CFTC's rule on commodity pool operators upheld by U.S. District Court

On Wednesday, December 12, 2011, the U.S. District Court for the District of Columbia rejected a challenge to the CFTC's new rule governing Commodity Pool Operators.  The rule was challenged by the Investment Company Institute and the U.S. Chamber of Commerce, primarily on procedural grounds related to the adequacy of the agency's consideration of the costs and benefits of the new rule, which is required by section 15(a) of the Commodity Exchange Act (CEA). 

 Judge Beryl A. Howell's comprehensive 92-page opinion, available on the court's website, serves as a virtual blueprint for how agencies should conduct analyses of the costs and benefits of regulations, particularly when the regulations cover areas in which the costs and benefits cannot be reasonably quantified.  Numerous regulations implementing the Dodd-Frank Act remain to be finalized and modifications to many of them can be expected as the industry evolves and experience with the new regulations accumulates.  Judge Howell's opinion will greatly facilitate this daunting task.  And, although the opinion addresses the specific requirements of section 15(a) of the CEA, the analysis illuminates the correct general approach for dealing with costs and benefits that cannot be quantified and should serve as a landmark in administrative law far beyond regulations under the CEA.

What are the benefits to considering the costs and benefits of regulations?

Many statutes require agencies to do some sort of analysis of the costs and benefits of a proposed regulation when promulgating a new or revised regulation.  Section 15(a) of the Commodity Exchange Act requires the CFTC to "consider the costs and benefits of the action of the Commission" in light of "(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."

The meaning of this Delphic reiteration of what appears to be the agency's statutory duty in the first instance will be hotly contested in the courts, as opponents of regulations argue that it requires as close to an exact quantification and comparison of costs and benefits as possible and proponents of regulations claim that it gives the Commission discretion to do anything not unreasonable.  The immense scope and novel features of the financial system addressed by the Dodd-Frank Act and the corresponding regulations makes it all but impossible to give the wording of section 15(a) any but the most general meaning.  But reasonable judges can, and do, differ, and a long season of litigation seems to await each of the rules before they become final.

Congress cannot be expected to act with the clarity and dispatch of the Executive branch.  But before enacting requirements such as section 15(a) in the future, Congress may wish to revisit the wording of the orders from the Combined Chiefs of Staff to General Eisenhower appointing him Supreme Allied Commander on the eve of the invasion of Europe:  "You will enter the continent of Europe and, in conjunction with the other United Nations, undertake operations aimed at the heart of Germany and the destruction of her armed forces."