U.S.C. § 80a-1(b) (“policy and purposes of [ICA] ...
shall be interpreted ... to eliminate” conflicts of interest); and
regulation of the governance structure of investment companies
is among the means the Congress used to effect that purpose.
See Burks, 441 U.S. at 479 (ICA “functions primarily to impose
controls and restrictions on the internal management of
investment companies”) (emphases removed); id. at 484 (in
enacting ICA Congress “place[d] the unaffiliated directors in the
role of independent watchdogs ... who would furnish an
independent check upon the management of investment
companies”). Moreover, the Commission’s effort to enlarge the
role of independent directors on the boards of investment
companies accords with “the structure and purpose of the ICA
[both of which] indicate that Congress entrusted to the
independent directors ... the primary responsibility for looking
after the interests of the funds’ shareholders.” Id. at 484-85.
In Teicher v. SEC, 177 F.3d 1016, 1019-20 (1999), we held
a provision of the 1934 Act authorizing the Commission to
“place limitations on the activities or functions” of a person
convicted of securities fraud in the broker-dealer industry did
not authorize it to place limitations upon the activities or
functions of that person in an industry regulated under a
different “occupational licensing regime” administered by the
Commission. The Commission’s authority, we reasoned, must
9
be read with “some concept of the relevant domain” in mind;
even the Commission did not “suggest that [provision] allows it
to bar one of the offending parties from being a retail shoe
salesman, or to exclude him from the Borough of Manhattan.”
Id. at 1019. The present case is different from Teicher because
here the Commission did not exercise its regulatory authority to
effect a purpose beyond that of the statute from which its
authority derives.
The Chamber’s second contention is that the conditions
conflict with the intent of the Congress, expressed in § 10(a) of
the ICA, that 40% of the directors of an investment company be
independent. See Chevron, U.S.A., Inc. v. NRDC, 467 U.S. 837,
842-43 (1984) (“If the intent of Congress is clear, that is the end
of the matter; for the court, as well as the agency, must give
effect to the unambiguously expressed intent of Congress”).
Section 10(a), however, states only that a fund may have “no
more than” 60% inside directors, 15 U.S.C. § 80a-10(a), which
necessarily means at least 40% must be independent and
strongly implies a greater percentage may be; it speaks not at all
to authority of the Commission to provide an incentive for
investment companies to enhance the role of independent
directors and, as the Commission is keen to point out, the
challenged conditions apply only to funds that engage in
exemptive transactions.
C. The Requirements of the APA
The condemnation of the APA extends to any rule that is
“arbitrary, capricious, an abuse of discretion, or otherwise not in
accordance with law.” 5 U.S.C. § 706(2)(A). Although the
“scope of review under the ‘arbitrary and capricious’ standard
is narrow and a court is not to substitute its judgment for that of
the agency,” we must nonetheless be sure the Commission has
“examine[d] the relevant data and articulate[d] a satisfactory
10
explanation for its action including a rational connection
between the facts found and the choice made.” Motor Vehicle
Mfrs. Ass’n v. State Farm Mutual Auto. Ins. Co., 463 U.S. 27, 43
(1983); see also Pub. Citizen v. Fed. Motor Carrier Safety
Admin., 374 F.3d 1209, 1216 (D.C. Cir. 2004).
The Chamber argues the Commission violated the APA
because it (1) failed to show the connection between the abuses
that prompted the rulemaking and the conditions newly included
in the Exemptive Rules; (2) did not comply with its obligation
under the ICA to consider whether those conditions “will
promote efficiency, competition, and capital formation,” 15
U.S.C. § 80a-2(c); see Pub. Citizen, 374 F.3d at 1216 (rule is
“arbitrary and capricious” if agency fails to consider factors “it
must consider under its organic statute”); and (3) did not
consider reasonable alternatives to the independent chairman
condition.
1. Justification for the Rulemaking
The Chamber maintains the “rulemaking is flawed for the
elementary reason that the Commission amended ten separate
and distinct pre-existing rules [by imposing the two challenged
conditions] without any meaningful consideration of them.”
Similarly, the Chamber argues the Commission did not
adequately explain why the conditions it added were necessary
in light of the conditions previously contained in the Exemptive
Rules. The Commission answers that its stated justification for
amending the Exemptive Rules satisfies the standards of the
APA. We agree.
In the wake of recent revelations of certain abuses in the
mutual fund industry, the Commission was concerned about
what it diagnosed as “a serious breakdown in management
controls.” See 69 Fed. Reg. at 46,378-46,379; 69 Fed. Reg. at
11
3472. Although it is true, as the Chamber repeatedly notes, that
none of the documented abuses involved a transaction covered
by the Exemptive Rules, the Commission, as we have said,
thought it prudent to amend those rules because the particular
abuses that had come to light revealed a more general problem
with conflicts of interest than it had previously suspected and
portended further abuses if that perceived problem was not
addressed. The Commission thus viewed strengthening the role
of independent directors in relation to exemptive transactions as
a prophylactic measure, not a response to a present problem
involving abuse of the Exemptive Rules. See 69 Fed. Reg. at
46,379.
