Articles

Client Alert: Twenty Years Later, the SEC Erases Vacated Fund Governance Requirements from Rule 0-1(a)(7)

Who should read this: Registered investment companies and business development companies (BDCs), fund boards and independent directors, fund counsel, chief compliance officers, investment advisers and fund managers, and BDC management teams and boards responsible for governance and compliance oversight.
 

The Short Version

On August 4, 2026, the Securities and Exchange Commission adopted technical amendments to Rule 0-1(a)(7) under the Investment Company Act of 1940.[1] The amendments delete two board governance conditions that the D.C. Circuit struck down in 2006: the requirement that independent directors make up at least 75 percent of a fund’s board, and the requirement that an independent director chair the board. Because those conditions have been legally inoperative for two decades, the amendments change nothing in practice. They simply bring the Code of Federal Regulations into line with the law as it has actually stood since July 2006, restoring the rule’s original standard: a simple majority of independent directors. The amendments took effect on August 6, 2026, upon publication in the Federal Register.
 

How the Rule Text Fell Out of Step with the Law

Rule 0-1(a)(7) conditions a fund’s ability to rely on ten widely used exemptive rules under the 1940 Act upon compliance with specified board governance standards. When the Commission adopted the rule in 2001, its centerpiece was a requirement that a majority of the fund’s directors not be “interested persons” of the fund within the meaning of Section 2(a)(19).[2]

In 2004, the Commission raised the bar. Over vigorous dissent, it amended the rule to require that independent directors constitute at least 75 percent of the board and that an independent director serve as board chair.[3] The amendments drew an immediate challenge, and they did not survive it. In Chamber of Commerce v. SEC, the D.C. Circuit vacated both provisions, holding that the Commission violated the Administrative Procedure Act by relying on cost data outside the rulemaking record without giving the public a chance to comment on it.[4] The court’s mandate issued on July 6, 2006. From that date forward, neither the 75 percent requirement nor the independent chair requirement had any legal effect.

The Commission, however, never revised the rule text. For twenty years, anyone consulting the Code of Federal Regulations saw governance conditions that no fund was actually required to satisfy. The 2026 amendments finally close that gap.
 

What the Amendments Do (and Do Not Do)

The amendments strike the vacated 75 percent and independent chair provisions from the rule text and reinstate the pre-2004 formulation requiring a majority of independent directors. They apply to registered investment companies and BDCs alike. Because the changes merely conform the printed rule to a binding judicial mandate, the Commission adopted them without notice and comment under the APA’s good cause exception, and they became effective immediately upon Federal Register publication.[5]

Just as important is what the amendments leave alone. The portions of the 2004 rulemaking that the D.C. Circuit did not vacate remain fully in force. Boards relying on the exemptive rules must still conduct annual self-assessments, independent directors must still meet in quarterly executive sessions, and independent directors retain express authority to hire employees and experts of their choosing. The longstanding requirements that independent directors select and nominate other independent directors, and that any counsel to the independent directors qualify as independent legal counsel, likewise continue to apply.
 

Practical Implications

• No new obligations. Funds have needed only a majority-independent board to rely on the exemptive rules since 2006. Nothing about that changes.
• Voluntary structures may stay. Many fund complexes adopted supermajority-independent boards or independent chairs as a matter of governance practice, and institutional investors and proxy advisers continue to view those structures favorably. The amendments do not require unwinding them, and most boards will see no reason to do so.
• Update documents that quote the old text. Compliance manuals, board governance guidelines, D&O questionnaires, registration statement disclosures and counsel opinions sometimes recite Rule 0-1(a)(7) verbatim. Any document quoting the 75 percent or independent chair language should be revised to reflect the current rule text.
• Confirm the surviving conditions are covered. The amendments are a useful prompt to verify that board calendars and policies address the requirements that remain: annual self-assessments, quarterly executive sessions of the independent directors and independent director control over the selection and nomination of their successors.

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The information contained here is not intended to provide legal advice or opinion and should not be acted upon without consulting an attorney. Counsel should not be selected based on advertising materials, and we recommend that you conduct further investigation when seeking legal representation.