Court Upholds CFTC Commodity Pool Rule; Rejects ICI Appeal

ICI says rule will result in redundant regulation of mutual funds, ETFs

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The U.S. Court of Appeals for the D.C. Circuit on Tuesday rejected an appeal brought by the Investment Company Institute, upholding new rules issued by the Commodity Futures Trading Commission that will require many investment companies to register as commodity pools.

ICI came out against the ruling, stating that the CFTC’s Rule 4.5 will result in redundant regulation of registered investment companies, such as mutual funds and exchange-traded funds.

Karrie McMillan, ICI’s general counsel, said in a statement after the ruling that the court’s decision “appears to reflect its judgment that the costs and benefits of the CFTC’s expanded regulation of investment companies cannot be fully assessed until the agency completes its rulemaking to ‘harmonize’ its rules with those of the Securities and Exchange Commission.”

The court “made clear,” McMillan continued, “that it expects the costs and benefits of the harmonization rule to be carefully considered.” She said ICI continues to believe the amendments made to CFTC Rule 4.5 “were improperly adopted,” and that ICI “intends to focus on ensuring that the CFTC’s regulatory regime as it evolves does not adversely affect fund investors.”

David Hirschmann, president and CEO of the Chamber of Commerce's Center for Capital Markets Competitiveness, agreed in the same statement issued by ICI that the CFTC’s rule “was improperly adopted and imposes duplicative compliance costs on American companies and investors.”

The ICI’s lawsuit challenged the CFTC’s recent changes to its Rule 4.5, which excludes certain entities from regulation as commodity pool operators. The ICI argued that the changes CFTC made to Rule 4.5 require “many advisors to registered investment companies—which are already regulated by the SEC—to be dually regulated by the CFTC” as commodity pool operators. The amendments to Rule 4.5 "result in unnecessary and burdensome regulations on advisors and their funds and, ultimately, their shareholders."

The U.S. District Court held that the CFTC met its regulatory obligations when promulgating the rule by analyzing the costs and benefits and providing sufficient notice and opportunity to comment. The Court also said that the CFTC did address the costs and benefits of the proposed rule changes. The Court stated that it would “be quite literally impossible to calculate the costs of an unknown regulation” and that the “law does not require agencies to measure the immeasurable.”

Cipperman Compliance Services warned investment companies the same day that the “new rules subjecting many registered funds to CPO registration are effective,” and that firms should not “ignore compliance on the hope that the ICI will try to appeal to the Supreme Court, the Supreme Court will even hear the case, and then the Court will reverse two concurring lower court opinions.”

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