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D.C. District Court Issues Opinion on SIFMA v. CFTC Cross-Border Guidance Case

Commentary by Bob Zwirb and Steven Lofchie

District Judge Paul Friedman of the D.C. District Court (the "Court") issued a long-awaited opinion in the ongoing lawsuit filed by SIFMA, ISDA and the Institute of International Bankers (the "Associations") against the CFTC's Cross-Border Guidance. The Associations filed the lawsuit on December 4, 2013, seeking to vacate the CFTC Cross-Border Guidance on procedural and substantive grounds. The lawsuit alleged that the CFTC unlawfully circumvented the requirements of the Administrative Procedure Act and the CEA by portraying its regulations as "guidance."

Judge Friedman said that the CFTC was "well within its discretion" to proceed as it did through guidance rather than rulemaking, and that the CFTC did not act "arbitrarily or capriciously" with respect to its refusal to address the scope of the Title VII Rules' extraterritorial application within the Title VII Rules. The Court ruled that the Cross-Border Guidance "reads like a non-binding policy statement" without legal effect, and that market participants are "free to ignore" it.

The Court did, however, agree with the Associations that the CFTC failed to consider adequately the costs and benefits of some of the Title VII Rules, as required by CEA Section 19, rendering the CFTC's cost-benefit analyses for these Rules "arbitrary and capricious" under the APA.

Overall, the Court said, the majority of the Associations' claims failed because Congress had "clearly indicated" that the swaps provisions within Dodd-Frank Title VII, including rules prescribed by the CFTC, "apply extraterritorially whenever the jurisdictional nexus" of Section 2(i) is applied. The Court therefore (i) dismissed the Associations' claims as to the Trade Execution Rule, (ii) granted summary judgment to the CFTC as to the Associations' claims regarding the Cross-Border Guidance and certain Title VII Rules, (iii) granted summary judgment to the Associations with regard to the remaining Title VII Rules, and (iv) directed the CFTC to conduct adequate cost-benefit analysis for the remaining Title VII Rules.

See: D.C. District Court Opinion; Order.
See also: Chair Massad's Statement on the Court's Opinion.
Related news: Court Denies CFTC's Motion to File Supplemental Authority in Cross-Border Guidance Case (with Zwirb Comment) (July 30, 2014); Associations Submit Response to CFTC's Second Notice of Supplemental Authority in CFTC Cross-Border Guidance Case (with Zwirb and Lofchie Comments and Lofchie YouTube Selection) (July 29, 2014); CFTC Submits Reply in Support of Its Motion to File Supplemental Declaration in CFTC Cross-Border Guidance Case (with Zwirb Comment) (July 25, 2014); Associations Submit Opposition to CFTC Motion to File Supplemental Declaration in SIFMA v. CFTC Cross-Border Guidance Case (with Zwirb Comment) (July 23, 2014); Parties Submit Supplemental Briefs in SIFMA v. CFTC Cross-Border Guidance Case (with Zwirb and Lofchie Comments) (July 21, 2014); CFTC Files Supplemental Declaration in CFTC Cross-Border Guidance Case (with Zwirb Comment) (July 17, 2014); Associations Submit Response to CFTC's Notice of Supplemental Authority in CFTC Cross-Border Guidance Case (June 26, 2014); Court Requests Supplemental Briefs from Parties in SIFMA v. CFTC Cross-Border Guidance Case (June 24, 2014); SIFMA v. CFTC Cross-Border Guidance Case Reassigned to New Judge (June 19, 2014); Judge Grants Amici Motion for Leave to File Brief in Support of CFTC; CFTC Submits Notice of Supplemental Authority in SIFMA v. CFTC Cross-Border Guidance Case (with Lofchie Comment) (June 18, 2014); Congressional Democrats' Amicus Brief Sides with CFTC in SIFMA v. CFTC (with Lofchie Comment and Energy Metro Desk Article Quoting Commissioner O'Malia) (March 24, 2014); Better Markets Amicus Brief Supports CFTC's Cross-Border Guidance (with Lofchie and Zwirb Comments) (March 20, 2014); CFTC's Legal Memorandum to Dismiss Challenge to Its Cross-Border Guidance (with Lofchie and Zwirb Comments) (March 17, 2014); Chamber of Commerce Submits Amicus Brief Regarding Lawsuit against CFTC Cross-Border Rule (with Zwirb Comment) (February 4, 2014); Market Participants File Amended Complaint Challenging CFTC Cross-Border Guidance (with Zwirb and Lofchie Comments) (January 7, 2014); Market Participants File Lawsuit Challenging CFTC Cross-Border Guidance for Being a Rule Adopted in Violation of the APA (with Lofchie Comment) (December 4, 2013).

