ICI vs. CFTC: Implementation of Amendments to Rule 4.5, too soon?
Commentary by Bob Zwirb
ICI filed an emergency motion seeking expedited consideration of its appeal of a federal district court's decision upholding CFTC amendments to Rule 4.5, which require advisers to certain SEC-registered investment companies ("RICs") to (a) register as CPOs by December 12, 2012 and (b) comply with various regulatory requirements within 60 days after the effective date of a "harmonization" rule that has yet to be issued. The three court filings attached represent the emergency motion, the CFTC's opposition to the motion, and ICI's reply.
See: ICI v. CFTC - Emergency Motion
See also: Response in Opposition; Emergency Reply.
Previous Commentary: ICI vs. CFTC - Industry's and Former Senior Regulators' Amicus Brief Support ICI (with Zwirb Comment).
Commentary
The rulemaking at issue here is twofold, and only one fold of it is in effect. The rule's registration provisions became effective on December 31, but the second part of the rule pertaining to recordkeeping, reporting and disclosure requirements, is awaiting the conclusion of a separate rulemaking intended to harmonize the CFTC's requirements with the requirements imposed by the SEC on investment companies registered under the Investment Company Act. The CFTC argues that there is no emergency here because many of the costs of compliance that may be borne by RICs are hypothetical, as they depend on a future rulemaking. ICI, on the other hand, argues that expedition in this case would allow the court to resolve the merits of the appeal before investment companies and their advisers were required to comply with the full panoply of CFTC regulation of CPOs.
Leaving aside the merits of the procedural motion - though it is clear that costs have already been imposed on RICs in the form of registration and gearing up for anticipated CFTC regulatory compliance - the interesting issue, which is at the heart of the litigation, is one of substance, i.e., whether the CFTC conducted an adequate economic analysis of its rule amendments. What is striking about the CFTC's position is its repeated invocation of the financial crisis as a justification for its rules. That may be strategically wise, given the lower court's reliance on the crisis for its decision upholding the CFTC's position. But the CFTC's reliance upon the "2007-2008 financial crisis," and its claim that the crisis "has been attributed in significant part to the unchecked growth in the 2000s of dark, unregulated markets in over-the-counter derivatives, including swaps," seems something of a long stretch as applied to SEC-registered investment companies.
For its part, ICI (echoing Commissioner Jill Sommers) argues that, while Congress responded to the financial crisis by requiring numerous new rules about swaps when it enacted Dodd-Frank, it did not require the rule at issue here. ICI also argues that the CFTC's cost/benefit analysis was "incomplete because it fail[ed] to determine whether, under the existing regime, sufficient protections existed."
We previously noted the importance of this case in that, if the CFTC's action is upheld, mutual funds that deal in swaps will be subject to costly, duplicative regulation and, ultimately, the cost of such regulation will be incurred primarily by retail investors in such funds whose interests in the outcome do not appear to be central to either the CFTC or lower court's view of the matter.