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United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued January 6, 2006 Decided April 7, 2006
No. 05-1240
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, Robin S. Conrad, and Amar D.
Sarwal.
Giovanni P. Prezioso, General Counsel, Securities &
Exchange Commission, argued the cause for respondent. With
him on the brief were Jacob H. Stillman, Solicitor, John W.
2
Avery, Special Counsel, and Michael L. Post, Senior Counsel.
Mercer Bullard was on the brief for amici curiae Fund
Democracy, Inc. and Consumer Federal of America in support
of respondent.
Before: HENDERSON, ROGERS and BROWN, Circuit Judges.
Opinion for the Court filed by Circuit Judge ROGERS.
ROGERS, Circuit Judge: This appeal concerns the
continuing challenge by the Chamber of Commerce of the
United States to the rule promulgated on July 27, 2004 (“the
Rule”) by the Securities and Exchange Commission amending
the Exemptive Rules under the Investment Company Act of
1940 (“ICA”), 15 U.S.C. § 80a-1 et seq. (2000). The Rule
requires that mutual funds relying on the Exemptive Rules adopt
certain governance practices, including those set forth in two
conditions: a fund must have (1) a board with no less than 75%
independent directors and (2) an independent chair. See
Investment Company Governance, Release No. 26,520, 69 Fed.
Reg. 46,378, 46,381 (Aug. 2, 2004) (“Adopting Release”). In
Chamber of Commerce v. SEC, 412 F.3d 133 (D.C. Cir. 2005)
(“Chamber I”), the court held that the Chamber had standing to
challenge the Rule, the Commission had authority to promulgate
the Rule, and the Commission had not violated the
Administrative Procedure Act (“APA”), 5 U.S.C. § 551 et seq.,
except when it failed, as required by the ICA, to determine the
costs of the two conditions and when it failed to address a
proposed alternative to the independent chair condition. The
court remanded the case to the Commission.
The Chamber now challenges the Commission’s decision
not to modify the two conditions in response to Chamber I. See
Investment Company Governance, Release No. 26,985, 70 Fed.
3
Reg. 39,390, 39,398 (July 7, 2005) (“Response Release”). We
again hold that the Chamber has standing, and we hold that the
Commission had authority to consider whether to modify the
Rule prior to issuance of the mandate in Chamber I. We further
hold that, although the Commission was not constrained by
Chamber I in how to estimate the costs of the conditions, the
Commission failed to comply with section 553(c) of the APA,
5 U.S.C. § 553(c), by relying on materials not in the rulemaking
record without affording an opportunity for public comment, to
the prejudice of the Chamber. On August 10, 2005, the court
stayed the two conditions.
I.
Section 2(c) of the ICA requires that when the Commission
“engage[s] 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). In Chamber I, the court held:
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 conditions but, as the Chamber contends, it does
not excuse the Commission from its statutory
obligation to determine as best it can the economic
4
implications of the rule it has proposed.
412 F.3d at 143 (citing Pub. Citizen v. Fed. Motor Carrier
Safety Admin., 374 F.3d 1209, 1221 (D.C. Cir. 2004)). With
respect to the independent chair condition, the court noted that
the Commission had stated that an independent chair may decide
to hire more staff, but that it had no “reliable basis for estimating
. . . th[ose] costs.” Id. at 144 (citing Adopting Release, 69 Fed.
Reg. at 46,387 n.81) The court held that “[a]lthough the
Commission may not have been able to estimate the aggregate
cost to the mutual fund industry of additional staff . . . 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.” Id. The court also held that the
Commission could not ignore a “facially reasonable” alternative
suggested by the two dissenting Members of the Commission.
See id. at 145 (citing standard set forth in Laclede Gas Co. v.
FERC, 873 F.2d 1494, 1498 (D.C. Cir. 1989)).
The Commission responded within a matter of days to the
release of Chamber I. The Commission explained that prompt
action was required to avoid postponing the January 15, 2006
date for compliance with the Rule in order to ensure protection
of fund investors “in the wake of the discovery of serious
wrongdoing at many of the nation’s largest fund complexes and
by officials at the highest levels of those complexes.” Response
Release, 70 Fed. Reg. at 39,391. This occurred, the Commission
explained, because “[f]und managers acted in their own interests
rather than in the interests of fund investors (which they are
required to do), resulting in substantial investor losses that were
well documented at the time [the Commission] adopted the
[Rule],” and left investor confidence severely shaken, id.; see
Adopting Release, 69 Fed. Reg. at 43,378. In the Commission’s
view, prompt action could best be accomplished by having the
5
same five Commissioners who had been considering mutual
fund governance issues for more than a year and a half “bring
the[ir] collective judgment and learning” to the issues identified
by the court. See Response Release, 70 Fed. Reg. at 39,391.
Because the Chairman was scheduled to resign on June 30,
2005, the Commission decided to respond to Chamber I at its
previously scheduled public meeting on June 29, 2005. See id.
at 39,391; see also id. at 39,403 (Glassman, Comm’r,
dissenting); id. at 39,408 (Atkins, Comm’r, dissenting)..
The Commission decided it was unnecessary to reopen the
rulemaking record for further comment. Observing that it had
previously given notice and called for comment on the costs of
complying with the two conditions, the Commission concluded
that “the information in the existing record, together with
publicly available information on which we may rely, is a
sufficient base on which to rest the Commission’s consideration
of the deficiencies identified by the Court.” Id. at 39,390-91
(emphasis added). Based on materials not in the rulemaking
record, including what the Commission described as a “widely
used industry survey” of mutual fund directors’ compensation,
the Commission determined a range of costs for each of the
options that a fund might use to meet the 75% independent
director condition. See id. at 39,392 n.28, 39,391-94. The
Commission viewed the costs to an individual fund of the
independent chair condition to derive principally from the
increased compensation for the independent chair and the costs
of additional staff, the latter cost estimated based on extra-
record salary surveys by the Securities Industry Association, a
source on which the Commission stated it “commonly rel[ies] in
its rulemakings.” Id. at 39,394. The Commission stated that it
did not expect small funds would hire additional staff. See id.
The Commission concluded, based on these cost estimates,
that the costs of complying with the two conditions “are
6
extremely small relative to the fund assets for which fund boards
are responsible, and are also small relative to the expected
benefits of the two conditions.” Id. at 39,395. “Whether the two
conditions are viewed separately or together,” the Commission
stated, “even at the high end of the ranges, the costs of
compliance are minimal.” Id. This was true as well for small
funds. See id. at 39,396 n.77. Accordingly, regarding section
2(c) of the ICA, the Commission concluded: “[W]e do not
expect the amendments to the Exemptive Rules to have a
significant adverse effect on efficiency, competition or capital
formation because the costs associated with the amendments are
minimal and many funds have already adopted the required
practices.” Id. at 39,396. The Commission noted that as of the
time it proposed the Rule, it estimated that “nearly sixty percent
of all funds currently me[t] [the 75% independent director]
requirement.” Adopting Release, 69 Fed. Reg. at 46,387 n.78;
see Response Release, 70 Fed. Reg. at 39,391 & n.18.
