April 17, 2012 / 8:40 PM / 8 years ago

Mutual funds sue U.S. CFTC over registration rule

WASHINGTON (Reuters) - Groups representing mutual funds and businesses filed a lawsuit on Tuesday against the U.S. Commodity Futures Trading Commission, challenging a rule that will require funds to register with the agency in the latest battle against new regulations coming out of Washington.

The Investment Company Institute and the U.S. Chamber of Commerce complained that the rule duplicates a requirement that funds register with the Securities and Exchange Commission.

It is the second lawsuit to be filed recently in U.S. District Court for the District of Columbia against the CFTC.

Another pair of industry groups challenged the CFTC in December over a rule stemming from the 2010 Dodd-Frank law that would impose trading curbs on speculators in commodity markets.

The two lawsuits employ a similar basic argument: that the CFTC failed to properly weigh the costs and benefits of the rules before finalizing them.

“The CFTC does not even make an effort to quantify the costs or the benefits,” said David Hirschmann, the head of the Chamber’s Center for Capital Markets Competitiveness.

“The CFTC openly admits in their rule that they were unable to predict the rule’s costs at the time the rule was promulgated. That is just not good government,” Hirschmann said.

The rule 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.

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

The rule is not tied to the 2010 Dodd-Frank financial oversight law, and stems instead from a request by the National Futures Association, a self-regulatory organization for the futures industry.

The CFTC approved the rule in February by a 4-1 vote. Republican Commissioner Jill Sommers dissented, saying the agency failed to adequately show that the benefits of the rule outweighed the cost to the industry.

The ICI, the leading mutual fund trade group, has been a vocal critic of the rule change, especially because funds already register with the SEC. “The rule will impose significant compliance costs on fund advisers, and ultimately those funds will come out of shareholders’ pockets,” said Paul Schott Stevens, ICI’s president.

“The CFTC’s rule will affect virtually every registered investment company offered to American investors today.”

A CFTC spokesman declined to comment on the lawsuit. The rule states that advisers must register with the CFTC by the later of December 31 or 60 days after the agency finalizes its definition of the term “swap.”


The failure to properly weigh the economic impact of new regulations has become a successful weapon of choice for industry groups over the past decade.

The SEC has lost multiple court cases in recent years, either due to problems with its economic analysis or because of other problems with following the rulemaking process.

The U.S. Chamber of Commerce and other industry groups have played an aggressive role in challenging financial regulations prompted by the 2007-2009 financial crisis.

In July, the Chamber and the Business Roundtable successfully overturned a Dodd-Frank rule from the SEC that would have made it easier for shareholders to nominate directors to corporate boards.

But Bart Chilton, a Democratic member of the CFTC, cautioned industry groups that judges may turn against them.

“Would-be litigants should perhaps start to be very circumspect about this scatter-gun approach to federal litigation,” Chilton said in an email. “Federal judges don’t like their courtrooms to be used as logjams to create regulatory slow-go’s and no-go’s, and it’s quite clear that(‘s) what such frivolous cases have become.”

Many of the successful legal challenges to SEC rules in recent years have been argued by Eugene Scalia, a partner at Gibson Dunn who is representing ICI and the Chamber in this latest lawsuit.

Scalia, the son of U.S. Supreme Court Justice Antonin Scalia, compared the legal arguments of this case to one he won a few years ago in which the SEC sought to classify equity-indexed annuities as securities.

In that case, the court found the SEC had failed to show why the regulatory requirements for indexed annuities already in place were insufficient.

“Quite similarly here, the CFTC has rushed forward to regulate investment companies without having first determined that there was some gap and shortfall in the existing regulatory apparatus that required them to enter the fray,” Scalia said.

Reporting By Dave Clarke and Sarah N. Lynch; additional reporting by Alexandra Alper, Aruna Viswanatha and Jeremy Pelofsky in Washington.; Editing by Gerald E. McCormick and Tim Dobbyn

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