CFTC Sued by Fund Industry to Overturn Registration Rule

The U.S. Commodity Futures Trading Commission was sued by two business groups seeking to overturn a rule requiring mutual funds with commodities investments to register with the agency.

The CFTC didn’t properly assess the costs and benefits when it imposed the regulation in a 4-1 vote in February, the U.S. Chamber of Commerce and the Investment Company Institute argue in a lawsuit filed today in federal court in Washington. The measure is unnecessary, they said, because mutual funds are already overseen by the Securities and Exchange Commission.

The rule, “if allowed to stand, will impose enormous costs and burdens,” ICI President Paul Schott Stevens said in a call with reporters. “Ultimately those costs will come out of shareholders’ pockets,” said Stevens, whose Washington-based trade group lobbies on behalf of mutual funds,

The case is one of several brought by the financial industry as it pushes back against tighter regulations passed in the wake of the 2008 credit crisis. CFTC commissioners who approved the registration requirement said it would increase investor protections and eliminate a decade-old loophole that let funds investing in futures and swaps tied to commodities evade their oversight.

Investment companies have “increased significantly” their use of commodity futures, swaps and options since the agency determined in 2003 that they didn’t need to register as “commodity pool operators,” CFTC Chairman Gary Gensler, a Democrat, said when the rule was passed.

‘Into the Light’

“It is critical to bring the pools that have been in the dark since 2003 back into the light,” Gensler said.

Republican Commissioner Jill Sommers, who voted against the rule, said the agency’s justification for the requirement was “sorely lacking” and that its cost-benefit analysis might not survive a court challenge.

Under the rule, funds would have to file reports with the CFTC about their use of leverage, exposure to risk from counterparties and other investment trading data.

A “substantial number of funds” would be subject to the regulation and the rest would be forced to pay more as they monitored trading to avoid running afoul of the rule, according to Stevens, who said ICI and the chamber hadn’t put a figure on how much registration would increase industry costs.

Mutual funds use commodity futures and other derivatives to hedge risk, for portfolio diversification or as part of a strategy for seeking higher returns, Stevens said.

Steve Adamske, a CFTC spokesman, said the agency was reviewing the lawsuit.

‘Mindless Yearning’

U.S. Representative Barney Frank, who co-wrote the Dodd-Frank regulation overhaul in 2010, called the lawsuit “outrageous” and said he was “very disappointed” in the ICI.

“It’s just incredible to me,” Frank, a Massachusetts Democrat, said in an interview today. “It’s just mindless yearning for the old ways.”

Republican lawmakers, most of whom opposed Dodd-Frank, said the lawsuit underscores the need for regulators to weigh carefully a policy’s costs against its benefits as they craft the biggest revision of Wall Street rules since the 1930s.

“Economic analysis holds the CFTC accountable to the American people that it will not impose harm on the economy through poorly vetted or unnecessary regulations,” said Representative Frank Lucas, an Oklahoma Republican who is chairman of the House Agriculture Committee. “Today’s announcement should serve as a note of caution to the commission as it proceeds with final rules.”

Eugene Scalia

The chamber and the ICI retained Eugene Scalia , the son of Supreme Court Justice Antonin Scalia and a partner at Gibson, Dunn & Crutcher LLP, to argue the case. In recent years, Scalia has won four cases challenging regulations imposed by the SEC and is also suing the CFTC over a rule limiting speculation in the commodities markets.

“It is elementary that we should not impose new regulatory costs on American investors without first determining that it is necessary to do so,” Scalia said today.

The case is Investment Company Institute v. U.S. Commodity Futures Trading Commission, 1:12-cv-00612, U.S. District Court, District of Columbia (Washington).

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