Investment Company Institute V. CFTC, 891 F
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United States Court of Appeals FOR THE DISTRICT OF COLUMBIA CIRCUIT Argued May 6, 2013 Decided June 25, 2013 No. 12-5413 INVESTMENT COMPANY INSTITUTE AND CHAMBER OF COMMERCE OF THE UNITED STATES OF AMERICA, APPELLANTS v. COMMODITY FUTURES TRADING COMMISSION, APPELLEE Appeal from the United States District Court for the District of Columbia (No. 1:12-cv-00612) Eugene Scalia argued the cause for appellants. On the briefs were Robin S. Conrad and Rachel Brand. Daniel T. Davis entered an appearance. Steven G. Bradbury and Susan Ferris Wyderko were on the brief for amici curiae Mutual Fund Directors Forum, et al. in support of appellants. Jonathan L. Marcus, Deputy General Counsel, U.S. Commodity Futures Trading Commission, argued the cause for appellee. With him on the brief were Dan M. Berkovitz, General Counsel, Robert A. Schwartz, Nancy R. Doyle, and Martin B. White, Assistant General Counsel, and Melissa Chiang, Counsel. 2 John M. Devaney, Martin E. Lybecker, Dennis M. Kelleher, and Stephen W. Hall were on the brief for amici curiae The National Futures Association, et al. in support of appellee. Before: GARLAND, Chief Judge, BROWN, Circuit Judge, and SENTELLE, Senior Circuit Judge. Opinion for the Court filed by Senior Circuit Judge SENTELLE. SENTELLE, Senior Circuit Judge: The Investment Company Institute and the Chamber of Commerce of the United States brought this action against the Commodity Futures Trading Commission (CFTC), seeking a declaratory judgment that recently adopted regulations of the Commission regarding derivatives trading were unlawfully adopted and invalid, and seeking to vacate and set aside those regulations and to enjoin their enforcement. The district court granted summary judgment in favor of the Commission. Because we agree with the district court that the Commission did not act unlawfully in promulgating the regulations at issue, we affirm. I. BACKGROUND A. Regulatory History The Commodity Exchange Act (CEA), Title 7, United States Code, Chapter 1, establishes and defines the jurisdiction of the Commodity Futures Trading Commission. Under this Act, the Commission has regulatory jurisdiction over a wide variety of markets in futures and derivatives, that is, contracts deriving their value from underlying assets. See 7 U.S.C. § 2(a). In addition to establishing the regulatory authority of the Commission, the CEA also directly imposes certain duties on regulated entities. As relevant here, the Act requires that 3 Commodity Pool Operators (CPOs) register with CFTC and adhere to regulatory requirements related to such issues as investor disclosures, recordkeeping, and reporting. 7 U.S.C. §§ 6k, 6n; 17 C.F.R. §§ 4.20–4.27. The CEA defines CPOs as entities “engaged in a business that is of the nature of a commodity pool, investment trust, syndicate, or similar form of enterprise” that buy and sell securities “for the purpose of trading in commodity interests.” 7 U.S.C. § 1a(11)(A)(i). The CEA, however, empowers CFTC to exclude an entity from regulation as a CPO if CFTC determines that the exclusion “will effectuate the purposes of” the statute. Id. § 1a(11)(B). Since 1985, the Commission has exercised its authority to exclude “otherwise regulated” entities through § 4.5 of its regulations. See Commodity Pool Operators, 50 Fed. Reg. 15,868 (Apr. 23, 1985) (codified at 17 C.F.R. § 4.5). Under the version of § 4.5 that applied before amendments of 2003, otherwise regulated entities could claim exclusion by meeting certain regulatory conditions. These conditions included that the entity: (i) Will use commodity futures or commodity options contracts solely for bona fide hedging purposes . [;] (ii) Will not enter into commodity futures and commodity options contracts for which the aggregate initial margin and premiums exceed 5 percent of the fair market value of the entity’s assets . [;] (iii) Will not be, and has not been, marketing participations to the public as or in a commodity pool or otherwise as or in a vehicle for trading in the commodity futures or commodity options markets; [and,] (iv) Will disclose in writing to each prospective participant the purpose of and the limitations on the scope of the commodity futures and commodity options trading in which the entity intends to engage[.] 