The Investment Company Institute and the Chamber of Commerce of the United States have brought suit against the Commodity Futures Trading Commission to challenge recent rule changes that will require some investment advisers to registered investment companies to register as commodity pool operators. Investment Company Institute v. CFTC, No. 1:12-cv-00612 (D.D.C. filed Apr. 17, 2012). The rule change has been unpopular within the industry; I was going to say "controversial," but that would imply the existence of a controversy, and I'm unaware of anyone within the industry who supports the rule change or even believes that it addresses a need. The case will be heard by Judge Beryl A. Howell in the U.S. District Court for the District of Columbia.
The plaintiffs' lead argument is that the CFTC did not properly evaluate the costs and benefits of the rule change. Section 15(a) of the Commodity Exchange Act, 7 U.S.C. § 19(a), imposes specific requirements for the CFTC to consider the costs and benefits of its regulations. Plaintiffs argue that the CFTC failed to examine the disclosure and protections already provided through regulation of registered funds and advisers by the Securities and Exchange Commission, and it therefore had no basis to conclude that the CFTC requirements offered any benefits beyond those already provided to investors. In addition, plaintiffs argue that the CFTC openly admitted it could not conduct a proper analysis of the rule's costs, and they argue that the CFTC failed to consider the costs the rule changes will impose by decreasing liquidity in the commodities markets. Plaintiffs also argue that the CFTC acted arbitrarily and capriciously under the Administrative Procedures Act and that it failed to provide interested persons a sufficient opportunity to meaningfully participate in the rulemaking.
The plaintiffs' arguments, if successful, would result in the CFTC amendments to 17 C.F.R. §§ 4.5 and 4.27 being vacated and set aside. These are the provisions that require some registered fund advisers to register as CPOs and to file new Form CPO-PQR. The lawsuit does not attack the CFTC's rescission of an exemption from CPO status with respect to commodity pools whose participants are all qualified eligible persons. Thus, there will continue to be a CPO registration requirements for many advisers to hedge funds and other private funds, which in the past relied on that exemption.
The ICI webpage on the litigation, including the complaint and additional materials, is at
There is also a U.S. Chamber of Commerce webpage, at
For my post on the adoption of the rule change, see
John M. Baker <JMB@...
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