Appeals Court Delays SEC Mutual Fund Rules

The Securities and Exchange Commission won’t be able to enforce new corporate governance rules for mutual funds until after a lawsuit opposing the measures is heard, according to a federal court order Wednesday.

The Court of Appeals for the District of Columbia Circuit stayed the SEC rules, granting a motion brought by the U.S. Chamber of Commerce. The chamber is suing the SEC for the second time over the governance standards, which require that the chairman of a mutual fund board and 75% of its directors be independent.

Former SEC Chairman William H. Donaldson, in one of his last acts before leaving the agency in June, cast the deciding vote to push through the rules after the appeals court rejected them. He ignored criticism from lawmakers, former SEC officials and business groups that the agency was rushing the vote to prevent his successor from reconsidering it.

“The court’s action should prompt the commission to reconsider its decision to hastily rubber-stamp the provisions without the benefit of public comment,” Eugene Scalia, a lawyer for the Chamber of Commerce, said in a statement.

About 80% of mutual fund companies, including Fidelity Investments and Vanguard Group, the two biggest, would be forced to change chairmen under the rule. The rule was to take effect in January and will be delayed by at least four to five months even if the court ultimately decides in favor of the SEC, said Stephen Bokat, the chamber’s general counsel.

Also Wednesday, an SEC advisory committee meeting in Chicago recommended that small companies be given until 2007 to comply with a corporate governance law provision that probably will boost the fees they pay for auditing.

The SEC has extended the deadline once for companies with market capitalization under $75 million to report on their internal controls of financial reporting.