On April 17, 2012, the ICI and the U.S. Chamber of Commerce filed a lawsuit against the Commodity Futures Trading Commission challenging the legality of recently enacted amendments to CFTC Rule 4.5. As amended, the rule reinstates certain restrictions on registered investment companies’ use of futures contracts and derivatives in effect prior to 2003, and requires CFTC registration for investment advisers to registered investment companies that engage in non-hedging commodity trading above certain thresholds or registered investment companies marketing themselves as vehicles for trading in the commodities markets.
The lawsuit, filed in the U.S. District Court for the District of Columbia, challenges the Rule 4.5 amendments by alleging that the CFTC failed to discharge its statutory obligations under both the Commodity Exchange Act and the Administrative Procedure Act when enacting new rules. Specifically, the complaint alleges that the amendments to Rule 4.5 are arbitrary and capricious in that they are unnecessary, redundant and costly for registered investment companies and requests injunctive relief to prevent the CFTC from implementing amended Rule 4.5. In support of their position, the ICI and the U.S. Chamber of Commerce allege numerous defects in the rulemaking process, including the CFTC’s failure to discharge its obligations to:
- Perform the required cost-benefit analysis of the impact of the amended rule as required by the Commodity Exchange Act.
- Provide the public with sufficient opportunity to participate in the rule-making process as required under the Administrative Procedure Act.
- Explain the benefits to be derived from the amended rule above those already provided to investors through existing regulation, as well as explain the reversal of the CFTC’s 2003 determination that regulation of investment companies was unnecessary, burdensome and impaired liquidity.
- Provide adequate justification for the increased regulatory requirements, obligations and restrictions that the amended rule would impose on registered investment companies.