Investment Co. Institute v. Commodity Futures Trading Commission , 720 F.3d 370 ( 2013 )

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.
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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
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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[.]
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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.
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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,
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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. Reg. at
11,283. As the appellants do not directly challenge the
aggregate net notional value threshold, we decline to define it
further and fill the Federal Reporter with irrelevant financial
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lingo.
In its Final Rule, CFTC justified its decision to return to the
pre-2003 regulatory framework on the basis of “changed
circumstances [that] warrant revisions to these rules.” Id. at
11,275. According to CFTC, the 2003 “system of exemptions
was appropriate because [registered investment companies]
engaged in relatively little derivatives trading.” Id. Since the
2003 amendments, however, such companies have engaged in
“increased derivatives trading activities” and “now offer[]
services substantially identical to those of registered entities
[that] are not subject to the same regulatory oversight.” Id.
Given this changed circumstance, and Dodd-Frank’s “more
robust mandate to manage systemic risk and to ensure safe
trading practices by entities involved in the derivatives
markets,” CFTC considered it necessary to narrow the
exclusions from its derivatives regulation. Id. Following this
rule change, RICs that do not satisfy the exclusion requirements
must register with CFTC per § 4.5.
In adopting the heightened disclosure requirements, CFTC
explained that “there currently is no source of reliable
information regarding the general use of derivatives by
registered investment companies.” Id. Such information would
be useful to CFTC and FSOC in performing their statutory
mandates of regulating commodities trading and identifying
systemic financial risks. See id. at 11,281.
Several commenters called the Commission’s attention to
possible inconsistencies with or redundancies to SEC
compliance requirements. In response to those commenters, and
concurrently with the issuance of the Final Rule, CFTC issued
a notice of proposed rulemaking to harmonize CFTC and SEC’s
compliance requirements. See Harmonization of Compliance
Obligations for Registered Investment Companies Required To
8
Register as Commodity Pool Operators, 77 Fed. Reg. 11,345(Feb. 24, 2012). In this notice, CFTC stated that it may change
certain disclosure requirements to harmonize them with SEC
requirements but, importantly, it does not plan to change the
new reporting requirements promulgated in the Final Rule and
contained in 17 C.F.R. § 4.27. See id.; see also Investment
Company Institute, 891 F. Supp. 2d at 183. The § 4.27 reporting
requirements, however, are suspended for registered investment
companies until CFTC and SEC promulgate a Final Rule on
harmonization. See id. at 183–84.
C. Procedural History
The Investment Company Institute and the Chamber of
Commerce filed suit in the district court against CFTC, alleging
that CFTC violated APA and CEA requirements in
promulgating the amendments to § 4.5 and § 4.27. Investment
Company Institute, 891 F. Supp. 2d at 184. The business
associations moved for summary judgment, and CFTC cross-
moved for summary judgment and moved to dismiss in part. Id.
at 167. The district court granted CFTC’s motion to dismiss in
part, ruling that the associations’ challenge to certain
compliance obligations (other than those arising under § 4.27)
was unripe because the Final Rule states that those obligations
are subject to change during the harmonization process. Id. at
205. The associations do not appeal that dismissal. The
associations do, however, appeal the district court’s grant of
summary judgment in favor of CFTC with regard to the other
issues raised in the associations’ complaint.
II. DISCUSSION
Federal Rule of Civil Procedure 56(a) provides that
summary judgment is appropriate “if the movant shows that
there is no genuine dispute as to any material fact and the
9
movant is entitled to judgment as a matter of law.” Our review
of a district court’s grant of summary judgment is de novo.
Calhoun v. Johnson, 632 F.3d 1259, 1261 (D.C. Cir. 2011).
There being no genuine dispute as to any material fact, the only
question before us is whether CFTC is entitled to judgment as a
matter of law. See Sherley v. Sebelius, 689 F.3d 776, 780 (D.C.
Cir. 2012). Under the APA, we must “hold unlawful and set
aside agency action, findings, and conclusions found to be . . .
arbitrary, capricious, an abuse of discretion, or otherwise not in
accordance with law.” 5 U.S.C. § 706(2). “Although the ‘scope
of review under the “arbitrary and capricious” standard is
narrow and a court is not to substitute its judgment for that of
the agency,’ we must nonetheless be sure [CFTC] has
‘examine[d] the relevant data and articulate[d] a satisfactory
explanation for its action including a rational connection
between the facts found and the choice made.’” Chamber of
Commerce v. SEC, 412 F.3d 133, 140 (D.C. Cir. 2005) (quoting
Motor Vehicle Mfrs. Ass’n v. State Farm Mut. Auto. Ins. Co.,
463 U.S. 29, 43 (1983)).
Appellants contend that CFTC violated the APA in its
rulemaking by: (1) failing to address its own 2003 rationales for
broadening CPO exemptions; (2) failing to comply with the
Commodity Exchange Act and offering an inadequate
evaluation of the rule’s costs and benefits; (3) including swaps
in the trading threshold, restricting its definition of bona fide
hedging, and failing to justify the five percent threshold; and, (4)
failing to provide an adequate opportunity for notice and
comment. We address each contention in turn.
