ICI Chamber of Commerce v. CFTC: CFTC Wins; Registration Rules for RICs Still Stand

Perhaps the two most striking features of the Court's decision are i) its wholesale acceptance of the CFTC's rationale for restoring operating restrictions on SEC-registered investment companies ("RICs") that it removed in 2003, and ii) its seeming decision not to conduct any economic analysis in a case that centers on the adequacy of a regulatory agency's analysis of costs and benefits.

With respect to the rationale, the judge fully accepts at face value--indeed wholeheartedly endorses--the view that the CFTC's rule serves as a rational response to the financial crisis of 2007-2008 and the passage of Dodd-Frank; in particular, that a "changed environment" created the need to bring CPO and CTA regulatory structure into alignment with the stated purposes of Dodd-Frank. It is somewhat hard to reconcile this, however, with the views expressed by Commissioner Sommers when the rule was adopted, who pointed out that "Congress was aware of the existing exclusions and exemptions for CPOs when it passed Dodd-Frank and did not direct the Commission to narrow their scope or require reporting for systemic risk purposes" and furthermore, that "there is no evidence to suggest that inadequate regulation of commodity pools was a contributing cause of the crisis, or that subjecting entities to a dual registration scheme will somehow prevent a similar crisis in the future."As to the adequacy of the cost/benefit analysis conducted by the CFTC, one can only say that the court's understanding of what constitutes adequate analysis sets a low bar. The holding of the cases that the SEC has lost on this very issue before the D.C. Circuit Court of Appeals, e.g., the Business Roundtable and Chamber of Commerce cases, seemed to be that an agency's unsubstantiated assertion of potential benefits of a rule does not serve as an adequate substitute for a rigorous evaluation of its potential economic consequences. Yet this Court upholds the CFTC's rulemaking, notwithstanding the CFTC's acknowledgement that the benefits of data collection requirements of the rule "cannot meaningfully be quantified"; and the court accepts the agency's explanation that "the purported benefits of the rule are ‘significant insofar as the Commission may be able to use this data to prevent further future shocks to the U.S. financial system.'" In the face of this assertion, the Court states that it "does not believe that any more exacting benefit calculation needs to be made in this case, particularly, here, where the agency is fulfilling expanded regulatory responsibilities mandated under Dodd-Frank" [notwithstanding, as we said above, that this rule change was in no way mandated by Dodd-Frank, nor is there anything in the history of Dodd-Frank to indicate that such a rule change was contemplated].

In fact, the Court takes the plaintiffs to task, for example, for arguing that the CFTC's cost-side analysis "fell short or was non-existent." What exactly were the plaintiffs referring to?

With respect to Section 4.5, the CFTC estimated, for example, that "each CPO . . . not previously subject to registration will be obligated to submit a $200 registration fee, an $85 registration fee for each associated person, and a $15 fee for fingerprinting services for each associated person." In addition, the CPO would be subject to, inter alia, $750 in annual membership dues for NFA membership, as well as NFA audit fees, which "var[y] greatly by individual entity and individual audit and thus [are] difficult to quantify on any sort of aggregate basis." Furthermore, the CFTC estimated the average annual time that would be required to submit the applicable registration forms. The CFTC also recognized that CPOs newly required to register could also incur a variety of other costs, which would vary amongst CPOs, including for compliance personnel, development of information technology, and legal/accounting advice. With respect to requirements under Section 4.27, the CFTC provided estimates of the "[a]nnual reporting burden" for the completion of each of the three schedules of Form CPO-PQR.

In other words, both the CFTC and the Court confuse the nominal costs entailed with paying registration fees and membership dues, and filling out forms with a robust empirical analysis of economic consequences. This is a far lower standard than previous courts have required to find that there was adequate cost/benefit analysis. But in contrast with the outcome the plaintiffs achieved in the position limits rule case, perhaps it was just not meant to be. When the plaintiffs here point out that increasing participation in the commodity markets on the part of RICs was something that the 2003 rules being rescinded by the CFTC sought to achieve, the Court responds by stating that the plaintiff's complaint "amounts to crocodile tears."

Finally, we note that registered investment companies are largely a retail product and that, if this double regulation of registered investment companies by both the SEC and the CFTC is wasteful, then it is retail investors who will bear the larger portion of the costs of such waste. We point this out in regard to the Court's reference to crocodile tears, which seems to imly a belief that the costs of regulations can be fully internalized by some amorphous entity called "Wall Street" and not passed on to the economy generally.