For the third time, a federal court has sent rules governing the mutual fund industry back to the Securities and Exchange Commission for further reflection on the costs of the changes.

In a 3-0 ruling, the U.S. Court of Appeals for the District of Columbia Circuit voided SEC regulations mandating that fund board chairman and three quarters of fund directors have no direct ties to the manager of the fund . The court said that the agency violated the Administrative Procedures Act by failing to adequately examine the potential costs to the mutual fund industry before adopting the rules.

The court said that it would wait 90 days before invalidating the rules, in order to give the SEC another chance to make its case and hear comments from the public. In the 33-page ruling, the court said that the SEC relied on incomplete data for its estimates of the potential costs of the rules.

SEC Chairman Christopher Cox said that the agency would comply with the court's decision.

The SEC originally adopted the rule in the summer of 2004, when the $7 trillion mutual fund industry was embroiled in a series of late-trading scandals. Shortly thereafter, the court ruled that the regulator did have the authority to adopt the rule, but first made the argument that the commission hadn't truly considered the costs of such a rule. Under that mandate, it was estimated that roughly 3,700 funds would have to seek new chairmen.

A divided SEC panel again adopted the rules on June 29, 2005, one day before Cox's predecessor, William Donaldson, resigned from the position. A case brought by the U.S. Chamber of Commerce had been settled earlier that same month, resulting in a court order for the SEC to consider alternatives to the rule.In reaffirming the rules a little more than nine months ago, the SEC panel said that alternatives, such as having a given mutual fund disclose whether or not it had an independent chairman, would be ineffective.

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