A. Change in Agency Position
The appellants first contend that CFTC failed to explain
why it changed from its more generous exemption requirements
that had existed since 2003 to the more stringent requirements
10
contained in the Final Rule. Though it is true that the Final Rule
stated that investment companies are increasing their
participation in derivatives markets, the 2003 rule was explicitly
designed to promote liquidity in the commodities markets by
making it easier for registered investment companies to
participate in derivatives markets. CFTC, according to the
appellants, completely failed to address the liquidity issue, and
therefore its change in position was arbitrary and capricious.
We disagree. An agency changing course “need not
demonstrate to a court’s satisfaction that the reasons for the new
policy are better than the reasons for the old one; it suffices that
the new policy is permissible under the statute, that there are
good reasons for it, and that the agency believes it to be better.”
FCC v. Fox Television Stations, Inc., 556 U.S. 502, 515 (2009).
Appellants do not argue that the new rule is impermissible under
CFTC’s statutory framework. Instead, appellants argue that
CFTC had an obligation to address the rule’s impact on
liquidity. But the APA imposes no heightened obligation on
agencies to explain “why the original reasons for adopting the
displaced rule or policy are no longer dispositive.” Id. at 514(internal quotation marks and citation omitted). So long as
CFTC provided a reasoned explanation for its regulation, and
the reviewing court can “reasonably . . . discern[]” the agency’s
path, we must uphold the regulation, even if the agency’s
decision has “less than ideal clarity.” Bowman Transp., Inc. v.
Arkansas-Best Freight Sys., Inc., 419 U.S. 281, 286 (1974).
CFTC’s regulation clears this low bar. CFTC explicitly
acknowledged that it was changing its position from its 2003
rulemaking. The Final Rule detailed the changed circumstances
that prompted CFTC to amend the rule, including increased
derivatives trading by investment companies (an issue inherently
tied to liquidity) and a perceived lack of market transparency
that could lead to a buildup of systemic risk. See 77 Fed. Reg.
11at 11,275, 11,277. It is clear that the Commission, in adopting
the changes and the rule, was attempting to respond to those
changed circumstances by adding registration and reporting
requirements. As is clear from our discussion of the regulatory
and statutory history above, the Commission’s requirements
followed a congressional shift evidenced in the Dodd-Frank
Act—legislation expressly relied upon by the Commission. See
id. at 11,252. Such reasoned decisionmaking is an acceptable
way to change CFTC’s past rules, cf. Fox, 556 U.S. at 517, the
appellants’ policy disagreements with CFTC notwithstanding.
The law requires no more.
B. Cost-Benefit Analysis
Appellants next contend that CFTC failed to adequately
consider the costs and benefits of the rule. The Commodity
Exchange Act requires that CFTC “consider the costs and
benefits” of its actions and “evaluate[]” those costs and benefits
“in light of” five factors: “(A) considerations of protection of
market participants and the public; (B) considerations of the
efficiency, competitiveness, and financial integrity of futures
markets; (C) considerations of price discovery; (D)
considerations of sound risk management practices; and (E)
other public interest considerations.” 7 U.S.C. § 19(a)(2). As
a reviewing court, “[o]ur role is to determine whether the
[agency] decision was based on a consideration of the relevant
factors and whether there has been a clear error of judgment.”
Center for Auto Safety v. Peck, 751 F.2d 1336, 1342 (D.C. Cir.
1985) (internal quotation marks omitted) (quoting State Farm,
463 U.S. at 43).
First, appellants argue that CFTC ignored existing SEC
regulations that could provide the necessary information about
investment companies’ activities in derivatives markets.
Appellants point to two recent cases in which we vacated SEC
12
regulations because SEC had failed to address existing
regulatory requirements to determine whether sufficient
protections were already present. See Business Roundtable v.
SEC, 647 F.3d 1144, 1154 (D.C. Cir. 2011); American Equity
Inv. Life Ins. Co. v. SEC, 613 F.3d 166, 179 (D.C. Cir. 2010).
According to the appellants, CFTC similarly failed to consider
whether existing regulations made its proposed regulation
unnecessary.