The Commission also set forth its reasons for rejecting the
alternative proposal to the independent chair condition: “[I]n
light of the nature of investment companies and the purposes of
the statutory prohibitions to which the Exemptive Rules apply,”
the Commission concluded that the condition requiring an
independent chair was superior to an expansion of disclosure
requirements. See Response Release, 70 Fed. Reg. at 39,396-97.
The Commission explained that mutual funds are “unique”
because they are managed “by people whose primary loyalty
and pecuniary interests lie outside the enterprise,” which
presents “inherent conflicts of interest and potential for abuses.”
Id. at 39,396. The Commission reasoned that disclosure alone
would not prevent self-dealing by managers. See id. at 39,397.
Further, the Commission observed, the independent chair was
part of a package of regulatory reforms designed to change the
“boardroom culture,” id., that would result in benefits that could
not be accomplished by disclosure alone, which to become
7
meaningful faced several obstacles given the information that
would need to be imparted to an investor, see id.
II.
The Chamber petitions for review, challenging the
Commission’s decision not to modify the Rule’s two conditions
on procedural and substantive grounds. Before reaching the
merits of the Chamber’s challenge, we address the Chamber’s
standing and the Commission’s authority to consider whether to
modify the two conditions before issuance of the mandate in
Chamber I.
A.
The Commission maintains that the court lacks jurisdiction
to consider the Chamber’s petition because the Chamber lacks
standing under Article III of the Constitution. Specifically, the
Commission maintains that the Chamber has failed to show a
continuing injury-in-fact and to address the implications of
DH2, Inc. v. SEC, 422 F.3d 591 (7th Cir. 2005), which the
Commission presents as being in conflict with our holding in
Chamber I that the Chamber has standing. See Chamber I, 412
F.3d at 138. Whatever may be said of the injury-in-fact analysis
in DH2, the holding in Chamber I is the law of this circuit. See
LaShawn A. v. Barry, 87 F.3d 1389, 1395 (D.C. Cir. 1996) (en
banc).
In Chamber I, the court held that the Chamber had standing
in light of sworn declarations regarding its investment in, and
continuing desire to invest in, mutual funds that are not
governed in accordance with the Rule’s two conditions. See
Chamber I, 412 F.3d at 138. The court concluded these concrete
actions and intentions were sufficient because the “inability of
consumers to buy a desired product constituted injury-in-fact
8
even if they could ameliorate the injury by purchasing some
alternative product.” Id. (quoting Consumer Fed’n of Am. v.
FCC, 348 F.3d 1009, 1012 (D.C. Cir. 2003)) (alterations and
internal quotations omitted).
The Chamber seeks in its current petition for review to
challenge the same two conditions it challenged in Chamber I.
It has substantiated its claim of continued injury through the
September 19, 2005 sworn declaration of Stan M. Harrell,
Senior Vice President, Chief Financial Officer and Chief
Information Officer of the Chamber. See Sierra Club v. EPA,
292 F.3d 895, 899-900 (D.C. Cir. 2002). Mr. Harrell avers that
the Chamber continues to hold investments in mutual funds, four
of which he identifies by name, and currently intends to
continue making such investments and wishes to invest in
management-chaired funds and in funds with fewer than 75%
independent directors. In light of the historical data in the
rulemaking record indicating that management-chaired funds
may have performed marginally better then independently
chaired funds, see Adopting Release, 69 Fed. Reg. at 46,383
n.52, and the Chamber’s concern that the costs of implementing
the two conditions will present barriers to entry, especially for
small funds, there is no basis to conclude that the circumstances
underlying Chamber I’s holding that the Chamber had standing
have changed.
B.
The Chamber, in turn, challenges the Commission’s
authority to consider modifying the Rule prior to issuance of the
court’s mandate in Chamber I. It advances this challenge based
on an analogy to Federal Rule of Appellate Procedure 41, which
effects a limit on the jurisdiction of a district court while a case
is pending on appeal, and like Article III standing, might be
viewed as a threshold jurisdictional issue. However, the
9
Chamber’s challenge is, in effect, a merits challenge based on
section 706(2)(C) of the APA.
Essentially, the Chamber makes a policy argument by
analogy. It points to Rule 41, which addresses when the
mandate of a court of appeals issues, and to authorities holding
that the pendency of an appeal “‘divests the district court of
control over those aspects of the case involved in the appeal,’”
United States v. DeFries, 129 F.3d 1293, 1302 (D.C. Cir. 1997)
(quoting Griggs v. Provident Consumer Disc. Co., 459 U.S. 56,
58 (1982) (per curiam)); see also FED. R. APP. P. 3, to argue that
the district court does not regain jurisdiction over those issues
until the court of appeals issues its mandate, cf. In re Thorpe,
655 F.2d 997, 998 (9th Cir. 1981). To extend this principle to
agencies, the Chamber points to an isolated and irrelevant
reference in the 1998 Advisory Committee Notes addressing
when a court of appeals determination becomes a “fixed” legal
obligation for an agency. See FED. R. APP. P. 41 Advisory
Committee’s Notes (1998 amends., subdiv. (c)). The Chamber
then contends that treating district courts and administrative
agencies as “divested” of jurisdiction prior to issuance of the
court’s mandate “is sensible in light of the[ir] comparable role[s]
. . . in developing a factual record and narrowing the issues for
review.” Petitioner’s Br. at 32. Such an approach, the Chamber
contends, also is consistent with the rule that a court will not
entertain a petition for review while a petition for
reconsideration is before an agency. Id. (citing United Transp.
Union v. ICC, 871 F.2d 1114, 1117 (D.C. Cir. 1989)).
The Chamber’s contention is unpersuasive. Admittedly,
some of the reasons underlying the general principle, expressed
in Griggs v. Provident Consumer Discount Co., 459 U.S. at 58,
that the jurisdictional authority of district courts and courts of
appeal are mutually exclusive regarding issues raised in the
appeal, see generally CHARLES ALAN WRIGHT, ARTHUR R.
