CFTC defeats challenge to mutual fund commodities rule

Registration was waived in 2003

The U.S. Commodity Futures Trading Commission defeated a federal court challenge to a rule requiring mutual funds with commodities investments to register with the agency.

U.S. District Judge Beryl Howell in Washington today rejected arguments by the U.S. Chamber of Commerce and the Investment Company Institute that the rule is unnecessary, and that the commission didn’t properly assess the costs and benefits when it approved the regulation in February.

“The court is satisfied that the CFTC considered the relevant factors, acted well within its discretion, and that there was nothing arbitrary or capricious about the CFTC’s actions in promulgating the final rule,” Howell wrote in a 93- page ruling dismissing the lawsuit.

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 in a 4-1 vote, 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.

‘Pool Operators’

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 said when the rule was passed.

Gensler, in an e-mailed statement today, said he was pleased with Howell’s decision, and “in particular, the court’s affirmation of the agency’s consideration of costs and benefits.” 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.

The groups argued the measure isn’t needed because mutual funds are already overseen by the Securities and Exchange Commission.

The complaint about “redundant regulation appears to be based on a false premise about the SEC’s capacity and interest in regulating for the CFTC’s purpose,” Howell said in her ruling.

The CFTC noted in the final rule, the judge said, that the SEC “itself had acknowledged that ’it had not developed a comprehensive and systematic approach to derivatives-related issues.’”

Reviewing Decision

Blair Latoff, a spokeswoman for the Chamber of Commerce, said the group is reviewing the decision and considering its options.

“We continue to believe that the CFTC’s new regulations of registered investment companies are fundamentally flawed,” she said. “They inject more confusion into our capital markets, without offering any real benefits to investors.”

Ianthe Zabel, a spokeswoman for the Investment Company Institute, said in an e-mail that the group was disappointed with the ruling and is “evaluating its options.”

When the lawsuit was filed in April, ICI President Paul Schott Stevens, whose Washington-based trade group lobbies on behalf of mutual funds, said in a call with reporters that the rule, “if allowed to stand, will impose enormous costs and burdens” and that these costs would come out of “shareholders’ pockets.” Higher Returns

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

Dennis Kelleher, president and chief executive officer of Better Markets, an organization advocating stricter financial regulation, said in a statement the decision is “a total victory not just for the CFTC, but also for financial reform.”

“This is also a victory for taxpayers as well who are still paying the price for the financial collapse caused largely by unregulated reckless trading and investments,” he said.

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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