On Wednesday, December 12, 2012, the U.S. District Court for the District of Columbia ruled in Investment Company Institute et al. v. United States Commodity Futures Trading Commission (CFTC). The plaintiffs in that case, the Investment Company Institute (ICI) and the Chamber of Commerce for the United States of America, challenged amendments to Rule 4.5 under the Commodity Exchange Act (CEA), which sets forth an exclusion from the definition of "commodity pool operator" for registered investment companies, and amendments to Rule 4.27. The plaintiffs—both industry trade associations—had challenged the amendments on behalf of their members, alleging that the rule-making process did not meet the standards set forth in the CEA relating to cost-benefit analysis and was arbitrary and capricious under the Administrative Procedures Act.
The court denied the plaintiffs' motion for summary judgment, granted the CFTC's motion to dismiss in part1 and granted the CFTC's cross-motion for summary judgment. Furthermore, the court found the following:
- There was no basis on which to disturb the CFTC's findings.
- The process met all the requirements under the CEA and the final rule was a "logical outgrowth" of the proposed rule.
- The CFTC "provided a reasoned explanation for its actions" and considered the costs and benefits as required.
- The CFTC provided an adequate basis for the shift in its views from the 2003 amendments to Rule 4.5.
- The challenged amendments were aligned with the intent of the Dodd-Frank Act to give the CFTC greater power to oversee swaps and the derivatives markets and to bring more transparency to those markets. Thus, the CFTC's actions were not arbitrary and capricious.
Mutual funds and their sponsors must be prepared to comply with the registration requirements under amended Rule 4.5 not later than December 31, 2012. For mutual funds that are no longer able to claim the Rule 4.5 exclusion, the commodity pool operator (typically the investment adviser) must register with the CFTC. Additionally, commodity pool operators that are required to register must comply with recordkeeping, reporting and disclosure requirements within 60 days following the adoption of final rules regarding harmonization of CFTC and Securities and Exchange Commission regulations.