10
MILLER, & EDWARD H. COOPER, 16A FEDERAL PRACTICE &
PROCEDURE JURISDICTION §§ 3949.1, 3987 (3d ed. 1999 and
2005 Pocket Part), such as avoiding confusion or a waste of time
by having the same matter considered in more than one forum
at the same time, see DeFries, 129 F.3d at 1303; United States
v. Salerno, 868 F.2d 524, 540 (2d Cir. 1989), apply to
administrative proceedings, cf. United Transp. Union, 871 F.2d
at 1117. However, the Chamber overlooks the fact that
administrative agencies, unlike federal courts, are not
jurisdictionally constrained by the case-and-controversy
limitation in Article III. See U.S. CONST. art. III; Envirocare of
Utah, Inc. v. NRC, 194 F.3d 72, 74 (D.C. Cir. 1999); see also
Fund Democracy, LLC v. SEC, 278 F.3d 21, 27 (D.C. Cir.
2002). Thus, the Chamber must recognize that its analogy based
on Rule 41 is not informed by the concerns underlying Article
III. It observes that in DeFries this court stated that the
principle that a district court lacks jurisdiction to act until the
court of appeals’ mandate issues is “grounded in solid
considerations of efficient judicial administration,” 129 F.3d at
1303. Even assuming that Article III concerns do not inform
DeFries’ holding, the Chamber’s contention fails.
The court has previously recognized that agencies possess
authority to address issues identified by the court prior to the
issuance of its mandate. See, e.g., Hazardous Waste Treatment
Council v. EPA, 886 F.2d 355, 371 (D.C. Cir. 1989); Nat'l Coal.
Against Misuse of Pesticides v. Thomas, 809 F.2d 875, 884-85
(D.C. Cir. 1987); Indep. U.S. Tanker Owners Comm. v. Dole,
809 F.2d 847, 855 (D.C. Cir. 1987); see also Northern States
Power Co. v. U.S. Dep’t of Energy, 128 F.3d 754, 761 (D.C. Cir.
1997). The Chamber would distinguish those cases on the
ground that in those instances the court instructed the agency to
proceed, and thus “wielded its mandate to determine when its
action attains controlling force so as to marshal litigation in an
orderly manner through the legal system.” Petitioner’s Br. at 33.
11
Even if that distinction were persuasive, no such distinction
applies to Alabama Power Co. v. FPC, 511 F.2d 383 (D.C. Cir.
1974).
In Alabama Power, the court observed that although
“[l]imitations on the [agency’s] power to modify an order during
the pendency of an appeal may be inferred from Section 313 of
the Federal Power Act, 16 U.S.C. § 825l [(1970)] . . . . [t]he
precise scope of these limitations has not been fully defined.”
511 F.2d at 388. Section 313 authorized the agency, upon
application for rehearing, to set aside or modify an order until
the record in the proceeding had been filed in the court of
appeals and stated that, upon the filing of a petition for review,
the appellate court has exclusive jurisdiction to affirm, modify,
or set aside the order. Concluding that it was unnecessary “to
define the precise contours of Section 313,” the court held that
[a]ssuming the [agency’s] remedial powers [are] limited
during the pendency of appeal, it nevertheless retains power
to consider a petition for amendment and to defer until
disposition of the appeal any modification found
appropriate or, in a case of urgency, to apply to the
reviewing court for a remand order so as to permit
amendment.
Id. The court cited Smith v. Pollin, 194 F.2d 349 (D.C. Cir.
1952), which established an exception under Rule 41 for district
courts to reconsider an order or judgment pending on appeal
and to seek remand of the case if it decided to grant relief, id. at
350. By parity of reasoning, the court in Alabama Power held
that the Federal Power Commission retained jurisdiction to
consider whether it would revise the Rule prior to the issuance
of the court’s mandate. 511 F.2d at 388.
Alabama Power is dispositive here because the
12
jurisdictional provisions of section 43(a) of the ICA, 15 U.S.C.
§ 80a-42(a),1 are substantially the same as section 313 of the
Federal Power Act, 16 U.S.C. § 825l, as construed in Alabama
Power. Assuming, as in Alabama Power, that the statute limited
1
Section 43(a) of ICA provides:
Any person or party aggrieved by an order issued by
the Commission . . . may obtain a review of such
order in the United States court of appeals within any
circuit wherein such person resides or has his
principal place of business, or in the United States
Court of Appeals for the District of Columbia . . . .
Upon the filing of such petition such court shall have
jurisdiction, which upon the filing of the record shall
be exclusive, to affirm, modify, or set aside such
order, in whole or in part.
15 U.S.C. § 80a-42(a). It further provides for a modified remand
procedure for further findings of fact:
If application is made to the court for leave to adduce
additional evidence, and it is shown to the
satisfaction of the court that such additional evidence
is material and that there were reasonable grounds for
failure to adduce such evidence in the proceeding
before the Commission, the court may order such
additional evidence to be taken before the
Commission and to be adduced upon the hearing in
such manner and upon such terms and conditions as
to the court may seem proper. The Commission may
modify its findings as to the facts by reason of the
additional evidence so taken, and it shall file with the
court such modified or new findings, which, if
supported by substantial evidence, shall be
conclusive, and its recommendation, if any, for the
modification or setting aside of the original order.
13
the Commission’s remedial power prior to the issuance of the
mandate in Chamber I, the Commission was not disabled from
sua sponte considering whether to modify the Rule’s two
conditions. See ICA § 6(c), 15 U.S.C. § 80a-6(c). Because the
Commission decided not to modify the Rule, there is no need to
consider whether, prior to issuance of the mandate, the
Commission retained authority to adopt amendments to the Rule
without first seeking a remand of the proceeding. While there
was a small risk that the Commission’s response would have
become wasted effort had the court granted the Chamber’s
petition for rehearing in Chamber I, this risk is balanced against
the benefits of allowing an agency broad scope to carry out its
mission, cf. Alabama Power, 511 F.2d at 388-89, particularly as
the goal of conserving judicial resources is served under the
Smith v. Pollin approach adopted in Alabama Power.
Accordingly, we hold that the Chamber has standing under
Article III to bring its petition challenging the Rule’s two
conditions and that the Commission had authority to consider
whether to alter the conditions in response to Chamber I prior to
the issuance of the mandate.
III.
Section 553 of the APA requires that an agency give notice
of a proposed rule setting forth “either the terms or substance of
the proposed rule or a description of the subjects and issues
involved,” 5 U.S.C. § 553(b), and “give interested persons an
opportunity to participate in the rule making through submission
of written data, views, or arguments with or without opportunity
for oral presentation,” id. § 553(c). Among the information that
must be revealed for public evaluation are the “technical studies
and data” upon which the agency relies. See Solite Corp. v.
EPA, 952 F.2d 473, 484 (D.C. Cir. 1991).
14
Congress may vest broad rulemaking authority in an
agency, and even charge the agency with “swiftly and
effectively implementing [a] national policy,” Natural Res. Def.