The Chamber claims the Commission’s decision was
unreasonable because the conditions for engaging in exemptive
transactions had already been tightened in 2001. But that begs
the question whether the conditions of 2001 were adequate in
view of the new evidence that some boards were failing to
prevent egregious conflicts of interest involving late trading and
market timing. Might not they also fail to police sufficiently the
conflicts of interest inherent in the exemptive transactions? That
those transactions were already subject to some regulation does
not render unreasonable the Commission’s judgment that
additional regulation was called for as a prophylactic.
Finally, the Chamber argues the “actual terms” of the
conditions were not reasonable in light of “the problems [the
Commission] claimed justified the rulemaking.” Those
problems all trace to the failure of investment company boards,
for whatever reason, to guard against advisers’ conflicts of
interest. See 69 Fed. Reg. at 3473 (“boards may have simply
abdicated their responsibilities, or failed to ask the tough
questions of advisers; in other cases, boards may have lacked the
information or organizational structure necessary to play their
proper role”). So that boards are apprised of the activities of
12
their fund’s adviser, the Commission, in a separate proceeding
first required funds to designate a chief compliance officer
charged with bringing relevant information to the board. See
Compliance Programs of Investment Companies and Investment
Advisers, 68 Fed. Reg. 74,714 (Dec. 24, 2003). The
Commission then undertook in the present rulemaking to ensure
that independent directors would be in a position to put such
information to good use.
To that end, the Commission reasonably concluded that
raising the minimum percentage of independent directors from
50% to 75% would “strengthen the hand of the independent
directors when dealing with fund management, and may assure
that independent directors maintain control of the board and its
agenda.” 69 Fed. Reg. at 46,382. Similarly, the Commission
concluded that having an independent chairman would be
beneficial because the chairman plays “an important role in
setting the agenda of the board[,] ... in providing a check on the
adviser, in negotiating the best deal for shareholders when
considering the advisory contract, and in providing leadership to
the board that focuses on the long-term interests of investors.”
69 Fed. Reg. at 46,383. We have no basis upon which to
second-guess that judgment.
In sum, the Chamber points to nothing in the ICA to suggest
the Congress restricted the authority of the Commission to make
“precautionary or prophylactic responses to perceived risks,”
Certified Color Mfrs. Ass’n v. Mathews, 543 F.2d 284, 296
(D.C. Cir. 1976); and the Commission’s effort to prevent future
abuses of exemptive transactions was not arbitrary, capricious,
or in any way an abuse of its discretion, in violation of the APA.
2. Consideration of Costs
The ICA mandates that when the Commission “engage[s]
13
in rulemaking and is required to consider or determine whether
an action is consistent with the public interest [it] shall ...
consider ... whether the action will promote efficiency,
competition, and capital formation.” 15 U.S.C. § 80a-2(c). The
Chamber argues the Commission violated this mandate, and
hence the APA, by failing (1) to develop new, and to consider
extant, empirical data comparing the performance of funds
respectively led by inside and by independent chairmen; and (2)
to consider the costs of the conditions it was imposing, which
costs in turn impede efficiency, competition, and capital
formation. The Commission denies the charges.
The particulars of the Chamber’s first contention are that
the Commission should have directed its staff to do a study of
the effect of an independent chairman upon fund performance
and that when such a study, commissioned by Fidelity
Investments, was presented during the comment period, the
Commission gave it short shrift. 69 Fed. Reg. at 46,383 n.52;
see Geoffrey H. Bobroff and Thomas H. Mack, Assessing the
Significance of Mutual Fund Board Independent Chairs (Mar.
10, 2004). As to the former point, although we recognize that an
agency acting upon the basis of empirical data may more readily
be able to show it has satisfied its obligations under the APA,
see Nat’l Ass’n of Regulatory Util. Comm’rs v. FCC, 737 F.2d
1096, 1124 (D.C. Cir. 1984) (in informal rulemaking it is
“desirable” that agency “independently amass [and] verify the
accuracy of” data), we are acutely aware that an agency need not
– indeed cannot – base its every action upon empirical data;
depending upon the nature of the problem, an agency may be
“entitled to conduct ... a general analysis based on informed
conjecture.” Melcher v. FCC, 134 F.3d 1143, 1158 (D.C. Cir.
1998); Nat’l Ass’n of Regulatory Util. Comm’rs, 737 F.2d at
1124 (failure to conduct independent study not violative of APA
because notice and comment procedures “permit parties to bring
relevant information quickly to the agency’s attention”); see also
14
FCC v. Nat’l Citizens Comm. for Broad., 436 U.S. 775, 813-14
(1978) (FCC, in making “judgmental or predictive” factual
determinations, did not need “complete factual support” because
“a forecast of the direction in which future public interest lies
necessarily involves deductions based on the expert knowledge
of the agency”).
