Opinion ID: 186464
Heading Depth: 2
Heading Rank: 2

Heading: The Commission's Authority under the ICA

Text: 12 The Chamber maintains the Commission did not have authority under the ICA to condition the exemptive transactions as it did. First the Chamber observes rather generally that matters of corporate governance are traditionally relegated to state law; and second, it maintains these particular conditions are inconsistent with the statutory requirement that 40% of the directors on the board of an investment company be independent, see 15 U.S.C. § 80a-10(a). The Commission points to § 6(c) of the ICA, 15 U.S.C. § 80a-6(c), as the source of its authority.  That provision conspicuously confers upon the Commission broad authority to exempt transactions from rules promulgated under the ICA, subject only to the public interest and the purposes of the ICA. 13 The thrust of the Chamber's first contention is that § 6(c) should not be read to enable the Commission to leverage the exemptive authority it clearly does have so as to regulate a matter, namely, corporate governance, over which the states, not the Commission, have authority. For support the Chamber relies principally upon two cases from this circuit concerning the Commission's authority under the Securities and Exchange Act of 1934. Neither of those cases, however, arose from an exercise of authority analogous to the rulemaking here under review. 14 In Business Roundtable v. SEC, 905 F.2d 406, 416-17 (1990), we held the Commission did not have authority under the 1934 Act to bar a stock exchange from listing common stock with restricted voting rights. The Commission had invoked the provision of that Act authorizing it to make rules otherwise in furtherance of the purposes of the Act. Id. at 410. Reasoning that unless the legislative purpose is defined by reference to the means Congress selected, it can be framed at any level of generality, and the means the Congress selected in the 1934 Act was disclosure, id., we vacated the rule because it went beyond disclosure to regulate the substance of what the shareholders may enact, id. at 411. 15 Business Roundtable is of little help to the Chamber because, as the Commission documents, the purposes of the ICA include tempering the conflicts of interest inherent in the structure of investment companies, Burks, 441 U.S. at 480, 99 S.Ct. 1831; see also 15 U.S.C. § 80a-1(b) (policy and purposes of [ICA] ... shall be interpreted ... to eliminate conflicts of interest); and regulation of the governance structure of investment companies is among the means the Congress used to effect that purpose. See Burks, 441 U.S. at 479, 99 S.Ct. 1831 (ICA functions primarily to impose controls and restrictions on the internal management of investment companies) (emphases removed); id. at 484, 99 S.Ct. 1831 (in enacting ICA Congress place[d] the unaffiliated directors in the role of independent watchdogs ... who would furnish an independent check upon the management of investment companies). Moreover, the Commission's effort to enlarge the role of independent directors on the boards of investment companies accords with the structure and purpose of the ICA [both of which] indicate that Congress entrusted to the independent directors ... the primary responsibility for looking after the interests of the funds' shareholders. Id. at 484-85, 99 S.Ct. 1831. 16 In Teicher v. SEC, 177 F.3d 1016, 1019-20 (1999), we held a provision of the 1934 Act authorizing the Commission to place limitations on the activities or functions of a person convicted of securities fraud in the broker-dealer industry did not authorize it to place limitations upon the activities or functions of that person in an industry regulated under a different occupational licensing regime administered by the Commission. The Commission's authority, we reasoned, must be read with some concept of the relevant domain in mind; even the Commission did not suggest that [provision] allows it to bar one of the offending parties from being a retail shoe salesman, or to exclude him from the Borough of Manhattan. Id. at 1019. The present case is different from Teicher because here the Commission did not exercise its regulatory authority to effect a purpose beyond that of the statute from which its authority derives. 17 The Chamber's second contention is that the conditions conflict with the intent of the Congress, expressed in § 10(a) of the ICA, that 40% of the directors of an investment company be independent. See Chevron, U.S.A., Inc. v. NRDC, 467 U.S. 837, 842-43, 104 S.Ct. 2778, 81 L.Ed.2d 694 (1984) (If the intent of Congress is clear, that is the end of the matter; for the court, as well as the agency, must give effect to the unambiguously expressed intent of Congress). Section 10(a), however, states only that a fund may have no more than 60% inside directors, 15 U.S.C. § 80a-10(a), which necessarily means at least 40% must be independent and strongly implies a greater percentage may be; it speaks not at all to authority of the Commission to provide an incentive for investment companies to enhance the role of independent directors and, as the Commission is keen to point out, the challenged conditions apply only to funds that engage in exemptive transactions.