Council, Inc. v. SEC, 606 F.2d 1031, 1050 (D.C. Cir. 1979)
(“NRDC”), but on remand the agency remains bound by the
APA’s notice and comment requirements, see Simmons v. ICC,
757 F.2d 296, 300 (D.C. Cir. 1985); cf. West Virginia v. EPA,
362 F.3d 861, 869 (D.C. Cir. 2004). Although judicial review
of informal rulemaking is generally limited in scope, see NRDC,
606 F.2d at 1050, and is deferential when rulemaking implicates
the agency’s expertise, see Fresno Mobile Radio, Inc. v. FCC,
165 F.3d 965, 971 (D.C. Cir. 1999), more exacting review may
be required when the presumption of regularity is rebutted, as
may occur when the agency arrives at an identical result on
remand under circumstances that throw into question the
regularity of its proceedings, see NRDC, 606 F.2d at 1049 n.23;
Food Mktg. Inst. v. ICC, 587 F.2d 1285, 1289-90 (D.C. Cir.
1978); see also Citizens to Preserve Overton Park v. Volpe, 401
U.S. 402, 420 (1971). Reviewing the procedures through which
agencies develop legislative rules falls within the court’s
“special area[s] of competence” and generally “contributes to
the rationality and fairness of agency decisionmaking without
detracting unduly from its effectiveness.” NRDC, 606 F.2d at
1049; see Envtl. Def. Fund, Inc. v. Ruckelshaus, 439 F.2d 584,
598 (D.C. Cir. 1971).
Where the court does not require additional fact gathering
on remand, as in Chamber I, 412 F.3d at 145, the agency is
typically authorized to determine, in its discretion, whether such
fact gathering is needed, see Sierra Club v. EPA, 325 F.3d 374,
382 (D.C. Cir. 2003) (citing Nat’l Grain & Feed Ass’n v.
OSHA, 903 F.2d 308, 310-11 (5th Cir. 1990)), and how it
should be accomplished, see NRDC, 606 F.2d at 1055. If the
agency determines that additional fact gathering is necessary,
then notice and comment are typically required. See Action on
15
Smoking and Health v. Civil Aeronautics Bd., 713 F.2d 795,
799-800 (D.C. Cir. 1983); cf. Air Transp. Ass'n of Am. v. FAA,
169 F.3d 1, 7 (D.C. Cir. 1999); Ass’n of Data Processing Serv.
Orgs., Inc. v. Bd. of Governors of the Fed. Reserve Sys., 745
F.2d 677, 684-85 (D.C. Cir. 1984).
However, further notice and comment are not required
when additional fact gathering merely supplements information
in the rulemaking record by checking or confirming prior
assessments without changing methodology, see Solite, 952
F.2d at 485, by confirming or corroborating data in the
rulemaking record, see Community Nutrition Inst. v. Block, 749
F.2d 50, 57–58 (D.C. Cir. 1984); cf. Building Indus. Ass’n of
Superior Cal. v. Norton, 247 F.3d 1241, 1246 (D.C. Cir. 2001),
or by internally generating information using a methodology
disclosed in the rulemaking record, Air Transp. Ass’n of Am. v.
Civil Aeronautics Bd., 732 F.2d 219, 224 (D.C. Cir. 1984); cf.
Portland Cement Ass’n v. Ruckleshaus, 486 F.2d 375, 393 (D.C.
Cir. 1973). For example, in Solite, the agency’s explanation of
a rule rested on a survey, which was not part of the rulemaking
record, that the agency substituted for an older report in the
rulemaking record. Solite, 952 F.2d at 481. The court stated
that “consistent with the APA, an agency may use
‘supplementary’ data, unavailable during the notice and
comment period, that ‘expands on and confirms’ information
contained in the proposed rulemaking and addresses ‘alleged
deficiencies’ in the pre-existing data, so long as no prejudice is
shown.” Id. at 484 (quoting Community Nutrition, 748 F.2d at
57-58) (alterations omitted). Such “supplementary”
information, the court explained in Community Nutrition, is
distinct from “provid[ing] entirely new information critical to
the [agency]’s determination.” Community Nutrition, 749 F.2d
at 57–58 (citations omitted). When the agency relies on
supplementary evidence without a showing of prejudice by an
interested party, see Solite, 952 F.2d at 484; Community
16
Nutrition, 748 F.2d at 58, the procedural requirements of the
APA are satisfied without further opportunity for comment,
provided that the agency’s response constitutes a “logical
outgrowth” of the rule initially proposed, see Envtl. Integrity
Project v. EPA, 425 F.3d 992, 996 (D.C. Cir. 2005); Ne. Md.
Waste Disposal Auth. v. EPA, 358 F.3d 936, 952 (D.C. Cir.
2004).
In essence, the question is whether “at least the most
critical factual material that is used to support the agency’s
position on review . . . [has] been made public in the proceeding
and exposed to refutation.” Ass’n of Data Processing, 745 F.2d
at 684; see Air Transp. Ass’n, 169 F.3d at 7. By requiring the
“most critical factual material” used by the agency be subjected
to informed comment, the APA provides a procedural device to
ensure that agency regulations are tested through exposure to
public comment, to afford affected parties an opportunity to
present comment and evidence to support their positions, and
thereby to enhance the quality of judicial review. See Int’l
Union, United Mine Workers of Am. v. Mine Safety & Health
Admin., 407 F.3d 1250, 1259 (D.C. Cir. 2005). These
considerations are no less relevant when an agency on remand
considers whether to modify a rule pending on appeal. See
Simmons, 757 F.2d at 300.
The Commission maintains that section 553 did not require
further notice and comment in response to Chamber I for two
reasons: First, the Rule’s two conditions were set out in
materially the same terms in the notice of proposed rulemaking,
see Investment Company Governance, Release No. 26,323, 69
Fed. Reg. 3472, 3473 (Jan. 23, 2004) (“NOPR”), thus providing
all interested parties the opportunity to comment on the
proposed amendments and specifically on their costs, see id. at
3481. Second, although the Commission relied on materials not
made subject to public comment under section 553(c), the
17
materials were “publicly available” and merely supplemented
data in the rulemaking record that had been subject to public
comment. See Response Release, 70 Fed. Reg. at 39,391. We
agree with the Commission’s first point, because the NOPR
provided adequate notice, but not the second, because the extra-
record materials did not merely supplement the rulemaking
record without prejudice to the Chamber, and the public
availability of those materials, in this instance, does not merit an
exception to the comment requirement of section 553(c). We
therefore do not reach the Chamber’s contention that the
Commission’s decision to forgo further notice and comment and
rely on extra-record materials was arbitrary and capricious
under the APA. Cf. Air Transp. Ass’n, 169 F.3d at 8.
In Chamber I, the court held that the Commission, in order
to satisfy “its statutory obligation” under ICA § 2(c), 15 U.S.C.