Commentary

In concluding that the CFTC's Cross-Border Guidance "is part interpretive and part policy statement, not a final agency action subject to review under APA," the Court leaves a number of ambiguities for the markets to ponder. For example, if market participants are now "completely free to ignore" the Guidance, as the Court suggests, then what happens to those non-U.S. swap dealers who use personnel in the United States to arrange, negotiate or execute a swap with a non-U.S. person? Would this action trigger Transaction-Level requirements, as an Advisory to such Guidance issued last November insists, and which the Court notes was the straw that broke the camel's back for the Associations here? And if it did, would that not constitute a "legally binding obligation," which could become the "basis for an enforcement action for violation"? Likewise, if market participants refused to follow former Chair Gensler's invocation to "come into compliance" with the Guidance, would they be violating a regulatory obligation or simply failing to follow a "non-binding policy within the Cross-Border Action," as the Court insists?

One irony here involves transparency. Early on in the Opinion, Judge Friedman writes that the Commodity Futures Modernization Act left the markets for most derivative swaps "effectively dark - in most respects." Yet in the Opinion, he endorses the CFTC's "non-binding, case-by-case approach to extraterritorial application," which leaves market participants in the dark regarding their cross-border obligations. Nor is the standard for determining the ultimate issue very illuminating. After concluding that the Guidance "reads like a non-binding policy statement," the Judge adds this: "Because the majority of the Cross Border Action looks, walks, and quacks like a policy statement, the Court holds that the majority of the Cross Border Action is a policy statement."

No one should get their hopes up that the remand for consideration of costs and benefits will be meaningful. In imposing this inconvenience upon the agency, the Court opined that the requirement "is not particularly demanding," requiring only that the CFTC consider and evaluate the costs of the rule, not that it conduct a "rigorous, quantitative economic analysis." Cf. Business Roundtable v. SEC, 647 F.3d 1144, 1148 (D.C. Cir. 2011) (requiring the SEC to "determine the likely economic consequences" and "assess the economic effects of a new rule").

Commentary

Bad process leads to bad substance. Whether or not one cares about the process of rulemaking or the quality of rules that are adopted, this is a problematic decision. The Court's conclusion that, because the CFTC has called its document "guidance," the requirements that it imposes do not constitute a rule will create deep uncertainty in the market. But a more profound message of the decision may be that the government need not abide by the rules it imposes on itself.

The judge's statement that the so-called "guidance" "does not establish any norms binding on . . . market participants" (at 71) ignores the real world. Likewise, the judge's statement that the guidance is not a rule because it "is called a duck [by the CFTC] so it must be a duck" (at 69) utterly trivializes the issue. If firms regulated by the CFTC are responding to the CFTC's "guidance" by spending hundreds of millions of dollars to comply with its terms because they are afraid of CFTC enforcement actions, then the so-called "guidance" has brought forth puppies, and a duck does not give birth to puppies. It does not matter if you call her Donald.

The Court's most egregious observation is that the CFTC's guidance cannot be a rule because "the guidance conditions its requirements with the modifier 'generally' nearly 200 times" (at 14). The fact that the guidance is not explicit in its requirements, but leaves the CFTC with broad discretion to make up interpretations as it goes along, does not mean the guidance is something other than a "rule." It means that the guidance is a bad rule because it violates the fundamental right of the governed to know which requirements apply to them.

The least compelling finding is that the "guidance" is not a rule because the CFTC did not publish the guidance in the Code of Federal Regulations as a rule (at 63). To assert that the CFTC's noncompliance with the (alleged) requirements of the law demonstrates that the CFTC did not break the law takes the whole notion of circularity and squares it.

Bad process leads to bad substance. The CFTC engaged in a bad guidance process and the consequences are inevitable. In contrast to the CFTC, the SEC went through a rulemaking process as to the extraterritorial application of Dodd-Frank. The actual rule produced by the SEC is far superior as a policy matter to the CFTC's "guidance."

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