Here the Commission, based upon “its own and its staff’s
experience, the many comments received, and other evidence,
in addition to the limited and conflicting empirical evidence,”
concluded an independent chairman “can provide benefits and
serve other purposes apart from achieving high performance of
the fund.” 69 Fed. Reg. at 46,383-46,384. The Commission’s
decision not to do an empirical study does not make that an
unreasoned decision. See BellSouth Corp. v. FCC, 162 F.3d
1215, 1221 (D.C. Cir. 1999) (“When ... an agency is obliged to
make policy judgments where no factual certainties exist or
where facts alone do not provide the answer, our role is more
limited; we require only that the agency so state and go on to
identify the considerations it found persuasive”).
Nor did the Commission violate the APA in its
consideration of the Fidelity study. Although Chairman
Donaldson did, as the Chamber points out, betray a dismissive
attitude toward the value of empirical data, SEC Open Meeting,
57-58 (June 23, 2004) (“there are no empirical studies that are
worth much. You can do anything you want with numbers and
we’ve seen evidence of that in a number of our submissions”),
the Commission did not reject the Fidelity study or decline to do
its own study upon that basis. Rather, the Commission
concluded the Fidelity study was “unpersuasive” because, as the
authors acknowledged, it did not rule out “other important
differences [than independence of the chairman] that may have
impacted performance results,” 69 Fed. Reg. at 46,383 n.52
(quoting study), and because it did not use a reliable method of
calculating fund expenses, id. The Commission also noted that
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other commenters reviewing the Fidelity study had concluded
funds with an independent chairman did “slightly better in terms
of returns, but at lower cost.” Id. Although a more detailed
discussion of the study might have been useful, the Commission
made clear enough the limitations of the study, and we have no
cause to disturb its ultimate judgment that the study was
“unpersuasive evidence.” Cf. Hüls Am. Inc. v. Browner, 83 F.3d
445, 452 (D.C. Cir. 1996) (court owes “extreme degree of
deference to the agency when it is evaluating scientific data
within its technical expertise”).*
We reach a different conclusion with regard to the
Commission’s consideration of the costs of the conditions. With
respect to the 75% independent director condition, the
Commission, although describing three methods by which a
fund might comply with the condition, claimed it was without a
“reliable basis for determining how funds would choose to
satisfy the [condition] and therefore it [was] difficult to
determine the costs associated with electing independent
directors.” 69 Fed. Reg. at 46,387. That particular difficulty
may mean the Commission can determine only the range within
which a fund’s cost of compliance will fall, depending upon
how it responds to the condition but, as the Chamber contends,
it does not excuse the Commission from its statutory obligation
to determine as best it can the economic implications of the rule
* The Chamber also argues the Congress’s subsequent direction to the
Commission to “provide[] a justification” for the independent
chairman condition, see Consolidated Appropriations Act, 2005, Pub.
L. No. 108-447, 118 Stat. 2809 (2004), establishes that the
Commission failed to provide an adequate justification in the
rulemaking proceeding. That does not follow, however; the Congress
may require a more detailed explanation for a rule than is required by
the APA. See Motor Vehicle Mfrs. Ass’n, 463 U.S. at 44-45 (rejecting
view “congressional reaction” to rule necessitated stricter judicial
review).
16
it has proposed. See Pub. Citizen, 374 F.3d at 1221 (in face of
uncertainty, agency must “exercise its expertise to make tough
choices about which of the competing estimates is most
plausible, and to hazard a guess as to which is correct, even if ...
the estimate will be imprecise”).
With respect to the costs of the independent chairman
condition, counsel maintains the Commission “was not aware of
any costs associated with the hiring of staff because boards
typically have this authority under state law, and the rule would
not require them to hire employees.” The Commission made
that observation, however, in regard not to the independent
chairman condition but to a condition not challenged here, and
we cannot therefore consider counsel’s rationalization for the
regulation under review. See Motor Vehicle Mfrs. Ass’n, 463
U.S. at 50 (“courts may not accept appellate counsel’s post hoc
rationalizations for agency action”). In any event, the argument
is a non sequitur; whether a board is authorized by law to hire
additional staff in no way bears upon the contention that,
because of his comparative lack of knowledge about the fund, an
independent chairman would in fact cause the fund to incur
additional staffing costs.