§ 80a-2(c), would need “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.” Chamber I, 412 F.3d at 144. Given this
general instruction, the Commission was not required under
section 553(b) to give further notice of the two conditions. The
NOPR identified the amendments to the Exemptive Rules,
proposed the 75% independent director and independent chair
conditions, id., and solicited comments and empirical data on
costs. See NOPR, 69 Fed. Reg. at 3473. In relevant part, the
NOPR stated:
We do not anticipate that these proposals will have a
significant effect on efficiency, competition and
capital formation with regard to funds because the
costs associated with the proposals are minimal and
many funds have already adopted some of the
proposed practices. . . . We request comments on
whether the proposed rule amendments, if adopted,
18
would promote efficiency, competition, and capital
formation. Will the proposed amendments or their
resulting costs materially affect the efficiency,
competition, and capital formation of funds?
Comments will be considered by the Commission in
satisfying its responsibilities under section 2(c) of the
Investment Company Act. Commenters are requested
to provide empirical data and other factual support for
their views to the extent possible.
Id. The NOPR thus fully informed interested parties of the two
conditions and expressly requested comments on costs so that
the Commission would be in a position to comply with ICA
section 2(c). See Envtl. Integrity Project, 425 F.3d at 996.
The Commission’s extensive reliance upon extra-record
materials in arriving at its cost estimates, and thus in
determining not to modify the two conditions, however,
required further opportunity for comment under section 553(c).
The Commission justified its decision not to reopen the
comment period on the ground that “the information in the
existing record, together with publicly available information
upon which we may rely, is a sufficient base on which to rest the
Commission’s consideration of the deficiencies identified by the
Court.” Response Release, 70 Fed. Reg. at 39,391 (emphasis
added); see also id. at 39,392 n.24. To the extent the
Commission suggests that the “publicly available” extra-record
materials merely supplemented the rulemaking record, which
alone would have been sufficient to allow the Commission to
estimate the costs of the two conditions, it ignores what is
obvious from the Response Release.
To develop cost estimates for the Rule’s two conditions, the
Commission relied on privately produced “Management
Practice Inc. Bulletin[s],” id. at 39,392 nn. 24, 28, 30; id. at
19
39,393 nn. 33, 43; id. at 39,394 n.48; id. at 39,395 n.73, and a
nonpublic survey of compensation and governance practices in
the mutual fund industry that is summarized in one of these
bulletins, id. at 39,392 n.28. Neither the bulletins nor the survey
were part of the rulemaking record. Nor did the Commission
identify the bulletins as materials on which it typically relies in
rulemakings. Compare id. at 39,394. Yet these extra-record
materials supply the basic assumptions used by the Commission
to establish the range of costs that mutual funds are likely to
bear in complying with the two conditions. See id. at 39,392.
The bulletins constitute the only source of information on the
number of directors serving on the boards of most mutual funds,
id. n.24, the median annual salaries for directors, id. n.28
(summarizing the “widely used” survey), and the rough
breakdown between boards overseeing a large number of
individual funds and boards overseeing a small number of
funds, id. n.30. With these three assumptions — average
number of board members, average salary, and average number
of funds overseen by an individual director — the Commission
was able to “estimate the annual compensation cost per fund”
of the 75% independent director requirement from $4,779 for
large fund complexes to $37,500 for boards overseeing only one
fund. Id. at 39,392-93.
When the Commission does refer to information in the
rulemaking record with regard to the per fund cost calculation
for the 75% independent director condition, see id. at 39,393
n.31, the Commission uses this data to bolster estimates based
upon the extra-record materials, and not the other way around.
Specifically, the Commission, in referring to two letters in the
rulemaking record, “note[s] that commentators’ estimated costs
of paying new independent directors ranged from $4000 to
$20,000, which are roughly comparable with and do not exceed
our estimated ranges.” Id. (citing letters of New Alternatives
Fund, Inc. (Feb. 9, 2004) and Independent Directors of Flaherty
20
& Crumrine Preferred Income Opportunity Fund Inc. (Feb. 23,
2004)). But comparing the range derived from the record data
with the range derived from the extra-record data implies that
the two ranges are comparable. The ranges are not comparable
because the two letters, which are cited as the source of the
$4,000 and $20,000 figures, refer only to boards overseeing
“small” and “small to mid-sized funds.”
Hence, the $4,000 to $20,000 range derived from the
rulemaking record is comparable only to the $37,500 figure that
the Commission estimated as the per fund cost for boards
overseeing a single fund. This comparison of the $37,500
estimate and the $4,000 to $20,000 range suggests that the
Commission, acting conservatively, may have overestimated the
per fund cost for boards overseeing only a few funds. See
Response Release, 70 Fed. Reg. at 39,392. However, the
Commission points to no data in the rulemaking record to
support its per fund cost estimate for compensation of
independent directors overseeing a large number of funds. At
best, the rulemaking record supports only one end of the
Commission’s estimated range; the cost estimate for boards
overseeing a large number of funds appears entirely derived
from the extra-record materials. See id. 39,392 n.28. The
rulemaking record, then, serves to supplement the extra-record
data by providing a cross-check for only the Commission’s
estimate for small fund families.
Other aspects of the Commission’s decision illustrate that
it treated extra-record data as primary, rather than
supplementary, evidence. Extra-record sources are essential to
the Commission’s cost estimate for the independent chair
condition, which is based on estimates of the cost of
compensation for independent directors. See id. at 39,395.
With respect to the ancillary, non-compensation costs of the
conditions, while the nature of the Commission’s estimates is
21
somewhat different — because they are largely based upon such
things as the prevailing rates for legal, financial, and other
services, matters with which Commission Members are likely
to be familiar and which are less susceptible to reasonable
disagreement — extra-record data is similarly essential to these
estimations to the extent they are affected by the Commission’s
predictions about how funds would come into compliance and
how independent directors will behave. See, e.g., id. at 39,394.
Thus, even with respect to ancillary costs, section 553(c)
required that interested parties have the opportunity to comment
prior to the agency’s final decision.
On appeal, the Commission maintains, relying on Solite,
952 F.2d at 484, and Building Industry, 247 F.3d at 1246, that
the extra-record materials simply filled gaps in the rulemaking
record and “only confirmed the findings delineated in the
[NOPR].” Respondent’s Br. at 46. By this, the Commission
suggests that the extra-record materials were “supplementary”
— not in the sense of being unnecessary support for the
Commission’s cost estimates — but in the sense of filling the
gap left in the rulemaking record after the Commission had
solicited public comment on the costs of the proposed
amendments. The NOPR requested such cost data and stated
that the Commission expected “the costs associated with the
proposals to be minimal.” 69 Fed. Reg. at 3473. However,
neither Solite, 952 F.2d at 484, nor Building Industry, 247 F.3d
at 1246, suggest that an agency generally may rely, without
affording comment, on data critical to support a rule solely
because the existing record contains a deficiency that extra-
record data might cure.
