District Court Upholds CFTC's CPO Rule Change
- The U.S. District Court for the District of Columbia has rejected a challenge to the Commodity Futures Trading Commission's 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. Dec. 12, 2012). The Investment Company Institute and the U.S. Chamber of Commerce brought the challenge in April, and the matter was currently pending before the court on cross-motions for summary judgment, following a hearing on October 5 and the completion of briefing on October 22.
Judge Beryl Howell, in a 93-page opinion, ruled that the plaintiffs had failed to show that the CFTC acted arbitrarily and capriciously in adopting the rule change. The plaintiffs relied primarily on a criticism of the CFTC's cost-benefit analysis, but the court ruled that the CFTC properly showed that narrowing the exemption from CPO regulation would provide more transparency and regulatory oversight of derivatives trading and that it considered and evaluated the costs of the rule. The court was particularly critical of the plaintiffs' arguments that the CFTC could not reverse its 2003 broadening of the exemption, which it called "myopic" and "even more vacuous upon examination," in light of the 2008 financial crisis and the statutory changes made by the Dodd-Frank Act. Plaintiffs argued that investment companies are already thoroughly regulated by the Securities and Exchange Commission, but the court wrote that the SEC and CFTC have different regulatory authority and purposes, and that the mandate from Congress in the Dodd-Frank Act to incorporate swaps into the definition of CPO demonstrates the insufficiency of prior regulations.
The plaintiffs relied particularly on several recent cases from the D.C. Circuit striking down SEC rulemakings. The court distinguished those cases, ruling that, unlike the SEC in those cases, the CFTC identified, considered, and evaluated the costs and benefits of the rule. The court also included a footnote in which it cited several law review articles criticizing those cases, particularly Business Roundtable v. SEC.
The plaintiffs will now have to consider whether to appeal to the D.C. Circuit themselves. In addition, the court ruled that some of the compliance obligations challenged by the plaintiffs will not be fit for review until the CFTC adopts its proposed harmonization rule changes, so there will be an additional opportunity to challenge those obligations then, if the plaintiffs decide to bring a second case. Meanwhile, compliance with the CPO registration requirement will be required by December 31, 2012. The related recordkeeping, reporting, and disclosure requirements will not apply until 60 days following the effectiveness of the harmonization rule changes. The CFTC staff has indicated that those rule changes, when adopted, will likely be effective 60 days after publication in the Federal Register, so compliance with the CPO recordkeeping, reporting, and disclosure requirements would be required 120 days after the harmonization rule changes are published in the Federal Register.
The court's opinion is available online at
My prior post on the lawsuit is at
My post on the adoption of the CFTC rule changes is at
John M. Baker <JMB@...>
Stradley Ronon Stevens & Young, LLP http://www.stradley.com
1250 Connecticut Avenue, NW, Suite 500
Washington, DC 20036
FundLaw Listowner http://groups.yahoo.com/group/fundlaw