4 Id. at 15,883. These conditions were amended slightly in 1993, when CFTC promulgated a rule removing the bona fide hedging requirement and excluding bona fide hedging from the trading threshold. Commodity Pool Operators, 58 Fed. Reg. 6,371, 6,372 (Jan. 28, 1993). Under these conditions, there was no automatic exclusion for registered investment companies, or “RICs,” regulated by the Securities and Exchange Commission pursuant to the Investment Company Act of 1940, 15 U.S.C. §§ 80a-1 to -64. Therefore, a commodity pool operator that was also a registered investment company was included within CFTC’s regulatory definition of CPOs unless it met all of the § 4.5 requirements for exclusion. In 2000, Congress enacted the Commodity Futures Modernization Act of 2000, Pub. L. No. 106-554, 114 Stat. 2763. That statute barred CFTC and SEC from regulating most “swaps,” a type of derivative involving the exchange of cash flows from financial instruments. See 7 U.S.C. § 2(d). Responsive to the statutory change, the Commission amended its requirements for exclusion to eliminate the five percent ceiling. See Additional Registration and Other Regulatory Relief for Commodity Pool Operators and Commodity Trading Advisors, 68 Fed. Reg. 47,221, 47,224 (Aug. 8, 2003). These 2003 amendments “effectively excluded RICs from the CPO definition,” freeing registered investment companies from most CFTC CPO regulations. Investment Company Institute v. CFTC, 891 F. Supp. 2d 162, 172 (D.D.C. 2013). CFTC viewed its 2003 amendments as consistent with the deregulatory spirit of the 2000 statute. See 68 Fed. Reg. at 47,223. In 2010, the Commission began shifting back to a more stringent regulatory framework. This shift came in the wake of the 2007–2008 financial crisis, which many attributed to poorly regulated derivatives markets, when Congress passed the Dodd- Frank Wall Street Reform and Consumer Protection Act, Pub. 5 L. No. 111-203, 124 Stat. 1376 (2010) (codified as amended in scattered sections of the U.S. Code). As relevant here, Dodd- Frank repealed several statutory provisions that had excluded certain commodities transactions from CFTC oversight. Id. §§ 723, 734. Dodd-Frank also gave CFTC regulatory authority over swaps, and amended the statutory definition of commodity pool operators to include entities that trade swaps. Id. §§ 721(a), 722. Dodd-Frank, however, did not affect CFTC’s authority to set exclusion requirements for CPOs. B. Rulemaking Process After Congress passed Dodd-Frank, the National Futures Association (NFA), to which all CPOs must belong, filed a petition of rulemaking with CFTC requesting that CFTC amend § 4.5 to limit the scope of its exclusion for registered investment companies. See Petition of the National Futures Association, 75 Fed. Reg. 56,997 (Sept. 17, 2010). In NFA’s view, mutual funds were using the relaxed § 4.5 standards to evade CFTC oversight of their derivative operations, reducing transparency and potentially harming the public because no other regulator had rules equivalent to CFTC’s. See Investment Company Institute, 891 F. Supp. 2d at 175–76. Therefore, NFA asked CFTC to restore the trading threshold and public marketing prohibition requirements to § 4.5 for any registered investment company seeking exclusion from CPO status. See 75 Fed. Reg. at 56,998. In essence, NFA sought a return to the pre-2003 regulatory framework, but only for registered investment companies. On February 11, 2011, CFTC proposed new regulations that would amend § 4.5 “to reinstate the pre-2003 operating criteria” for all registered investment companies. Commodity Pool Operators and Commodity Trading Advisors: Amendments to Compliance Obligations, 76 Fed. Reg. 7,976, 7,984 (Feb. 11, 6 2011). One notable difference from the 2003 framework is that because of Dodd-Frank’s extension of CFTC authority to swaps, the regulations proposed that swaps be included in the trading thresholds. See id. at 7,989. The proposed regulations also required certified regular reports from CPOs, a requirement that would be contained in a new § 4.27. See id. at 7,978. CFTC provided four explanations for these proposed regulations: First, the regulations would align CFTC’s regulatory framework “with the stated purposes of the Dodd-Frank Act.” Id. Second, they would “encourage more congruent and consistent regulation of similarly situated entities among Federal financial regulatory agencies.” Id. Third, they would “improve accountability and increase transparency of the activities of CPOs” and commodity pools. Id. Fourth, they would make it easier to collect data for the Financial Stability Oversight Council (“FSOC”), a new body created by Dodd-Frank charged with “identify[ing] risks to the financial stability of the United States.” Id.; Dodd-Frank Act § 112 (codified at 12 U.S.C. § 5322). After the public comment period expired, CFTC promulgated a Final Rule amending § 4.5 and adding § 4.27 largely as proposed. See Commodity Pool Operators and Commodity Trading Advisors: Compliance Obligations, 77 Fed. Reg. 11,252 (Feb. 24, 2012), as corrected due to Fed. Reg. errors in its original publication, 77 Fed. Reg. 17,328 (Mar. 26, 2012); see also 17 C.F.R. §§ 4.5, 4.27. The primary difference between the proposed rule and the Final Rule is that, to be eligible for exclusion, a RIC’s non-bona fide hedging trading must be less than or equal to five percent of the liquidation value of the entity’s portfolio, or the aggregate net notional value of such trading must be less than or equal to “100 percent of the liquidation value of the pool’s portfolio.” 77 Fed.