Rather, for extra-record data to be “supplementary,” it must
clarify, expand, or amend other data that has been offered for
comment. See Air Transp. Ass’n, 169 F.3d at 8. In Solite, the
agency relied upon an updated and expanded extra-record study
22
that was based upon a “methodology . . . that did not change
significantly from the proposed notices,” giving the petitioners
“ample opportunity to criticize the [agency’s] approach.” See
952 F.2d at 485. In Building Industry, the agency relied upon
a comprehensive empirical study that “confirmed the findings
delineated in the proposal,” was supported by data in the record,
and “provided additional support for that hypothesis.” See 247
F.3d at 1246 (emphasis added). Similarly, the Commission’s
reliance on the statement in Association of Data Processing
“that the ‘administrative record’ might well include crucial
material that was neither shown to nor known by the private
parties in the proceeding,” 745 F.2d at 684, is misplaced, for the
court was addressing judicial review of all informal agency
actions, including adjudications under the arbitrary and
capricious standard, 5 U.S.C. § 706, not addressing an agency’s
independent requirement to provide notice and comment under
section 553(c). See Ass’n of Data Processing, 745 F.2d at 683-
84.
The Commission also maintains that it was free to use
extra-record data in its response because the Chamber has not,
as we have required, shown that it was prejudiced by its lack of
opportunity to comment. See Solite, 952 F.2d at 484 (citing
Community Nutrition, 749 F.2d at 57-58, and Air Transp. Ass’n,
732 F.2d at 224); see also Air Canada v. Dep’t of Transp., 148
F.3d 1142, 1156-57 (D.C. Cir. 1998) (citing 5 U.S.C. § 706).
To show prejudice, those protesting the use of supplementary
information might “point to inaccuracies in the [supplemental]
data,” Solite, 952 F.2d at 484, show that the agency “hid or
disguised the information it used, or otherwise conducted the
rulemaking in bad faith,” id., or “indicate with ‘reasonable
specificity’ what portions of the [data] it objects to and how it
might have responded if given the opportunity,” Air Transp.
Ass’n, 169 F.3d at 8. The court has not required a particularly
robust showing of prejudice in notice-and-comment cases,
23
holding that “an utter failure to comply with notice and
comment cannot be considered harmless if there is any
uncertainty at all as to the effect of that failure.” Sugar Cane
Growers Co-op. of Fla. v. Veneman, 289 F.3d 89, 96 (D.C. Cir.
2002) (explaining the standard of McLouth Steel Prods. Corp.
v. Thomas, 838 F.2d 1317, 1324 (D.C. Cir.1988)); see also
Sprint Corp. v. FCC, 315 F.3d 369, 376-77 (D.C. Cir. 2003).
Although the instant case does not involve the outright dodge of
APA procedures that led the court to permit a limited showing
of prejudice, see McLouth Steel Prods. Corp., 838 F.2d at 1323-
24, the Chamber has offered objections and studies creating
enough “[un]certainty whether petitioner’s comments would
have had some effect if they had been considered,” id. at 1324,
to show prejudice.
To be clear, the requirement, deriving from sections 553(c)
and 706 that an agency may rely on supplemental materials to
fill gaps in the rulemaking record only when there is no
prejudice to the interested parties does not mean parties can
withhold relevant data and blindside the agency on appeal.
When, after an agency explains the basis for its preliminary
conclusions by reference to the information on which it has
relied and requests data regarding its conclusions, and the
agency concludes no such data (or no data the agency concludes
is reliable) has been produced during the comment period, the
agency may develop data along the lines it has proposed to
fulfill its statutory obligations without further public comment.
See Solite, 952 F. 2d at 484-85. In light of the notice provided,
there is no fair-comment prejudice to interested parties under
section 553(c) even if the extra-record materials serve as the
crucial confirmation of the agency’s preliminary conclusions,
see Building Indus., 247 F.3d at 1246, or even as the
compelling reason for the agency’s modification of its
preliminary conclusion, see Solite 952 F.2d at 484-85. A
contrary rule would provide a perverse incentive for parties
24
opposing a rule to withhold data in order to seek vacation of the
rule on appeal.
This is not the situation here. The Commission’s bare
request for information on costs and its expectation that these
costs would be “minimal” did not place interested parties on
notice that, in the absence of receiving reliable cost data during
the comment period, the Commission would base its cost
estimates on an extra-record summary of extra-record survey
data that, although characterized as “a widely used survey,” was
not the sort, apparently, relied upon by the Commission during
the normal course of its official business. For purposes of
section 553(c), it is one thing to suggest that members of the
mutual fund industry are familiar with an extra-record survey
and quite another thing to give notice that the Commission
would rely on a summary of that survey as set forth in the
bulletins. The Chamber’s failure to critique the extra-record
bulletins and summarized survey until this appeal indicates that
it had no reason to anticipate the Commission’s ultimate
reliance on those materials.
Moreover, the rulemaking record closed almost a year
before the Commission returned to the cost issue in July 2005,
and during that period more funds had adopted the Rule’s
conditions. See Response Release, 70 Fed. Reg. at 39,391,
39,398; see id. at 39,407 & n.23 (Atkins, Comm’r, dissenting).
When the Commission decided not to reopen the rulemaking
record, individual mutual funds had offered to provide
information on their actual implementation costs and the
Investment Company Institute had offered to gather such data
from its membership. See id. The Chamber alerted the
Commission that the actual implementation data would identify
how funds had adopted the 75% independent director condition
and could indicate whether independent director’s fees had
increased and whether additional staff had been hired in light of
25
the added costs for the fund.
The Commission would rebut the Chamber’s assertions of
prejudice by pointing out that the Chamber has not suggested
the implementation cost data would show that the
Commission’s cost estimates are materially inaccurate. This is
not the relevant test of prejudice under our precedent, which
does not require a showing that the Commission would have
reached a different result. See, e.g., Sprint, 315 F.3d at 376-77.
