Claiming that the Commodity Futures Trading Commission failed to consider the costs and benefits of a new rule, the U.S. Chamber of Commerce and the Investment Company Institute today sued the agency in U.S. District Court for the District of Columbia.
The plaintiffs allege that the CFTC is imposing redundant regulations on investment companies such as mutual funds and exchange traded funds. The companies, which are already regulated by the U.S. Securities and Exchange Commission, will now be required to register with the CFTC as "commodity pool operators" as well.
“The new rule creates confusion, not clarity, by subjecting mutual funds to redundant, overlapping, and unnecessary regulatory requirements,” said David Hirschmann, president and CEO of the U.S. Chamber’s Center for Capital Markets Competitiveness in a news release. “The CFTC completely ignored its statutory duty to evaluate the costs this unnecessary regulation will undoubtedly impose on the economy.”
Leading the court challenge are Gibson, Dunn & Crutcher partners Eugene Scalia and Daniel Davis, who last year successfully represented the Chamber and the Business Roundtable in striking down an SEC rule on proxy access in part for failing to properly consider costs and benefits.
The complaint against the CFTC alleges that the agency’s Rule 4.5 amendment requiring both SEC and CFTC registration for certain companies violates the Commodity Exchange Act and the Administrative Procedure Act, and asks the court for injunctive relief to prevent the rule’s implementation.
In their complaint, the plaintiffs note that the CFTC in 2003 excluded investment companies from registration, in part because the companies were already overseen by the SEC, and also as a way to “encourage and facilitate participation in the commodity interest markets” and provide “increased liquidity.”
“In adopting the rule at issue here, the Commission effectively reversed those determinations, yet it nowhere explained or determined in any manner that SEC regulation was proving to be insufficient, or that the benefits of increased liquidity no longer justified exemption from registration,” the complaint states.
Although the CFTC is required by statute to consider costs and benefits, the complaint continued, “The commission failed to perform the most basic tasks of an appropriate cost-benefit analysis.”
Republican CFTC Commissioner Scott O'Malia defended the agency's actions. “The financial crisis, and now the collapse of MF Global, highlights the need for more accessible and effective customer protection measures,” he said in a statement issued in February, when the final rule was passed. “To be clear, registration with the Commission is not duplicative of registration with the SEC.
"Not only is the Commission in the best position to adequately oversee the derivatives trading in our jurisdictional markets, but registration ensures that all entities participating in our markets meet minimum standards of fitness and competency.”
The CFTC is not the only agency on the hot seat over cost-benefit analysis. A House Oversight subcommittee this morning held a hearing titled, tellingly, “The SEC’s Aversion to Cost-Benefit Analysis.”
SEC Chairman Mary Schapiro outlined the agency’s new guidance for considering cost-benefit analysis, touting “the strengthened role of economists in rulemakings.”
But some, like George Mason Law School assistant professor J.W. Verret, told committee members it wasn’t enough. "The agency should freeze attorney hiring until it hires at least 200 more economists,” he said.
University of Mississippi School of Law associate professor Mercer Bullard countered that merely adding economists wouldn’t change the SEC any more than “adding more workers would change the architecture of the pyramids.”
“You’ve got to get the lawyers on board,” Bullard said. “Too many senior SEC lawyers view their roles only through a narrow prism of hyper-legal analysis that inhibits their ability to confront the true nature of the practical problems that they are tasked with solving.”