ICI vs. CFTC, Brief of Appellee CFTC; Joint Motion of NFA and Better Markets for Leave to File Joint Amicus Curiae Brief
Commentary by Bob Zwirb
The CFTC has filed a brief with the U.S. Court of Appeals for the District of Columbia Circuit in connection with the appeal of the Investment Company Institute and the Chamber of Commerce of a federal district court's decision dismissing their challenge to CFTC amendments to Rule 4.5, which will require Registered Investment Companies ("RICs") trading in futures and swaps beyond a certain level to register as commodity pool operators ("CPOs") and be subject to certain data reporting requirements for CPOs. The CFTC amendments challenged by ICI also reinstate a trading threshold and marketing restriction for RICs claiming an exclusion from the definition of CPO under Rule 4.5.
The CFTC's brief argues that the amendments to Rule 4.5 are "a reasonable response to significant events and legislation [Dodd-Frank Act] as part of the CFTC's overall effort to restore oversight in opaque markets"; that the economic turmoil resulting from the financial crisis of 2007-2008 caused it to reconsider the level of appropriate regulation; and that while its exclusion of RICs from Rule 4.5 was appropriate in the investment environment in 2003, it is not now in light of the financial crisis, which "has been attributed in significant part to the proliferation of dark, unregulated markets in OTC derivatives including swaps."
The Joint Motion of NFA and Better Markets seeks leave to file a joint amicus brief with NFA focusing on the need for the CFTC rule and Better Markets focusing on the CFTC's duty to consider costs and benefits when it promulgates rules.
See: ICI v. CFTCBrief
See also: Motion; Notice
Related news item: ICI vs. CFTC: Implementation of Amendments to Rule 4.5, too soon? (with Zwirb Comment)
Commentary
We have previously commented a number of times on this case as it has proceeded on appeal, noting the CFTC is asserting a minimalistic approach to its duty to consider costs and benefits, but also observing that the D.C. Circuit will be reviewing not an Order of the CFTC, but a lower court's opinion upholding that Order (thus improving the CFTC's chances, from a procedural standpoint). That said, this appeal is being heard by a court that has consistently required regulatory agencies to fulfill the cost/benefit obligation in a robust and rigorous manner, and therefore it may not be a winning strategy for the CFTC to assert that the CFTC "is simply [required] to consider the costs and benefits of its discretionary rules . . . not to conduct an exhaustive cost-benefit analysis - a task that is time consuming, inherently imprecise, and in many cases, virtually impossible to perform." In light of the D.C. Circuit's insistence in cases like Business Roundtable v. SEC and Chamber of Commerce v. SEC that a regulator apprise itself as best as it can "of the economic consequences of a proposed regulation before it decides whether to adopt the measure," it is not clear that this line of argument will be convincing to the court.
In short, the CFTC continues to rely upon an argument that it used unsuccessfully in support of its position limit rule, i.e., that it need not identify a specific problem, but may instead enact "prophylactic measures" to ensure that it can adequately oversee and manage risk in its jurisdictional market. This line of argument did not work in the position limit case, at least at the lower level. It remains to be seen whether it will work on appeal in this matter.