The Investment Company Institute and the U.S. Chamber of Commerce have joined together as plaintiffs to challenge recent changes the CFTC made to its Rule 4.5, which specifies limits in commodity interest holdings by mutual or exchange traded funds. If a mutual fund or an ETF maintains holdings in excess of those limits, the fund’s adviser must register as a commodity pool operator.

In briefing on summary judgment pleadings filed this spring and summer in District of Columbia federal court, plaintiffs assert that the CFTC:

  • acted arbitrarily and capriciously under the Administrative Procedure Act (APA) and the Commodity Exchange Act (CEA);
  • failed to make the kind of costbenefit analysis required by the CEA; and
  • failed to adequately explain the CFTC’s change of position reflected in the rule amendment.

Plaintiffs rely largely on a District of Columbia Circuit Court of Appeals opinion that, in 2010, vacated the SEC’s former Rule 151A (concerning index annuities). Although plaintiffs believe that the CEA requires a costbenefit analysis comparable to what the DC Circuit required of the SEC, the CFTC is arguing for somewhat different considerations and analysis. In addition, the CFTC contends that its initiative to “harmonize” the duplicative and conflicting securities law and commodities law compliance obligations applicable to SEC/CFTC dually-regulated funds is addressing cost-benefit issues and that any challenge to that initiative is not yet ripe.

According to the FTC, Congress, through Dodd-Frank, charged the CFTC “with the task of illuminating previously dark markets in the complex derivative instruments at the heart of the crisis known as ‘swaps’.” It cites Dodd-Frank’s more general objective of controlling “systemic” risks as justification for its amendment of Rule 4.5. Plaintiffs counter that nothing in Dodd-Frank abrogates the CFTC’s obligations under the APA and CEA and that investment companies are not the source of the core systemic risks.

An ultimate victory by the CFTC concerning its Rule 4.5 amendment could assuage any dismay that, as recently reported, former MF Global Holdings Ltd. Chairman and Chief Executive Jon S. Corzine was the only senior official registered with the CFTC, which makes any CFTC action against other executives more difficult. The ICI included its objection to the CFTC changes to Rule 4.5 in recent testimony on Dodd-Frank to the Capital Markets Subcommittee of the House Financial Services Committee.