While the Chamber’s section 553(c) challenge focuses on the
procedural faults of the Commission’s action, with respect to
which the Chamber maintains it had no burden to show such
prejudice because it had no knowledge of the specific extra-
record information until the Commission relied upon such
information in its final decision, see Air Transp. Ass’n, 169 F.3d
at 8, the Chamber proffered specific and credible objections to
the soundness of the Commission’s estimates and hence to its
decision not to modify the two conditions. See id.; Sprint, 315
F.3d at 377. Specifically, the Chamber maintains that the
Commission’s cost estimates were predicated upon an
assumption that the extra-record survey summarized in an extra-
record bulletin provides information on the salaries solely of
independent directors, see Response Release, 70 Fed. Reg. at
39,392 n.28, which if incorrect “would have depressed the
overall salary data and potentially seriously undermined this
important cost of the rule,” Petitioner’s Br. at 46. Cf. Cent. &
S. Motor Freight Tariff Ass’n v. ICC, 777 F.2d 722, 737 (D.C.
Cir. 1985). Although the Chamber also identifies data
regarding small funds that it would have presented had it been
afforded an opportunity to comment, only data that was
unavailable during the comment period is relevant here as the
NOPR specifically requested cost data; the actual
implementation data, however, would either lend support or not
to the Chamber’s position that the Commission understated the
potential ill effects of the two conditions on smaller mutual
26
funds. Cf. Air Transp. Ass’n, 169 F.3d at 8. Under our
precedents, the Chamber need not prove that its comments
would have persuaded the Commission to reach a different
outcome. The Chamber’s demonstration that it had something
useful to say about this critical data is sufficient to establish
prejudice.
In sum, the combination of circumstances — inadequate
notice that the Commission would base its cost estimates for the
two conditions on “publicly available” extra-record materials on
which it did not typically rely in rulemakings; the
Commission’s acknowledgment that the rulemaking record
contained gaps and did not include reliable cost data; the
availability of additional implementation data for the period
between the close of the rulemaking record and the
Commission’s response to Chamber I as more funds adopted
the conditions; the Chamber’s colorable claim that the
Commission’s failure to consider such implementation data
harms its investment choices — suffices to show that the
Chamber has been prejudiced by the Commission’s reliance on
materials not in, nor merely “supplementary” to, the rulemaking
record. See Solite, 952 F.2d at 484; Community Nutrition, 748
F.2d at 57-58.
The Commission seeks to mitigate its procedural burdens
in two ways. First, the Commission suggests that public
comment was not necessary because the extra-record materials
on which it relied were “publicly available.” See Response
Release, 70 Fed. Reg. at 39,391. In some instances, “publicly
available” information, such as “published literature in the
fields relevant to the [agency’s] proposal,” may be so obviously
relevant that requiring it be specifically noticed and included in
the rulemaking record would advance none of the goals of the
APA, see RICHARD J. PIERCE, ADMINISTRATIVE LAW TREATISE
§ 7.3, at 436-38 (2004), such as improving the quality of the
27
information used by the agency, ensuring fairness to affected
parties, or enhancing the quality of judicial review, cf. Sprint,
315 F.3d at 373. The public availability of such information
might fall into an implied exception to the general requirement
that extra-record data critical to support a legislative rule be
subject to public comment, see Community Nutrition, 749 F.2d
at 57-58, or, alternatively, go towards negating the petitioner’s
claims of prejudice when such extra-record information is used
to cure deficiencies in the rulemaking record. Neither
circumstance is present here.
On appeal, the Commission characterizes the extra-record
survey as a “widely used industry survey,” Response Release,
70 Fed. Reg. at 39,392 n.28; Respondent’s Br. at 52, noting that
an earlier version had been cited by the dissenting
commissioners, id., and pointing to the Management Practice
Inc. website as one public source for the bulletins summarizing
the results of this survey. However, the mere availability of the
extra-record bulletins on the internet is insufficient to
demonstrate that these bulletins are generally considered
reliable sources of information that should be treated as the
inevitable background source of information on the mutual fund
industry, as might be true, in other contexts, of a relevant study
in a broadly cited scientific journal. See PIERCE,
ADMINISTRATIVE LAW TREATISE § 7.3, at 436-38. Although the
Commission points out that opponents of the two conditions,
including the Investment Company Institute, have cited a broad
array of publications as the principal sources on fund director
compensation during the last decade, this does not explain why
these particular privately produced bulletins are trustworthy or
confirm that the survey is so reliable or ubiquitous that the
procedural requirements for comment should be relaxed when
these materials serve as the critical data on which the
Commission relies to assess the costs of implementing the two
conditions. See Building Indus., 247 F.3d at 1245-46; Ass’n of
28
Data Processing, 745 F.2d at 684-85; see also Int’l Union,
UAW v. OSHA, 938 F.2d 1310, 1324 (D.C. Cir. 1991) (citing
Sierra Club v. Costle, 657 F.2d 298, 398 (D.C. Cir. 1981)).
Unlike the salary surveys conducted by the Securities Industry
Association, which the Commission identified as “a source on
which we commonly rely in our rulemakings,” Response
Release, 70 Fed. Reg. at 39,394, and the Mutual Fund Fact
Book, which is a generally cited source of statistical information
relied upon by the Commission in other rulemakings, see, e.g.,
Regulation NMS, Exchange Act Release No. 34-51808, 70 Fed.
Reg. 37,496, 37,532 n.300 (2005), the bulletins received no
such commendation by the Commission in the Response
Release.
Nor are the Chamber’s claims of prejudice materially
diminished because the bulletins are “publicly available.” The
NOPR did not indicate that the Commission intended to rely on
these bulletins if reliable cost data was not produced during the
comment period, much less indicate that the Commission
considered the bulletins to be a source of reliable data for
estimating the costs of the two conditions. The fact that the
dissenting Commissioners cited a news article that summarized
an extra-record survey conducted by the publisher of the
bulletins, see Adopting Release, 69 Fed. Reg. at 46,391 n.24
(Glassman & Atkins, Comm’rs, dissenting), likewise does not
indicate that interested parties would have treated a summary of
the “widely used survey” as background information or focused
their comments on the survey. At best, notice was given that
surveys of the type typically relied upon by the Commission in
rulemakings should be addressed. In fact, one of the bulletins
was not in existence until after the rulemaking record had closed
and thus was not “publicly available” for comment. See id. at
39,393 n.43.
Nor does public access to the bulletins alter the fact that the
29
Commission had acknowledged the inadequacies of the
rulemaking record with respect to estimating costs. The
Commission’s recourse to extra-record materials indicates that
even for the more refined task of estimating direct costs
described in Chamber I, 412 F.3d at 144, the Commission
continued to view the rulemaking record as lacking reliable cost
information. Nor, finally, does the availability of the “widely
used survey” alleviate the prejudice to the Chamber when the
Commission, in light of its prior acknowledgment of the
inadequacies of the rulemaking record and the period during
which more funds had adopted the conditions, declines to
reopen the record to allow the Chamber to submit actual
implementation cost data. Although the Commission’s
judgment in relying on these extra-record sources may be well-
founded, the bulletins themselves acknowledge “wide
divergence” among the funds represented in the summarized
extra-record survey “in the methodologies used to calculate
director compensation.” Management Practice Inc. Bulletin:
More Meetings Means More Pay for Fund Directors at 1 (April
2004) (cited at 70 Fed. Reg. at 39,392 n.28). In the absence of
an explanation by the Commission, this caveat suggests that
other, possibly more reliable estimates may exist that could
have influenced the Commission’s assumptions about director
compensation, which supports the Chamber’s claim of
prejudice.