We are unconvinced. In its Final Rule, CFTC explicitly
discussed SEC’s oversight in the derivatives markets: “In its
recent concept release regarding the use of derivatives by
registered investment companies, the SEC noted that although
its staff had addressed issues related to derivatives on a case-by-
case basis, it had not developed a ‘comprehensive and
systematic approach to derivatives related issues.’” 77 Fed.
Reg. at 11,255 (quoting Use of Derivatives by Investment
Companies Under the Investment Company Act of 1940, 76
Fed. Reg. 55,237, 55,239 (Sept. 7, 2011)). CFTC surveyed the
existing regulatory landscape and concluded that it “is in the
best position to oversee entities engaged in more than a limited
amount of non-hedging derivatives trading.” Id.; see also id. at
11,278. CFTC found that its registration and reporting
requirements could fill gaps in current regulations, explaining
that only it has the authority “to take punitive and/or remedial
action against registered entities for violations of the CEA or of
the Commission’s regulations.” Id. at 11,254. It explained how
the new § 4.27 forms would collect information from entities
registered under § 4.5 that would not otherwise be collected by
SEC. See id. at 11,275. Further, CFTC issued a harmonization
proposal to ensure that its rules do not duplicate or contradict
SEC regulations. See 77 Fed. Reg. 11,345.
These explanations suffice to justify the marginal benefit
of CFTC regulation of registered investment companies in the
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derivatives markets, and distinguish this case from Business
Roundtable and American Equity. In Business Roundtable, we
vacated an SEC rule because SEC had “failed adequately to
address whether the regulatory requirements of the [Investment
Company Act] reduce the need for, and hence the benefit to be
had from” additional regulations. 647 F.3d at 1154. In
American Equity, we determined that SEC acted in an arbitrary
and capricious manner because it completely failed to “assess
the baseline level of price transparency and information
disclosure under state law.” 613 F.3d at 178. In fact, SEC had
stated that it considered state regulatory regimes “not relevant.”
Id. As the district court rightly held, these cases are “plainly
distinguishable” from the present case. Investment Company
Institute, 891 F. Supp. 2d at 219. As the district court noted,
unlike the SEC in the other two cases, “CFTC did consider
whether RICs were otherwise regulated, and concluded that
CFTC regulation was necessary” despite the existing SEC
regime. Id. at 217. Moreover, CFTC issued a notice of
proposed rulemaking for a harmonization, the entire purpose of
which was to synchronize SEC and CFTC regulations, further
distinguishing this case from American Equity and Business
Roundtable.
Appellants next argue that CFTC, by engaging in a multi-
step rulemaking with some regulations becoming final now and
other regulations becoming final only after harmonization with
SEC regulations, made it impossible to determine the costs and
benefits of its rule. The thrust of the appellants’ argument is that
CFTC counted benefits that may not materialize and depend on
the harmonization rule while ignoring costs that may result from
that rule.
We again reject the appellants’ argument. In its Final Rule,
CFTC explicitly listed and analyzed the five statutory factors
that it must take into account when “consider[ing]” and
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“evalulat[ing]” the costs and benefits of a rule. 7 U.S.C. § 19(a);
see 77 Fed. Reg. at 11,275–83. It had no obligation to consider
hypothetical costs that may never arise. The statute only
requires the Commission to address costs and benefits “[b]efore
promulgating a regulation.” 7 U.S.C. § 19(a)(1). CFTC stated
that it had not finalized several disclosure requirements (not
including the requirements in § 4.27) and would not do so until
after harmonization. See 77 Fed. Reg. 11,345. We see at least
two good reasons that CFTC need not count costs from these
potential disclosure requirements. First, the statute does not
mandate it, and second, it would be quite literally impossible to
calculate the costs of an unknown regulation. And as the
Supreme Court has emphasized, “[n]othing prohibits federal
agencies from moving in an incremental manner.” Fox, 556
U.S. at 522. CFTC counsel correctly stated at oral argument that
CFTC must consider and evaluate the costs and benefits of its
harmonization rulemaking during that rulemaking, and the
appellants can challenge that rule when it is finalized. See Oral
Arg. Recording at 33:30–34:30. As the district court opined,
“The time for any challenge to any new compliance obligations
is when the final harmonization rule has been released and the
nature of those obligations is clear.” Investment Company
Institute, 891 F. Supp. 2d at 205.
