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Reports of the Dodd-Frank Act’s Demise May Be Premature

June 25, 2013


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Today, the U.S. Court of Appeals for the D.C. Circuit may have put to rest reports of the Dodd-Frank Act’s demise. It upheld the District Court’s summary judgment order dismissing challenges made by the Investment Company Institute and the U.S. Chamber of Commerce to CFTC rules requiring SEC-registered investment companies engaging in the activities of a commodity pool operator (and meeting certain trading thresholds), to register with and report to the CFTC.

In doing so, the Court made two notable points: agencies can change their minds (especially when authorized by Congress to do so), and the Administrative Procedures Act’s cost-benefit requirements cannot be used to challenge an agency’s method for obtaining data on the ground that the agency has not yet obtained the necessary data.

The Court’s opinion principally addressed two of the four challenges presented by the Investment Company Institute (“ICI”) and the Chamber: that the CFTC’s rules violated the Administrative Procedures Act (“APA”) by failing to address why it was changing an existing rule that exempted investment companies from the CPO registration requirements, and offering an inadequate evaluation of the rule’s costs and benefits.

Explaining why the CFTC’s decision to require investment company CPO registration was permissible, the Court said: “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.’” Moreover, the CFTC’s “requirements followed a congressional shift evidenced in the Dodd-Frank Act. . . . Such reasoned decision-making is an acceptable way to change CFTC’s past rules . . . the appellants’ policy disagreements with CFTC notwithstanding.”

In rejecting the claims of the ICI and the Chamber that the CFTC failed to adequately weigh the rule’s costs and benefits, the Court distinguished its earlier opinions in which it vacated SEC rules for violating that tenet. Unlike the SEC in those cases, the CFTC surveyed the existing regulatory landscape, found that its registration and reporting requirements could fill gaps in current regulations, explained how the new forms would collect information that would not otherwise be collected by the SEC, and issued a harmonization proposal to ensure that its rules do not duplicate or contradict SEC regulations.

The Court also called out the ICI and Chamber for their apparent attempt to impose a catch-22 on the CFTC. “In essence, the appellants are challenging the very method for obtaining the data they want on the ground that CFTC has not yet obtained the data they want. But neither the APA nor the CEA imposes such a catch-22 on CFTC. We hold that CFTC’s consideration and evaluation of the rule’s costs and benefits was not arbitrary or capricious.”

View the D.C. Circuit’s opinion here. For a summary of the CFTC’s rule click here.

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