Second, the Commission justifies its choice to act without
re-opening the record by invoking the need to act swiftly:
We find that any further delay or ambiguity
surrounding implementation of the rules would
disadvantage not only investors but also fund boards
and management companies, most of which have
already begun the process of coming into compliance
with the rules. By acting swiftly and deliberately to
30
respond to the Court’s remand order, the Commission
will reduce uncertainty, facilitate better
decision-making by funds, and ultimately serve the
interests of fund shareholders.
Id. at 39,398. The Commission’s preference to proceed with the
same five Commission Members who were familiar with the
rulemaking in considering the cost estimates described in
Chamber I, see id. at 39,391, is not the type of exigent
circumstance that comes within the narrow “good cause”
exception of section 553(b)(B). See Tennessee Gas Pipeline
Co. v. FERC, 969 F.2d 1141, 1144 (D.C. Cir. 1992); Util. Solid
Waste Activities Group v. EPA, 236 F.3d 749, 754 (D.C. Cir.
2001). The exception excuses notice and comment in
emergency situations, Am. Fed’n of Gov’t Employees v. Block,
655 F.2d 1153, 1156 (D.C. Cir. 1981), where delay could result
in serious harm, see Jifry v. FAA, 370 F.3d 1174, 1179 (D.C.
Cir. 2004) (citing Hawaii Helicopter Operators Ass’n v. FAA,
51 F.3d 212, 214 (9th Cir. 1995)), or when the very
announcement of a proposed rule itself could be expected to
precipitate activity by affected parties that would harm the
public welfare, see Mobil Oil Corp. v. Dep’t of Energy, 728
F.2d 1477, 1492 (Temp. Emer. Ct. App. 1983). These exigent
circumstances are of a far different nature than the not
uncommon circumstance facing commissions when their
membership changes during the course of a rulemaking, which
may involve appeals and remands and thus extend for a period
of years. Although the Commission’s membership would
change after June 30, 2005, and the even division among the
remaining Commissioners could delay further action on the
Rule, which the Commission considered necessary to redress “a
serious breakdown in management controls,” Adopting Release,
69 Fed. Reg. at 43,379, the risk of such delay is hardly atypical
and does not satisfy the narrow exception.
31
Therefore, because the Commission relied on extra-record
material critical to its costs estimates without affording an
opportunity for comment to the prejudice of the Chamber, we
hold that the Commission violated the comment requirement of
section 553(c).
IV.
The question remains what is the appropriate remedy for
the Commission’s procedural violation under section 553(c).
The APA provides that the court shall “hold unlawful and set
aside agency action, findings, and conclusions found to be . . .
without observance of procedure required by law,” 5 U.S.C. §
706(2)(D), with “due account . . . taken of the rule of prejudicial
error,” id. § 706. Under circuit precedent, the decision to
remand or vacate hinges upon court’s assessment of “the
seriousness of the . . . deficiencies (and thus the extent of doubt
whether the agency chose correctly) and the disruptive
consequences of an interim change that may itself be changed.”
Allied-Signal, Inc. v. U.S. Nuclear Regulatory Comm’n, 988
F.2d 146, 150-51 (D.C. Cir. 1993) (citations omitted).
When the Rule was proposed, the Commission estimated
that nearly 60% of mutual funds already complied with the 75%
independent director condition. See Response Release, 70 Fed.
Reg. at 39,391 & n.18. The court stayed the effectiveness of the
Rule’s two conditions on August 10, 2005; the other
amendments to the Exemptive Rules, see Adopting Release, 69
Fed. Reg. at 46,381, were scheduled to take effect on January
15, 2006. See 17 C.F.R. § 270.0-1(a)(7)(v), (vi), & (vii) (2005).
In the meantime, more mutual funds have voluntarily adopted
the challenged conditions. See Response Release, 70 Fed. Reg
at 39,407 (Atkins, Comm’r, dissenting). In other words, the two
conditions, which were part of a larger program of regulatory
reforms adopted by the Commission to address serious conflicts
32
of interest in the mutual fund industry by changing the
“boardroom culture,” Response Release, 70 Fed. Reg. at 39,397,
have become partially operational.
The Commission’s reliance on extra-record materials to
fulfill its statutory obligation under ICA § 2(c), 15 U.S.C. §
80a-2(c), effectively acknowledges gaps in the rulemaking
record that could not be properly supplemented without further
opportunity for comment under section 553(c). Given the
circumstances described in Part III of this opinion, a further
remand to the Commission without the opportunity for
comment would be unproductive. This suggests that vacation
of the 75% independent director and independent chair
conditions would be appropriate.
However, although vacating the two conditions would be
less disruptive than if they had taken effect on January 15, 2006,
see Allied Signal, 988 F.2d at 150-51, a significant portion of
the mutual fund industry appears to have come into substantial
compliance with the Rule. This compliance tends to suggest
that immediate vacation of the two conditions risks substantial
disruption to the mutual fund industry because of the resultant
inconsistent governance practices that would arise within the
industry, which also might sow confusion in the investing
public. Also, the Commission’s decision to rely upon extra-
record data without reopening the rulemaking record for
comment does not, of itself, indicate that the Commission’s cost
estimates are incorrect, much less that its conclusion, under ICA
§ 2(c), that the costs of implementing the two conditions do not
outweigh the benefits of adopting the two conditions. See id.
The Commission is in a better position than the court to
assess the disruptive effect of vacating the Rule’s two
conditions. Therefore, the court will vacate the 75%
independent director and independent chair conditions of the
33
Rule but, given the court’s expectation in Chamber I that the
Commission could “readily” address costs, 412 F.3d at 144,
withhold the issuance of its mandate pursuant to Rule 41(b) for
ninety days. Such an approach is not unprecedented. See
Hazardous Waste Treatment Council, 886 F.2d at 371; Nat’l
Coal. Against Misuse of Pesticides, 809 F.2d at 884-85; Indep.
U.S. Tanker Owners Comm., 809 F.2d at 855; Simmons, 757
F.2d at 300; see also Rodway v. U.S. Dep’t of Agric., 514 F.2d
at 817-18. This approach will afford the Commission an
opportunity to reopen the record for comment on the costs of
implementing the two conditions. Within ninety days the
Commission shall file a status report with the court, unless the
Commission shall have prevailed on a motion to modify,
accelerate, or postpone the mandate, and upon further order the
mandate will issue.
Accordingly, we grant the Chamber’s petition, without
reaching its other challenges to the Remand Release, vacate the
two conditions, but withhold the issuance of the mandate for
ninety days as set forth in this opinion.