978-1285770178 Case Problem Case CPC-23-04 Part 2

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independent director requirement from $4,779 for large fund complexes to

$37,500 for boards overseeing only one fund. Id. at 39,392-93.

Specifically, the Commission, in referring to two letters in the rulemaking record,

(Feb. 9, 2004) and Independent Directors of Flaherty & Crumrine Preferred

two letters, which are cited as the source of the $4,000 and $20,000 figures, refer

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

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

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

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 extra–

record data might cure.

[10] Link to KeyCite Notes Rather, for extra-record data to be “supplementary,” it

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

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,

particularly robust showing of prejudice in notice-and-comment cases, 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

to show prejudice.

[12] Link to KeyCite Notes[13] Link to KeyCite Notes 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

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

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

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

[14] Link to KeyCite Notes 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

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 extra-record bulletin provides information on the salaries solely

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 funds.

Cf. Air Transp. Ass’n, 169 F.3d at 8. Under our precedents, the Chamber need

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

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

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;

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

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,

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

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 Commission had

acknowledged the inadequacies of the rulemaking record with respect to

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 well-founded, the bulletins themselves

acknowledge “wide divergence” among the funds represented in the summarized

Chamber’s claim of prejudice.

[15] Link to KeyCite Notes[16] Link to KeyCite Notes 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

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,

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

exception.

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).

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,

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

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.

that would arise within the industry, which also might sow confusion in the

investing public. Also, the Commission’s decision to rely upon extra-record 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

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

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.