On December 12, 2012, the U.S. District Court for the District of Columbia rejected a challenge by the Investment Company Institute (ICI) and the U.S. Chamber of Commerce (“Chamber of Commerce,” and together with ICI, the “plaintiffs”) to the U.S. Commodity Futures Trading Commission’s (CFTC) amendments to CFTC Regulations 4.5 and 4.27. The amended Regulation 4.5 reinstates, with some modifications, the trading threshold and marketing restrictions for advisers to registered investment companies (“Investment Companies”) claiming an exclusion from the definition of commodity pool operator (CPO) under the CFTC regulations. The new Regulation 4.27 imposes quarterly reporting obligations on CPOs, including advisers to Investment Companies that would qualify as CPOs under the amended Regulation 4.5. The plaintiffs had sought to vacate the amended Regulation 4.5 in its entirety, and the amended Regulation 4.27 as it applies to Investment Companies.
In their complaint filed on April 17, 2012, the plaintiffs had alleged that the amendments violated the Commodity Exchange Act (CEA) and the Administrative Procedure Act (APA) on multiple counts, foremost being that the final rule imposes redundant regulations on Investment Companies without satisfying the CFTC’s obligation to weigh the costs or benefits of the rule. Counsel for the plaintiffs argued that the CFTC did not explain or determine in any manner that U.S Securities and Exchange Commission (SEC) regulation of these entities was proving to be insufficient, noting that Investment Companies and their advisers are already among the most highly regulated entities in the financial industry. The complaint further stated that the rule, as amended, is “arbitrary and capricious” and requested injunctive relief to prevent the CFTC from implementing it.
U.S. District Court Judge Beryl Howell, however, found that the CFTC had “fulfilled its obligation under the CEA to consider the costs and benefits of its proposed rule,” as well as its obligations under the APA, and that the court was “satisfied that the CFTC considered the relevant factors, acted well within its discretion, and that there was nothing arbitrary or capricious about the CFTC’s actions in promulgating the Final Rule with respect to Sections 4.5 and 4.27.” Judge Howell noted that some of the compliance obligations that the plaintiffs had challenged will not be fit for review until the harmonization rules for entities subject to both CFTC and SEC regulation are adopted. With this decision, the plaintiffs now have to decide whether to appeal the district court ruling to the D.C. Court of Appeals.
In the meantime, unless other relief is available, the deadline for Investment Company advisers to register as CPOs if they are unable to obtain relief under the amended Regulation 4.5 remains December 31, 2012. The related recordkeeping, reporting and disclosure requirements will not apply until 60 days following the effectiveness of the harmonization rules, which have not yet been finalized.