In a story that US forex firms will sympathize with, the US Mutual Fund industry is appealing a December 12th ruling that backed a CFTC ruling that investment funds engaged with trading commodities and futures would need to register with the regulator. The CFTC is updating its previous opinion from 2003 that although investment companies engage in the use of commodity futures, swaps, and options they weren’t classified as commodity pool operators. However, the agency has now decided that due to an increase in use of commodity products, firms fall under their jurisdiction. Under the proposed rule, the CFTC would require firms to file reports about leverage and counterparty risk.
Standing against the CFTC, the Investment Company Institute (the US’s fund industry group) and US Chamber of Commerce filed a joint appeal to the US Court of Appeals. The parties are arguing that Investment Funds already are regulated by the SEC. Therefore, filing with the CFTC would lead to dual regulation and increase expenses for the sector. In an interesting twist, the ICI also added that the SEC and CFTC have conflicting rules between them. “As a result of those amendments, many advisers to registered funds already regulated by the SEC will be subjected to dual regulation by the CFTC as commodity pool operators (CPOs). CFTC regulations duplicate and in some cases conflict with the comprehensive regulation provided by the SEC.”
You can read the whole press release from the ICI below. The current ruling is part of an ongoing process from regulators to implement increase supervision due to the Dodd-Frank ACT. Overall, Dodd-Frank implementation continues to be a slow process as its ravels through laws that in many cases were enacted over 70 years ago. While most of the industry is fixed on what new laws Dodd Frank will bring, one area that should be watched is loopholes. As mentioned above with the case that the CFTC and SEC’s contain conflicting laws, it goes without saying that financial companies will be innovative in finding ways to circumvent laws and take advantage of ambiguous rulings.
ICI, U.S. Chamber Appeal Challenge to CFTC Rule 4.5 to the D.C. Circuit
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Washington, DC, December 27, 2012 – The Investment Company Institute (ICI) and the U.S. Chamber of Commerce today filed a notice of appeal of a recent ruling by the U.S. District Court for the District of Columbia (District Court) upholding the Commodity Futures Trading Commission’s (CFTC) amendments to Rule 4.5 imposing redundant regulations on registered investment companies, such as mutual funds and exchange traded funds (ETFs). The case will be appealed to the U.S. Court of Appeals for the District of Columbia Circuit.
“The District Court’s decision fell far short of well-established D.C. Circuit precedent requiring agencies to adequately measure the costs imposed by capital markets regulations on businesses, investors, and the economy as a whole, and to weigh them against the desired benefits,” said David Hirschmann, President and CEO of the Chamber’s Center for Capital Markets Competitiveness. “Nothing in the District Court’s decision changes the fact that the CFTC did not adequately consider alternative approaches to its flawed and overly-broad approach, which will only inject more confusion into our capital markets without offering any clear benefits to investors. We look forward to presenting our arguments to the D.C. Circuit.”
“We brought this challenge because the CFTC failed to justify the regulatory excess and added costs of its amendments to Rule 4.5, which would impose that agency’s regulatory regime atop the comprehensive regulation already applied to registered funds by the Securities and Exchange Commission,” said ICI President and CEO Paul Schott Stevens. “We believe the District Court decision is deeply flawed and will clearly harm the many shareholders of registered funds that will bear the costs of overlapping regulation by two agencies.”
Today’s appeal is in response to a December 12, 2012 decision by the District Court upholding the CFTC’s Rule 4.5 amendments. As a result of those amendments, many advisers to registered funds already regulated by the SEC will be subjected to dual regulation by the CFTC as commodity pool operators (CPOs). CFTC regulations duplicate and in some cases conflict with the comprehensive regulation provided by the SEC.
The ICI-Chamber lawsuit argued that the amended Rule 4.5 imposes unnecessary, overlapping, and burdensome regulations on registered funds, their advisers, and, ultimately, fund shareholders. The lawsuit charged that the Rule 4.5 amendments are arbitrary and capricious, and that the CFTC violated the Administrative Procedure Act as well as the Commodity Exchange Act.