September 9, 2004

Eugene Scalia, Esq.
Gibson, Dunn & Crutcher LLP
1050 Connecticut Avenue, N.W.
Washington, DC 20036-5306

Re: Chamber of Commerce of the United States of America — Request for Stay of Effectiveness of Conditions to Reliance upon Certain Exemptive Rules Under the Investment Company Act

Dear Mr. Scalia:

The Commission has directed me to send you this response to your letter dated September 2, 2004, requesting, on behalf of the Chamber of Commerce of the United States of America, a stay of the effectiveness of certain provisions of recently adopted amendments to exemptive rules under the Investment Company Act. ¹ We note at the outset that although the effective date of these amendments was September 7, 2004, the Commission has already provided in the rule amendments themselves for a delay of the date for compliance with the new provisions of more than sixteen months, until January 16, 2006.

On July 27, 2004, the Commission adopted amendments to ten exemptive rules under the Investment Company Act. ² These exemptive rules allow funds that rely upon them to engage in transactions often involving conflicts of interest that would otherwise be prohibited under the Investment Company Act. Among other things, the amendments put two conditions upon a fund's reliance upon any of those exemptive rules: (i) at least 75 percent of the directors of the fund must be independent directors (or, if the fund board has only three directors, all but one ofthe directors must be independent directors), and (ii) the chairman of the board must be an independent director.

On September 2, 2004, the Chamber of Commerce filed a complaint in the United States District Court for the District of Columbia challenging these rule amendments. Case No. 04-CV-01522 (D.D.C. filed Sept. 2, 2004). The complaint alleges that by including in the rule amendments the two conditions described above, the Commission exceeded its statutory authority; failed adequately to justify its exercise of its rulemaking authority; and otherwise engaged in rulemaking that was arbitrary, capricious and not in accordance with law. The complaint asks that the independent chair and 75 percent independent director conditions be declared unlawful and set aside, and that the Commission be enjoined from giving effect to the conditions. On September 2, 2004, the Chamber also filed a petition for review of the independent chair and 75 percent independent director conditions in the United States Court of Appeals for the District of Columbia Circuit. Case No. 04-1300 (D.C. Cir. filed Sept. 2, 2004).

In connection with the filing of the complaint and the petition for review, you delivered a letter on September 2, 2004 on behalf of your client, the Chamber, to me as the Commission's General Counsel, requesting that the Commission formally stay the effective date of the independent chair and 75 percent independent director conditions pending the outcome of the litigation or, alternatively, extend the conditions' January 16, 2006 compliance date by the period of time the litigation remains before the courts. For the reasons discussed below, the Commission has determined not to stay the effectiveness of these conditions.

First, the Chamber has provided an insufficient basis to show that irreparable harm, or even any substantial hardship, would be caused if the Commission does not immediately extend the already lengthy sixteen month period for funds to meet the new conditions to qualify for exemptions under the rule amendments. Although the Chamber has stated that a failure to stay the rule amendments "would cause unnecessary cost and confusion for virtually all participants in the mutual fund industry," it has provided no evidence of any harm to any fund at this time. The letter includes no affidavits or other evidence that any fund has been or will be injured if the Commission denies the requested stay. ³ The Chamber's unsupported assertion that it will take funds "considerable time and resources" to identify, recruit, and appoint qualified directors and chairs does not provide the Commission with sufficient basis to determine that this will work a substantial hardship on the funds. Indeed, your letter states that half of the funds already meet the 75 percent independent director condition, and that 20 percent already have independent chairs — a point that undermines your statement that the rule amendments would adversely affect "virtually all" participants in the mutual fund industry. In the adopting release the Commission describes several ways in which funds might address the new conditions, some of which involve little, if any, additional cost to the funds. ⁴ Although the Chamber goes on to state that funds are threatened with irreparable harm because the rule amendments would "shift control" of funds from directors affiliated with fund advisers to independent directors, this ignores that, even if the rule amendments were stayed, a fund's reliance upon any of the ten exemptive rules is already conditioned upon its having a majority of independent directors.

