A trial that will begin in a federal appeals court Friday will test whether the Securities and Exchange Commission exceeded its authority by limiting the eligibility to serve on mutual funds’ boards. The SEC regulation passed in June 2004 requires that 75% of directors be independent of the investment company in charge of the fund’s management. Previously this number was 40%. The commission’s ruling also stipulates that the chairman of a fund’s board be independent of the investment company.

"These provisions exceed the commission’s authority," said Eugene Scalia, an attorney who will act on behalf of the Chamber of Commerce in the trial. "The Securities and Exchange Commission doesn’t really have the authority to regulate corporate governance practices."

Opponents argue that increasing independence of the corporate boards usually contributes to their performance, which might also prove true with mutual funds. At the moment, funds have until Jan. 16, 2006 to comply with the new requirement.

"There’s probably a 50-50 chance the SEC will lose," said Mercer Bullard, head of fund advocacy group Fund Democracy and a former SEC attorney. "Now you have the Chamber of Commerce waging a political battle to put the fear of God into the SEC," he said.

The trial comes in the wake of loud criticism over the 2002 Sarbanes-Oxley Act administered by the SEC, passed after scandals wrecked corporate governance and mutual fund industry.