Notice: This opinion is subject to formal revision before publication in the

Federal Reporter or U.S.App.D.C. Reports. Users are requested to notify the

Clerk of any formal errors in order that corrections may be made before the

bound volumes go to press.

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 extrarecord 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

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.

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
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 extrarecord 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 extrarecord 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 extrarecord 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 extrarecord 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 wellfounded, 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 extrarecord 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.