What the Commission itself did was acknowledge in a
footnote that an independent chairman “may choose to hire
[more] staff” but it stopped there because, it said, it had no
“reliable basis for estimating those costs.” 69 Fed. Reg. at
46,387 n.81. Although the Commission may not have been able
to estimate the aggregate cost to the mutual fund industry of
additional staff because it did not know what percentage of
funds with independent chairman would incur that cost, it
readily could have estimated the cost to an individual fund,
which estimate would be pertinent to its assessment of the effect
the condition would have upon efficiency and competition, if not
upon capital formation. And, as we have just seen, uncertainty
may limit what the Commission can do, but it does not excuse
17
the Commission from its statutory obligation to do what it can
to apprise itself – and hence the public and the Congress – of the
economic consequences of a proposed regulation before it
decides whether to adopt the measure.
In sum, the Commission violated its obligation under 15
U.S.C. § 80a-2(c), and therefore the APA, in failing adequately
to consider the costs imposed upon funds by the two challenged
conditions.
3. Consideration of Alternatives
Finally, the Chamber argues the Commission gave
“inadequate consideration” to suggested alternatives to the
independent chairman condition, citing as an example – the only
significant one, it seems to us – the proposal, endorsed by the
two dissenting Commissioners, that each fund be required
prominently to disclose whether it has an inside or an
independent chairman and thereby allow investors to make an
informed choice. Commission counsel responds by noting
generally that the agency is “not required to discuss every
alternative raised” and that it did consider the “major
alternatives” proposed by commenters, adding more specifically
that it had no obligation to consider the dissenters’ disclosure
alternative because the “Congress rejected a purely disclosure-
based approach to regulating conflicts of interest under the
[ICA].”
We conclude the Commission’s failure to consider the
disclosure alternative violated the APA. To be sure, the
Commission is not required to consider “every alternative ...
conceivable by the mind of man ... regardless of how uncommon
or unknown that alternative” may be. Motor Vehicle Mfrs.
Ass’n, 463 U.S. at 51. Here, however, two dissenting
Commissioners raised, as an alternative to prescription, reliance
upon disclosure, see 69 Fed. Reg. at 46,393 – a familiar tool in
18
the Commission’s toolkit – and several commenters suggested
that the Commission should leave the choice of chairman to
market forces, making it hard to see how that particular policy
alternative was either “uncommon or unknown.”
The Commission would nevertheless be excused for failing
to consider this alternative if it were, for whatever reason,
unworthy of consideration. Commission counsel accordingly
suggests one such reason, namely, that in the ICA the Congress
rejected a “purely disclosure-based approach.” See also SEC v.
Variable Annuity Life Ins. Co., 359 U.S. 65, 78 (1959) (ICA
“passes beyond a simple ‘disclosure’ philosophy”). Counsel’s
statement is true but irrelevant; that the Congress required more
than disclosure with respect to some matters governed by the
ICA does not mean it deemed disclosure insufficient with
respect to all such matters. On the contrary, the ICA requires
funds to make extensive disclosures. See, e.g., 15 U.S.C. § 80a-
8(b) (fund must file registration statement with Commission); id.
§ 80a-29(e) (fund must send semiannual report to shareholders);
id. § 80a-44(a) (fund must make available to public all
documents filed with Commission); see also Mary M. Frank et
al., Copycat Funds: Information Disclosure Regulation and the
Returns to Active Fund Management in the Mutual Fund
Industry, 47 J.L. & ECON. 515 (2004) (“[ICA] regulates
information disclosure by mutual funds”). Indeed, the
Commission augmented the disclosure requirements of the ICA
even as it was considering the independent chairman condition.
See Final Rule, Shareholder Reports and Quarterly Portfolio
Disclosure of Registered Management Investment Companies,
69 Fed. Reg. 11,244, 11,245 (Mar. 9, 2004).
In sum, the disclosure alternative was neither frivolous nor
out of bounds and the Commission therefore had an obligation
to consider it. Cf. Laclede Gas Co. v. FERC, 873 F.2d 1494,
1498 (D.C. Cir. 1989) (“where a party raises facially reasonable
alternatives ... the agency must either consider those alternatives
19
or give some reason ... for declining to do so”) (emphases
removed). The Commission may ultimately decide the
disclosure alternative will not sufficiently serve the interests of
shareholders, but the Commission – not its counsel and not this
court – is charged by the Congress with bringing its expertise
and its best judgment to bear upon that issue. See SEC v.
Chenery Corp., 332 U.S. 194, 196-97 (1947); see also Motor
Vehicle Mfrs. Ass’n, 463 U.S. at 54.
III. Conclusion
For the foregoing reasons, we grant in part the Chamber’s
petition for review. This matter is remanded to the Commission
to address the deficiencies with the 75% independent director
condition and the independent chairman condition identified
herein. See Fox Television Stations, Inc. v. FCC, 280 F.3d 1027,
1048-49 (D.C. Cir. 2002); Allied Signal, Inc. v. U.S. Nuclear
Regulatory Comm’n, 988 F.2d 146, 150-51 (D.C. Cir. 1993).
So ordered.