Judge weighs whether to strike CFTC investment fund rule

Fri Oct 5, 2012 1:55pm EDT

* Chamber, ICI challenge CFTC registration rule

* Ruling not expected imminently

By Aruna Viswanatha

WASHINGTON, Oct 5 (Reuters) - The U.S. commodity regulator went to court on Friday to try to fend off an industry challenge to its rule requiring that certain investment funds register with the agency.

The hearing came just one week after the regulator saw another one of its rules tossed out.

U.S. District Judge Beryl Howell gave little indication which way she might rule, but had tough questions for both sides, the Investment Company Institute and the U.S. Chamber of Commerce on one side, and the Commodity Futures Trading Commission on the other.

When a lawyer for the industry groups, Eugene Scalia, suggested the new registration requirements would impose enormous costs on mutual funds and their investors, Howell asked: "how significant can those costs be for mere registration?"

The groups have said the CFTC did not adequately weigh the costs of the rule against its benefits, as it is required to do, and did not assess whether it would overlap with existing regulation from the U.S. Securities and Exchange Commission.

Industry complaints about flawed economic analyses have been used to successfully strike down a handful of SEC reforms in recent years.

This challenge against the CFTC's fund rule is the second legal complaint against that agency.

The first challenge was decided last Friday, when a judge from the same court ruled that the CFTC's "position limits" rule, included in the 2010 Dodd-Frank financial reform law, should be vacated.

Judge Robert Wilkins said that Dodd-Frank did not give the agency a "clear and unambiguous mandate" to set these trading curbs without showing they were necessary.

The rule debated on Friday would require advisers to mutual funds and exchange-traded funds to register in certain cases with the CFTC, such as if the funds' non-hedging commodity trades - including futures, swaps and options - exceed certain thresholds.

The rule was not mandated by Dodd-Frank, but the CFTC has argued the 2007-2009 crisis and other provisions in Dodd-Frank justifies the need for greater oversight of funds that use derivatives.

Howell appeared sympathetic to that argument. "The fact that we had the financial crisis" shows the existing enforcement regime "didn't work," she said. Congress passed Dodd-Frank in part "to increase enforcement agency oversight of this kind of trading market," she said.

Several details of the rule are still in doubt, because they rely on definitions to be provided in other rules that have not been finalized, an idea Howell pressed the CFTC on.

"With three moving parts of critical aspects of the rule, how could the Commission do as complete" an analysis as the law requires? she asked CFTC lawyer Jonathan Marcus.

A ruling is not expected immediately because both parties have to submit additional briefs to the court.

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