Associations Submit Response to CFTC's Second Notice of Supplemental Authority in CFTC Cross-Border Guidance Case
Commentary by Bob Zwirb and Steven Lofchie
SIFMA, ISDA and the Institute of International Bankers (the "Associations") submitted a response to the CFTC's second notice of supplemental authority, which brought the Court's attention to the July 11, 2014 decision in National Mining Association v. McCarthy ("NMA").
According to the CFTC's second notice of supplemental authority, the analysis of NMA reiterates that established law and general statements of policy are not subject to pre-enforcement judicial review under the Administrative Procedure Act, and concludes that the legal effect on regulated entities must be established to determine whether an agency action is a policy statement or legislative rule.
In their response, the Associations assert that, although NMA concerns an Environmental Protection Agency guidance document ("EPA Guidance") that is "factually distinguishable" from the Cross-Border Guidance, the legal principles set forth in NMA confirm that the Cross-Border Guidance is "unmistakably legislative." The Associations state that, unlike the Cross-Border Guidance, the EPA Guidance imposes no requirements and only recommends a consideration to be weighed by state regulators; therefore, the NMA Court concluded that, "as a legal matter," the EPA Guidance "is meaningless."
Additionally, the Associations observe, NMA acknowledged the EPA's notice that state authorities are free to ignore the EPA Guidance. By contrast, the Associations explain, the CFTC maintains that "even courts must defer to the Cross-Border Rule," and confirmed the legal effect by issuing an "Exemptive Order" to give regulated entities more time to "transition to" and "come into compliance with" the Cross-Border Guidance's provisions.
The Associations went on to discuss other distinctions between the EPA Guidance and the Cross-Border Guidance in order to demonstrate that the Cross-Border Guidance cannot be viewed as a general statement of policy. The Associations explain, by way of example, that the EPA Guidance was issued by intermediate agency officials, whereas the Cross-Border Guidance was issued by a full vote of the CFTC's commissioners.
See also: These Lofchie YouTube Selections demonstrate one instance of guidance; and another exemplar of guidance.
See: Associations Response to CFTC's Second Notice of Supplemental Authority.
Related news: 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
When it comes to characterizing products or entities that are subject to its jurisdiction – e.g., whether a rolling spot is a futures contract or swap subject to the CEA or a spot outside the scope of the Act – the CFTC argues consistently that "form should be disregarded for substance and the emphasis should be put on economic reality." CFTC v. Erskine, Petition for Rehearing and Suggestion for Rehearing En Banc, Case No. 06-3896 (Feb. 21, 2008) at 14, quoting SEC v. Zandford, 535 U. S. 813, 819-820 (2002). Rather than being bound by form, the CFTC endorses a multi-factor test that looks beyond the form of the instrument. That is akin to what the Associations appear to be doing here, with respect to the CFTC's cross-border "guidance," by attempting to demonstrate the various ways in which release requires compliance on the part of those entering into cross-border swap activities.The irony here is the CFTC's primary reliance upon its own characterization of that release as mere guidance; that is, the CFTC is resorting to form over substance, even as the Associations demonstrate the substantive reality that members face in coming to terms with a "non-binding" legal document that nevertheless spells out what they may and may not do when conducting business abroad.
Commentary
Here is the key paragraph from the NMA decision explaining why the "guidance" at issue was merely guidance and not a rule:
"As EPA acknowledged at oral argument, 'The Guidance has no legal impact. . . .' The Final Guidance does not tell regulated parties what they must do or may not do in order to avoid liability. The Final Guidance imposes no obligations or prohibitions on regulated entities. . . . The Final Guidance may not be the basis for an enforcement action against a regulated entity. Moreover, the Final Guidance may not be relied on by EPA as a defense in a proceeding . . . [a]nd the Final Guidance does not impose any requirements in order to obtain a permit or license. As a matter of law, state permitting authorities and permit applicants may ignore EPA's Final Guidance without facing any legal consequences."
In short, even if the CFTC "wins" its case (despite some of its arguments seeming quite strained), its reliance on the NMA decision would make it impossible for the CFTC to enforce its guidance/rule, which would seem to render the CFTC's victory somewhat meaningless. Given that, in its cross-border rulemaking, the SEC found that the great majority of swaps involved cross-border elements, can it really be the case that the CFTC intended to enforce its derivatives rules without any rules clearly establishing the agency's jurisdiction? That would seem a terribly imprudent way to establish regulatory authority.
In light of the above, the CFTC either loses its case or ends up with "guidance" that the CFTC has itself argued has no legal effect. Wouldn't it make sense for the CFTC to go back to the drawing board and actually propose a rule? The CFTC's task in this regard should be made significantly easier, since the SEC has already adopted a rule, and it would make sense for the CFTC to piggyback on the SEC's rulemaking as this would have the added benefit of establishing one set of requirements to which U.S. institutions would be subject, rather than one set of rules under the securities laws and another under the CEA.