ICI vs. CFTC to Go on Appeal
Commentary by Bob Zwirb
ICI has filed notice that it intends to appeal the adverse decision in its suit against the CFTC, in which it complained that the CFTC had failed to conduct an adequate cost-benefit analysis of the CFTC's planned expansion of Rule 4.5 to apply to mutual funds.
Click here to view the notice of appeal.
Commentary
I had commented previously on this case that the lower court opinion had paid perhaps an undue amount of deference to the "expertise" of the CFTC. (See related news story.) Indeed, over and over again, the trial judge in the ICI case refers to the deference that she felt must be accorded the CFTC. If the case were before the DC Circuit de novo, there would be good reason to believe that ICI's claim would be vindicated. Instead, it will be before the DC Circuit based on the reasonableness of the lower court's opinion. Even if the panel were the same as any of those which had previously ruled against the SEC on related issues, it is not clear whether the lower court committed an error by violating the Administrative Procedure Act.
The philosophical tension (between showing deference to an administrative agency vs. independent assment of the agency's rulemaking in cases in which an agency's exercise of economic analysis is at issue) is best illustrated by a decision of the 7th Circuit in a trade practice case, Elliott v. CFTC, 202 F.3d 926 (7th Cir. 2000), which pitted Judge Frank Easterbrook, a leading law economics practitioner, against two other judges (Cudahy and Ripple, two proponents of a more deferential attitude towards regulatory agency decisions). In Elliott, Judge Easterbrook blasted away at the CFTC's lack of reasoning.
"They [the majority] say that the Commission's 'expert' view is entitled to deference. Unless we are to abandon all judicial review of administrative orders, however, we cannot kowtow to a claim of expertise; the claim must be supported by evidence and reasoning. . . . No statistical analysis appears in the CFTC's opinion, however, and a raw bottom line can't be 'substantial evidence.' Our recent opinion in Chicago Board of Trade v. SEC, 187 F.3d 713 (7th Cir. 1999), and the D.C. Circuit's thoughtful opinion in Bechtel v. FCC, 10 F.3d 875 (D.C. Cir. 1993), stress that an agency must act like an expert if it wants the judiciary to treat it as one. In both Chicago Board of Trade and Bechtel the court set aside an agency's order when it failed to undertake the sort of empirical inquiry necessary to support the factual propositions essential to its decision. Just so here."
But Judge Easterbrook's argument for not according deference to the CFTC was rejected by Judges Cudahy and Ripple, who made up the majority and expressed a very deferential view toward the agency's exercise of its "expertise":
"We believe the deferential standard applies here. Deciding whether a particular set of circumstances supports an inference of non-competitive trading on the futures markets is an issue peculiarly within the Commission's area of expertise. . . . The Commission, on the other hand, regularly considers the question and has already drawn a line, even if difficult to define, between evidence that establishes culpability and that which does not. We are not inclined to second-guess the Commission on this issue. . . .
"This is one reason we are not moved, beyond the concerns noted earlier, by our colleague's complaints about evidentiary weaknesses in this case. For instance, the dissent complains that the record contains no evidence of 'usual' trading patterns during the delivery months, without which the Commission could not conclude that the trades in question here were unusual. Our colleague apparently requires as a remedy 'statistical analysis' or 'empirical inquiry.' Dissent at 31. But this is putting a burden on the Commission that exceeds what is routinely accepted in other areas of decisionmaking. . . . In the case before us, of course, the facts are more specialized, and so is the factfinder. We only ask whether the decision was non-arbitrary. Based on other like decisions, we conclude that it was. . . ." "In short, the Commission is uniquely well positioned to make these sorts of fact-specific, inference-laden determinations. . . .
"If our dissenting colleague were a member of the CFTC, his opinion, offered as the opinion of the agency, might well survive judicial review as reasonable and as supported by substantial evidence. The issue before us, however, is not whether the CFTC here might have applied a different analysis and reached a different result; the issue is whether the analysis the agency did apply and the result it did reach have a rational basis and are supported by substantial evidence. 5 U.S.C. sec. 706. Wisdom strongly counsels and the Administrative Procedure Act demands appropriate deference to the Commission, an independent regulatory agency charged with the difficult task, among others, of detecting pre-arranged trading on its regulated exchanges. . . .
"We defer to the Commission in part because of its 'expertise' or perhaps more precisely, as the dissent would have it, its specialized knowledge. The expertise or specialized knowledge of the agency is institutional, not personal. The dissent is off-base in exploring the occupational backgrounds of members of the Commission. As the dissent illustrates, it is a tempting but ultimately unrewarding exercise to make this a contest between the expertise of the commissioners and the expertise of the judges. The agency employs experts in the various subjects with which it must grapple and some of its staff advise the commissioners. Courts, on the other hand, employ no experts to advise the judges although it has been suggested from time to time that judges too should have expert advisors. But in the interest of fairness, courts generally eschew the idea of kept experts whispering in the judges' ears. And to try to run agencies like courts is what Alfred Kahn deplores as the 'overjudicialization' of the regulatory process. 2 Alfred E. Kahn, The Economics of Regulation 87 (1971) (quoting Harry M. Trebing, A Critique of the Planning Function in Regulation, Pub. Util. Fortnightly (March 16, 1967)."
In summary, whether ICI can prevail on appeal here depends in no small part upon the attitude of the members of the reviewing panel, i.e., whether they are inclined to "defer" to the CFTC or to "independently assess" the argument on the merits.