A federal appeals court panel yesterday told the Securities and Exchange Commission to reconsider a rule that would have required mutual fund board chairmen to be independent.

The rule, which would forbid chairmen from having ties to management, was adopted by the SEC as part of its effort to restore investor confidence in the governance of mutual funds.

The U.S. Court of Appeals for the D.C. Circuit unanimously agreed with complaints by the U.S. Chamber of Commerce and two SEC commissioners, who argued that the agency failed to evaluate the rule's expense and whether there were better ways to prevent conflicts of interest.

The SEC measure, which affects about 80 percent of the $7.9 trillion industry, drew strong opposition from companies including Fidelity and Vanguard Group when the rule was passed in a 3 to 2 vote last year. It had been scheduled to take effect in early 2006.

The court sent the rule back to the SEC a week before Chairman William H. Donaldson, the measure's biggest champion, is to leave. The White House has nominated Rep. Christopher Cox (R-Calif.) to replace Donaldson. Cox's appointment requires Senate confirmation. He has not expressed a position on the issue.

Under Donaldson's watch, the agency passed more than a dozen measures related to mutual funds, as federal lawmakers and New York Attorney General Eliot L. Spitzer urged quick action to restore investor confidence after multiple trading abuses.

The chamber was strongly critical of the rule requiring an independent chairman. "The SEC failed to satisfy basic rulemaking requirements by ignoring important information about the costs -- and the consequences -- of the rule," said Stephen A. Bokat, executive vice president for the chamber's litigation unit, which filed the case.

In the 19-page ruling, Chief Judge Douglas H. Ginsburg directed the agency to analyze "the economic consequences of a proposed regulation before it decides whether to adopt the measure."

The judge added that the SEC was obliged to consider an alternative, supported by Republican Commissioners Paul S. Atkins and Cynthia A. Glassman, that would mandate that funds tell investors whether or not their board chairmen were independent.

Democratic Commissioner Harvey J. Goldschmid, who voted to support the rule last year, took comfort in the fact that the court affirmed the SEC's authority over mutual fund governance. He said the problems the appeals court cited "should be easy to remedy."

The agency is expected to hold a public meeting before Donaldson's June 30 departure, but it is unclear whether SEC staff could complete their work on the rule in time for a vote.

Goldschmid is leaving the agency as early as this summer to return to a teaching position at Columbia University's law school, though he told lawmakers last week that he might stay until the Senate confirms his successor.

The third commissioner who voted to support the rule, Democrat Roel C. Campos, is seeking renomination to the five-member panel. His term expired recently. Senate Democrats have forwarded his name to the White House. Under current rules, Campos can remain at the SEC for up to 18 months.

Mercer E. Bullard, a law professor at the University of Mississippi, called the court decision "disappointing but not surprising," since the SEC's reasoning had been roundly criticized for months. Bullard, a former agency lawyer, said that mutual funds could decide on their own to appoint independent board chairmen as an investor-friendly move while the SEC reviews its options.

Bullard added that the court ruling could spell trouble for another controversial SEC rule requiring hedge funds to register with the agency, "because the analysis there is even weaker."

The federal appeals court in Washington is considering a separate lawsuit filed by a New York hedge fund manager who argues that the SEC overstepped its authority in the registration rule. The court has not yet scheduled an oral argument in that case.