The appellants also assert that the agency improperly
counted hypothetical benefits, but this assertion is incorrect. It
was appropriate for CFTC to count the benefits flowing from its
registration and disclosure requirements in § 4.5 and § 4.27, as
the specifics of those requirements are finalized and not subject
to the harmonization rule.1 The appellants further complain that
1
Unlike the cost posited by the appellants as unconsidered, the
benefits upon which the Commission relies are not hypothetical. The
Commission’s analysis relies upon the benefits as being established in
the ungarnished application of § 4.5 and § 4.27, not in the
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CFTC failed to put a precise number on the benefit of data
collection in preventing future financial crises. But the law does
not require agencies to measure the immeasurable. CFTC’s
discussion of unquantifiable benefits fulfills its statutory
obligation to consider and evaluate potential costs and benefits.
See Fox, 556 U.S. at 519 (holding that agencies are not required
to “adduce empirical data that” cannot be obtained). Where
Congress has required “rigorous, quantitative economic
analysis,” it has made that requirement clear in the agency’s
statute, but it imposed no such requirement here. American
Financial Services Ass’n v. FTC, 767 F.2d 957, 986 (D.C. Cir.
1985); cf., e.g., 2 U.S.C. § 1532(a) (requiring the agency to
“prepare a written statement containing . . . a qualitative and
quantitative assessment of the anticipated costs and benefits”
that includes, among other things, “estimates by the agency of
the [rule’s] effect on the national economy”).
Finally, the appellants argue that CFTC failed to consider
the relevant costs and benefits of its rule because it had not yet
adopted a definition of swaps and it did not obtain some market
data suggested by commenters. But Dodd-Frank includes a
detailed definition of “swap,” see 7 U.S.C. § 1a(47). Further,
CFTC stated in a previous proposed rulemaking that “extensive
further definition of the term[] by rule is not necessary.” Joint
Proposed Rule, Further Definition of “Swap,” 76 Fed. Reg.
29,818, 29,821 (May 23, 2011) (internal quotation marks
omitted). Given that the Commission explained the lack of need
for significant additions to the definition in Dodd-Frank, it was
not arbitrary or capricious for it to view any costs resulting from
the lack of a CFTC regulation defining “swap” as minimal. In
harmonization rule. Of course if it should materialize that the
harmonization in some fashion destroys those benefits, appellants
would then be free to raise the resulting imbalance of costs and
benefits in a challenge to the harmonization rule.
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any event, in light of a final rule defining “swap” in essentially
the same way as Dodd-Frank, see Further Definition of “Swap,”
77 Fed. Reg. 48,208 (Aug. 13, 2012), the appellants can show no
“prejudicial error.” 5 U.S.C. § 706.
The appellants also fail to show that CFTC’s refusal to
gather additional market data as suggested by commenters was
arbitrary or capricious. CFTC acknowledged that its data was
limited in some respects, see 77 Fed. Reg. at 11,278, but that is
true in practically any regulatory endeavor. CFTC adequately
considered the costs and benefits of the rule given this
uncertainty, explaining that the commenters provided no data
that “would warrant deviation” from the proposed rule, given the
rule’s “costs and benefits.” Id. CFTC went on to explain that
“[t]hese data limitations are one reason why the Commission is
pursuing additional data collection initiatives under these final
rules.” Id. at 11,278 n.229. In essence, the appellants are
challenging the very method for obtaining the data they want on
the ground that CFTC has not yet obtained the data they want.
But neither the APA nor the CEA imposes such a catch-22 on
CFTC. We hold that CFTC’s consideration and evaluation of
the rule’s costs and benefits was not arbitrary or capricious.
C. The Rule’s Particulars
The appellants challenge three particular aspects of the
Final Rule. The first is CFTC’s decision to include swap
transactions in the registration threshold, which has the effect of
requiring more investment companies to register pursuant to
§ 4.5. The appellants claim that this decision was arbitrary and
capricious because Dodd-Frank implemented a separate
reporting framework with regard to swaps. Appellants contend
that one of CFTC’s responses to this claim, that participation in
swaps would trigger the registration requirement even if CFTC
17
based its threshold only on futures and options, is irrational and
obviously incorrect.
Though we agree that this particular response offers “less
than ideal clarity,” CFTC gave sufficient other explanations for
including swap trades in the § 4.5 trading threshold that we can
“reasonably . . . discern[]” its rationale. Bowman, 419 U.S. at
286. The Final Rule explained that “[t]he Dodd-Frank Act
amended the statutory definition of the terms ‘commodity pool
operator’ and ‘commodity pool’ to include those entities that
trade swaps,” evidencing that swaps were a central concern of
the statute. 77 Fed. Reg. at 11,258. The rule further explained
that CFTC would use information obtained “from CPOs
transacting in swaps” to “help to bring transparency to the swaps
markets, as well as to the interaction of swaps and futures
markets, protecting the participants in both markets from
potentially negative behavior.” Id. at 11,283. Given these
goals, it was not arbitrary or capricious to include swaps in the
§ 4.5 trading threshold.
