ICI vs. CFTC - Industry's and Former Senior Regulators' Amicus Brief Support ICI
Commentary by Bob Zwirb
The Mutual Fund Directors Forum ("MFDF") and an impressive honor role of former senior officials from the SEC submitted an amicus brief in Investment Company Institute v. CFTC. The brief, in support of ICI, argues that the CFTC's new registration regime under Rule 4.5 for mutual fund advisers, which will require such advisers to register as CPOs if their funds invest in futures and swaps above a certain level, will impose significant new costs on mutual funds and negatively impact such funds' ability to implement the most efficient and beneficial investment strategies for shareholders.
The brief makes three primary points: 1) the CFTC failed to quantify the additional regulatory costs being imposed on mutual funds or to consider their impact on investors; 2) the CFTC framed the expected benefits of the new rule almost entirely in terms of its own institutional interests rather than that of investors; and 3) the new rule will inevitably lead to a reduction in the variety of investment strategies that a mutual fund can efficiently offer.
Regarding the first point, MFDF argues that the benefits that the new registration regime are supposed to achieve for investors "are already realized for mutual fund investors by virtue of the SEC's long-standing registration, disclosure, examination, and enforcement regime under the Investment Company Act and the Investment Advisers Act." As to the second point, MFDF argues that the CFTC's idea of the rule's "benefits" are rather parochial involving its need for more information (which is available in any case from the SEC) and its desire to become a more active player in the Financial Stability Oversight Council. With respect to the third point, MFDF argues that by imposing an arbitrary cap on the portion of a fund's holdings that can be invested in commodity interests, "the new rule will reduce the ability of advisers to offer such strategies efficiently to the [mutual fund] shareholders."
See: Investment Company Institute v. CFTC - Brief in Support of Appellants [U.S. Court of Appeals for the D. C. Circuit, 12-5413].
Related Cabinet News and Commentary: ICI vs. CFTC (with Zwirb Comments) (February 2, 2013); ICI vs. CFTC to Go on Appeal (with Zwirb Comment) (December 27, 2012); ICI Chamber of Commerce v. CFTC: CFTC Wins; Registration Rules for RICs Still Stand (with Zwirb Comment) (December 13, 2012).
Commentary
The CEA's express requirement that the CFTC "consider" the costs and benefits of its proposed actions is an obligation that has not always been faithfully adhered to. For example, early on it came out in a report by the CFTC's Inspector General that the cost/benefit analyses accompanying the first set of Dodd-Frank rules had been written by agency lawyers rather than by economists, as one would expect. Notwithstanding this embarrassing revelation, and the outspoken view of one commissioner that the requirement constitutes "a Sword of Damocles over regulatory agencies," a faithful fulfillment of that obligation would seem to be especially called for here given the "substantively duplicate but operationally different" regulatory requirements that the CFTC is seeking to impose upon fund advisers already regulated by the SEC.
The fundamental question, as MFDF aptly puts it, is "how the dual registration burden will be offset by any corresponding direct regulatory benefits over and above the investor protections already encompassed by the SEC's registration and disclosure authority." To answer that question requires the CFTC to not only quantify the costs and benefits of its rule, but to "determine as best it can the economic implications" of the rule. Chamber of Commerce v. SEC, 412 F.3d 133, 143 (D.C. Cir. 2005). But rather than answer that question, the CFTC, in MFDF's view, has instead "framed the expected benefits of the new rule almost entirely in terms of [its] own institutional interest[s]." This apparently was enough to pass muster with the district court; it remains to be seen whether it will suffice with the Court of Appeals.