Important Victory for CFTC in ICI and Chamber of Commerce v. CFTC; Registration Rules for RICs Still Stand
Commentary by Bob Zwirb and Steven Lofchie
The U.S. Court of Appeals affirmed a federal district court's ruling upholding amendments to CFTC Rule 4.5 requiring operators of mutual funds with commodity investments to register with the agency. The amendments had been challenged by a coalition comprised of two trade associations - the Investment Company Institute and the U.S. Chamber of Commerce - on the grounds that the CFTC failed to address its rationale for repealing rule amendments issued in 2003 that exempted mutual funds from CPO regulation, and for failing to conduct an adequate cost-benefit analysis of the new amendments.
In rejecting the appellant challengers' argument that the CFTC's change of position was arbitrary and capricious, the D.C. Circuit held that an agency changing course "need not demonstrate to a court's satisfaction that the reasons for the new policy are better than the reasons for the old one; it suffices that the new policy is permissible under the statute, that there are good reasons for it, and that the agency believes it to be better" (quoting FCC v. Fox Television Stations, Inc., 556 U.S. 502, 515 (2009)). The Court also found persuasive the CFTC's argument that changed circumstances and a congressional shift evidenced in the passage of the Dodd-Frank Act provided an adequate rationale for the CFTC's action.
Similarly, the Court found unpersuasive the appellants' argument that the CFTC ignored existing SEC regulations governing mutual funds, finding that the CFTC "explicitly discussed SEC's oversight in the derivatives markets" and found that the CFTC, rather than the SEC, was in the "best position" to oversee funds engaged in non-hedging derivatives trading. The Court also appeared to be impressed by the CFTC's issuance of a harmonization proposal to ensure that its rules do not duplicate or contradict SEC regulations. Finally, the Court rejected challengers' argument that the CFTC failed to adequately analyze the costs and benefits of the amendments as required by CEA Sec. 15.
See: Per Curium Judgment - ICI v. CFTC [U.S. Court of Appeals for the D.C. Circuit, 12-5413]; Opinion - ICI v. CFTC [U.S. Court of Appeals for the D.C. Circuit, 12-5413]; and Clerk's Order - ICI v. CFTC [U.S. Court of Appeals for the D.C. Circuit, 12-5413].
Related News: "ICI Chamber of Commerce v. CFTC: CFTC Wins; Registration Rules for RICs Still Stand (with Zwirb Comment)" (December 13, 2012) and "ICI vs. CFTC to Go on Appeal (with Zwirb Comment)" (December 27, 2012).
Commentary
This is an important victory for the CFTC and an equally significant setback for the mutual fund industry, which will be subject to two sets of regulations for funds that engage in more than a minimal amount of swap trading. We previously commented that the outcome of this case depended in no small part upon the attitude of the reviewing panel toward the degree of deference it would be willing to extend to the CFTC's exercise of its discretion. It appears that this panel afforded a fairly generous amount of deference to the agency here, for example, by finding that, notwithstanding the "less than ideal clarity" in the CFTC's reasoning, the CFTC gave sufficient explanations such that the court can "reasonably . . . discern[] its rationale." Elsewhere, the reviewing panel excused the CFTC's failure to put a precise number on the benefits of the rule, including the benefits of data collection involved in the rulemaking, stating that "the law does not require agencies to measure the immeasurable." Indeed, in making these findings, the Court expressly extended "deference appropriate to" the CFTC's "expert determinations."
In contrast with the Court's posture in Business Roundtable v. SEC, 647 F.3d 1144 (D.C. Cir. 2011), where a panel that included two members of the current panel meticulously dissected the SEC's cost/benefit analysis, criticized it for failing adequately to quantify the certain costs or to explain why those costs could not be quantified, and otherwise held 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, the panel here appears to have given the CFTC much more leeway. Perhaps this is due, as we pointed out in previous commentary, to the procedural posture of this case, which involved the review of a decision by a lower court, in contrast to Business Roundtable, which involved a direct appeal of an administrative rulemaking. In the former, the reviewing court is determining the reasonableness of lower court holding in addition to the action of the agency, while in the latter, it is looking at what the agency did, unfiltered by the view of an intermediary court.
We also previously opined that the district court in this matter implicitly had set a rather low bar for the CFTC to satisfy in demonstrating its statutory duty to consider the costs and benefits of the Rule 4.5 amendments. What was implicit at the lower court level became explicit upon appeal, with the reviewing panel acknowledging that the "CFTC's regulation clears this low bar." The interesting question going forward is whether the outcome here will have any influence on the position limit case pending before the D.C. Circuit. Two differences, however, may distinguish these cases. First, unlike the Rule 4.5 case, which the CFTC won (see below), the position limit case involves review of a decision that the agency lost at the trial level. Second, in contrast to the Rule 4.5 case, where the CFTC attempted, if somewhat feebly, to analyze the rule's costs and benefits, the position limit matter involves a rule in which the CFTC brazenly proclaimed that it didn't need to do so in light of Dodd-Frank's mandate that it promulgate position limits rules by a certain deadline.
Commentary
This case is significant from the standpoint of administrative law. Of similar significance, is the regulatory policy question: Is it really a good use of the CFTC's limited resources to impose double-regulation on SEC-registered investment companies? In a world of limited governmental resources, this is a policy choice that seems almost impossible to justify. In today's news, we cover the CFTC's request for an increase in budget. Link here to the story on Chairman Gensler's Congressional testimony.