December 13, 2012 / 12:25 AM / 5 years ago

U.S. regulator wins legal victory over mutual funds

WASHINGTON (Reuters) - A federal judge upheld a new regulation governing the mutual funds industry on Wednesday, ruling against two industry trade groups that had sought to block a registration rule by the Commodities Futures Trade Commission.

The Investment Company Institute and the U.S. Chamber of Commerce had filed a lawsuit in April seeking to overturn the new regulation, claiming that the CFTC’s requirement for funds to register duplicates a similar rule from the Securities and Exchange Commission.

The ruling is a shot in the arm for the CFTC, which is facing a number of legal challenges as it works to bring large unregulated swathes of financial markets under its remit to prevent a repeat of the 2008 financial crisis.

U.S. District Judge Beryl Howell, in her ruling, said the CFTC had done enough to weigh the cost and benefits of the new rule.

“The CFTC considered the relevant factors, acted well within its discretion, and that there was nothing arbitrary or capricious about the CFTC’s actions,” Howell said in her ruling.

Under the new rule, advisers to mutual funds and exchange-traded funds need to register with the CFTC if their commodity trades, including futures, swaps and options exceed certain thresholds, excluding pure hedges.

Registration with the CFTC would then impose regulatory requirements on advisers, including record-keeping, reporting, advertising restrictions and disclosure obligations.

The groups have 30 days to appeal the ruling.

”We continue to believe that the CFTC’s new regulations of registered investment companies are fundamentally flawed, the U.S. Chamber of Commerce said.

“They inject more confusion into our capital markets, without offering any real benefits to investors. We are reviewing the district court’s opinion and evaluating our options,” said the group.

In September, the derivatives industry knocked out a CFTC rule to curb commodity speculation by putting caps on trading positions, when a judge said it had no explicit mandate to introduce the rule. The CFTC is appealing.

The funds rule stems from a request by the National Futures Association, a self-regulatory organization for the industry, while the position limits rule is tied to the financial industry reform under the Dodd-Frank law.

Still, the two lawsuits employed a similar basic argument that the CFTC failed to properly weigh the costs and benefits of the rules before finalizing them, and the lawyer pleading the cases was also the same: Eugene Scalia.

Scalia - the son of Supreme Court Justice Antonin Scalia - has a winning record in striking down regulatory rules based on problems in the rulemaking process and has successfully challenged SEC rules in the past two years.

Additional reporting by Sarah Lynch; Editing by Tim Dobbyn and Leslie Adler

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