We also note that the Commission has authority to grant individual exemptions to any mutual fund that does not meet the conditions of the exemptive rule if and to the extent that such exemption is necessary or appropriate in the public interest and consistent with the protection of investors and the purposes fairly intended by the policy and provisions of the Investment Company Act. The Commission has not, to date, received any request for such exemptive relief on account of the rule amendments.

The Commission, accordingly, does not believe that the Chamber has made an adequate showing of immediate harm to justify at present a stay of the January 16, 2006, compliance date. Because circumstances may change or additional evidence may be brought to its attention, however, the Commission'sdetermination is without prejudice to the ability of affected parties to seek a stay upon a proper showing.

Second, the Chamber has not made any showing, much less a strong showing, that it is likely to prevail on the merits of its challenge to the rule amendments. Although the Chamber's complaint sets forth various allegations described above, the Chamber's motion to the Commission for a stay of the rule amendments does not elaborate upon those bare allegations. Instead, the Chamber simply states that it believes it will prevail on the merits and that the complaint "identifies genuine, non-frivolous grounds for concern." In fact, the Chamber's grounds for concern were raised before the Commission in the course of the rulemaking and fully considered by the Commission when it adopted the rule amendments. The Commission also carefully considered the views of the two Commissioners who dissented from the adoption of the rule amendments. ⁵ While the Chamber may disagree with the action taken by the Commission, it has not demonstrated that the action was unlawful and is likely to be overturned. ⁶

Finally, the Commission believes that, on the present showing by the Chamber, the public interest would not be served by a stay of the rule amendments. As the Commission stated in the adopting release, ⁷ these amendments were adopted, along with a number of other initiatives, in the wake of a troubling series of enforcement actions involving mutual funds, their advisers and their affiliates. The Commission expressed concern that the enforcement actions in many cases reflected a serious breakdown in management controls. The Commission observed that, in some cases, the fund was used for the benefit of fund insiders, often the management company or its employees. In addition, theCommission noted that it had recently adopted a new rule requiring the creation of the position of fund chief compliance officer, which reports directly to the board on compliance matters. The proposed fund governance standards would complement that rule by placing fund boards in a better position to demand that management adhere to the highest of compliance standards.

The Commission considers the adoption of the rule amendments challenged here a key step in restoring investor confidence in U.S. mutual funds, a matter of substantial national interest. As noted above, each of the ten exemptive rules allows funds to engage in transactions involving potential conflicts of interest that would otherwise be prohibited by the Investment Company Act. It is entirely appropriate for the Commission to impose conditions upon funds that seek to engage in such transactions in order to insure that the interests of investors are protected. When the Commission adopted the rule amendments, it effectively "stayed" their application for sixteen months. On the present showing, the Commission believes that a further stay is not warranted and that it is in the interest of investors for the compliance date not to be postponed. ⁸

¹ We note that, although your letter was not filed with the Secretary of the Commission and was not in the form of a motion, the Commission has determined to review your letter as a motion by the Chamber of Commerce for a stay of the rule amendments.

² Investment Company Governance, Investment Company Act Release No. 26520 (July 27, 2004) [69 FR 46378 (Aug. 2, 2004)] .

³ We note that Rule 18 of the Federal Rules of Appellate Procedure, which governs motions for stays before the appellate courts, requires affidavits or other sworn statements to support facts subject to dispute.

⁴ See, e.g., Investment Company Governance at 46387 (if independent directors do not constitute at least 75 percent of a fund's board, the fund may decrease the size of its board and allow some interested directors to resign).

⁵ Those Commissioners likewise dissented from the denial of your request for a stay.

⁶ As the Commission pointed out in the adopting release, these amendments expand upon the fund governance amendments adopted in 2001 which make the exemptive rules available only to funds that have a majority independent board. Investment Company Governance at 46378. The validity of the 2001 amendments has never been challenged.

⁷ Investment Company Governance at 46378-80.

⁸ Because the Commission is denying the Chamber's request for a stay for the reasons stated in this letter, the Commission does not address in this letter any other possible grounds for denial.

http://www.sec.gov/rules/final/ccusastay090904.htm