The second aspect of the rule challenged by the appellants
is its definition of bona fide hedging transactions, a definition
that the appellants claim is too narrow and should encompass
risk management strategies in financial markets. This argument
amounts to nothing more than another policy disagreement with
CFTC, so we must reject it. CFTC adequately explained that it
was rejecting the broader “risk management” definition because
“bona fide hedging transactions are unlikely to present the same
level of market risk [as risk management transactions] as they
are offset by exposure in the physical markets.” Id. at 11,256.
It also found that the risk management definition would be
difficult to “properly limit” and make its exclusion “onerous to
enforce.” Id. Given the deference appropriate to such expert
determinations, we reject the appellants’ challenge to this aspect
of the rule. See Rural Cellular Ass’n v. FCC, 588 F.3d 1095,
18
1105 (D.C. Cir. 2009) (“The ‘arbitrary and capricious’ standard
is particularly deferential in matters implicating predictive
judgments . . . .”).
We further reject the appellants’ contention that this aspect
of the rule must be vacated because the bona fide hedging
definition was cross-referenced to another rule that was recently
vacated. See Int’l Swaps & Derivatives Ass’n v. CFTC, 887 F.
Supp. 2d 259 (D.D.C. 2012). The decision vacating the cross-
referenced rule had nothing to do with the bona fide exception
in this rule, and the fact that the definition here was cross-
referenced instead of reproduced does not make it automatically
invalid.
The third and final particular aspect of the rule challenged
by the appellants is the five percent registration threshold for
§ 4.5, which the appellants argue is too low. Our cases explain
the appropriate deference given to these types of agency
determinations:
It is true that an agency may not pluck a number out of thin
air when it promulgates rules in which percentage terms
play a critical role. When a line has to be drawn, however,
[CFTC] is authorized to make a rational legislative-type
judgment. If the figure selected by the agency reflects its
informed discretion, and is neither patently unreasonable
nor a dictate of unbridled whim, then the agency’s decision
adequately satisfies the standard of review.
WJG Telephone Co. v. FCC, 675 F.2d 386, 388–89 (D.C. Cir.
1982) (internal quotation marks and citations omitted). CFTC
offered a reasoned explanation for its choice of five percent,
finding that “trading exceeding five percent of the liquidation
value of a portfolio evidences a significant exposure to the
derivatives markets.” 77 Fed. Reg. at 11,278. According to the
19
Final Rule, the five percent threshold is appropriate because “it
is possible for a commodity pool to have a portfolio that is
sizeable enough that even if just five percent of the pool’s
portfolio were committed to margin for futures, the pool’s
portfolio could be so significant that the commodity pool would
constitute a major participant in the futures market.” Id. at
11,262 (quoting 76 Fed. Reg. at 7,985). We defer to CFTC’s
judgment and hold that adopting the five percent threshold was
neither arbitrary nor capricious.
D. Notice and Comment
Finally, appellants contend that CFTC failed to provide
adequate opportunity for notice and comment both because the
proposal’s cost-benefit discussion did not set out the basis for
the Final Rule’s analysis and because CFTC did not give
commenters notice of the seven-factor marketing test. We
disagree. The APA requires “reference to the legal authority
under which the rule is proposed” and “either the terms or
substance of the proposed rule or a description of the subjects
and issues involved.” 5 U.S.C. § 553(b). The proposed rule
included a separate section entitled “Cost-Benefit Analysis” that
gave adequate notice of CFTC’s approach to the cost-benefit
analysis by setting forth the factors that CFTC would consider
and summarizing expected costs and benefits. See 76 Fed. Reg.
at 7,988.
As for the seven-factor marketing test, no notice and
comment was required. The APA’s notice-and-comment
provision does not apply to “general statements of policy,” 5
U.S.C. § 553(b)(3)(A), and the seven factors were included in
the rule only as guidance. See 77 Fed. Reg. at 11,258–59. The
rule explicitly states that CFTC “will determine whether a
violation of the marketing restriction exists on a case by case
basis through an examination of the relevant facts.” Id. at
20
11,259. Even if these factors were not included as a mere
statement of policy, the appellants do not even attempt to show
that any prejudice resulted from this failure to provide notice, as
they must to succeed on such a claim. See 5 U.S.C. § 706;
American Coke & Coal Chemicals Institute v. EPA, 452 F.3d
930, 939 (D.C. Cir. 2006).
III. CONCLUSION
For the foregoing reasons, the decision of the district court
is
Affirmed.