Published October 04, 2012
A week after losing a major court battle in their bid to impose trading curbs on commodity speculators, U.S. regulators are gearing up to fend off another attack against their reforms.
On Friday, the Commodity Futures Trading Commission will face off in federal district court in Washington, D.C. against another pair of industry groups who sued earlier this year to block a rule that would require many investment funds to register with the agency.
The Investment Company Institute and the U.S. Chamber of Commerce complain that the measure duplicates the mutual fund regulations already imposed by the Securities and Exchange Commission.
Should the groups win, the case could be used as a model for combating other reforms designed to bring Wall Street and financial markets under closer watch. The hearing comes one week after the same court threw out the CFTC's "position limits'' rule, a reform included in the 2010 Dodd-Frank financial reform law in response to concerns about high gasoline prices.
U.S. District Court Judge Robert Wilkins found that Dodd-Frank did not give the agency a ``clear and unambiguous mandate'' to set position limits without showing they were necessary.
It was the first time the CFTC had a rule tossed out, and is a major blow to the agency as it races against the clock to finalize the dozens of reforms called for in Dodd-Frank.
While the rule at issue in Friday's hearing is not part of that legislation, the crux of the complaint could be used against a number of other reforms.
The rule would require advisers to mutual funds and exchange-traded funds to register in certain cases with the CFTC, such as if the funds' non-hedging commodity trades, including futures, swaps and options exceed certain thresholds.
The rule was requested by the National Futures Association, a self regulatory body, which expressed concern that certain mutual funds were exploiting SEC regulations to market managed futures strategies and escaping proper regulatory oversight. The CFTC argues that the 2007-2009 financial crisis helps justify the need for greater oversight of funds that use derivatives, saying the rule will ``enhance the commission's oversight of the derivatives markets and its ability to monitor and combat systemic risks.''
But the trade groups say the CFTC failed to properly weigh the benefits of the rule against its cost -- a federally mandated obligation that has successfully been used to strike down a handful of SEC reforms in recent years.
For the CFTC, however, this is relatively new territory. The ICI and Chamber's lawsuit marks only the second legal challenge to a CFTC rule, and experts said the agency has good reason to be a little jittery.
"The CFTC and the SEC are still struggling with how to get the cost-benefit analysis done in ways that will satisfy the courts,'' said Geoffrey Aronow, a partner at Bingham McClutchen who previously served as enforcement director for the agency. "I am sure any agency in this uncertain area can't be highly confident.''
The attorney arguing the case for ICI and the Chamber will be Gibson Dunn's Eugene Scalia - the same attorney who helped defeat the position limits rule last week. He has a winning record in knocking down SEC regulations, from indexed annuities to the agency's ``proxy access'' rule, wh i ch was struck down last year.
The lawsuit against the CFTC's position limits, which was brought by the Securities Industry and Financial Markets Association and the International Swaps and Derivatives Association, also alleged the agency conducted a flawed cost-benefit analysis.
But the Judge Robert Wilkins' ruling did not address the issue, since he found that the rule itself was out of sync with the law.
His silence on the issue means that the challenge to the fund registration rule will give the federal court a chance to weigh in for the first time on the CFTC's approach to economic justification.
"Although substantively position limits may be viewed as more important to a lot of folks, in some ways this is more important...because it applies across all rulemaking,'' said Dan Waldman, a partner at Arnold & Porter and former CFTC General Counsel.
"If they really create a high hurdle for the agency to jump over, it could have ripple effects across all of their rulemaking.''
James Moser, a professor at American University's Kogod School of Business and former deputy chief economist at the CFTC, said the CFTC has often taken too long to get economists
involved in the rule-making process, and failed to set benchmarks to help conduct cost-benefit analysis.
"Very early in the cycle of developing a rule, you ought to decide what is going to be the benchmark for this rule,'' he said. "That would provide a really clear framework for the cost-benefit analysis.''
A spokesman for the CFTC could not be immediately reached for a comment.