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.
Showing posts with label litigation. Show all posts
Showing posts with label litigation. Show all posts
Friday, December 14, 2012
Monday, December 3, 2012
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."
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."
Sunday, October 7, 2012
More imaginative penalties are needed
Constructing appropriate penalties for violation of the commodities laws in no easy undertaking. Entities that can do the most damage to the economy are often "too big to fail/too big to jail." Fines in the hundreds of millions of dollars may be the equivalent of a traffic ticket -- as U.S. District Judge Jed Rakoff has noted. On the other hand, fines of a ruinous amount inflict punishment on a broad swath of the investing public and could have adverse impacts on entire markets. But to limit the range of possible sanctions to monetary penalties takes too narrow an approach in my view.
The law of equity has a wide range of remedies, developed over centuries of dealing with novel situations. At the top end of the spectrum is the imposition of a receivership. This is a truly draconian step, in which the receiver -- an officer of the court -- actually takes control of the entity in question. This remedy is unlikely to be feasible when a wrongdoer is still a going concern, but has, of course, been widely used when the entity has failed. Less aggressive measures include the appointment of a party with special powers tailored to the problems to be corrected. These parties are often referred to as private inspectors general, monitors, or consultants. Such a party might be empowered to conduct periodic audits of financial transactions, review the structure of an organization and recommend changes, assure compliance with court-ordered conditions, make reports to parties in interest, and the like. At the lower end of the spectrum, a wrongdoer might agree to the use of a third party simply to verify its compliance with the conditions of a settlement.
The use of flexible, third-party involvement in the operation of a company or in assuring compliance with the requirements of a court order or settlement agreement is not novel -- the Department of Justice has used mechanisms of this sort for years in the criminal prosecution of corporations. The key is to assure that the scope of the powers of the third party is sufficiently broad to give the monitorship real teeth and yet not so intrusive as to be counterproductive.
Use of a sanction of this type would help address the chronic lack of resources available to regulators, because the wrongdoer bears the expense of the monitor. Non-monetary sanctions are also rebarbative to entities who must host the third party and so may incentivize them to more carefully obey the law.
These suggestions are just that -- the ultimate point is that monetary sanctions, by themselves, are not adequate to deal with the complexities of modern market regulation. Regulators should use a much broader range of remedies if they are to make any meaningful progress in policing the commodities markets. Your further suggestions would be greatly appreciated.
The law of equity has a wide range of remedies, developed over centuries of dealing with novel situations. At the top end of the spectrum is the imposition of a receivership. This is a truly draconian step, in which the receiver -- an officer of the court -- actually takes control of the entity in question. This remedy is unlikely to be feasible when a wrongdoer is still a going concern, but has, of course, been widely used when the entity has failed. Less aggressive measures include the appointment of a party with special powers tailored to the problems to be corrected. These parties are often referred to as private inspectors general, monitors, or consultants. Such a party might be empowered to conduct periodic audits of financial transactions, review the structure of an organization and recommend changes, assure compliance with court-ordered conditions, make reports to parties in interest, and the like. At the lower end of the spectrum, a wrongdoer might agree to the use of a third party simply to verify its compliance with the conditions of a settlement.
The use of flexible, third-party involvement in the operation of a company or in assuring compliance with the requirements of a court order or settlement agreement is not novel -- the Department of Justice has used mechanisms of this sort for years in the criminal prosecution of corporations. The key is to assure that the scope of the powers of the third party is sufficiently broad to give the monitorship real teeth and yet not so intrusive as to be counterproductive.
Use of a sanction of this type would help address the chronic lack of resources available to regulators, because the wrongdoer bears the expense of the monitor. Non-monetary sanctions are also rebarbative to entities who must host the third party and so may incentivize them to more carefully obey the law.
These suggestions are just that -- the ultimate point is that monetary sanctions, by themselves, are not adequate to deal with the complexities of modern market regulation. Regulators should use a much broader range of remedies if they are to make any meaningful progress in policing the commodities markets. Your further suggestions would be greatly appreciated.
Monday, October 1, 2012
Court vacates CFTC position limits rule
On September 28, 2012, U.S. District Judge Robert Wilkins vacated the CFTC's rule setting speculative position limits on futures, options, and swaps contracts linked to 28 physical commodities, and remanded the matter to the agency for further rulemaking. The CFTC promulgated the position limits rule on November 18, 2011, as part of its implementation of the Dodd-Frank Act. The three commissioners voting for the rule -- Chairman Gensler and Commissioners Chilton and Dunn -- believed that Congress had concluded that the limits were necessary to prevent "excessive speculation," preempting any consideration by the agency of the need for the limits. Although he voted for the rule on the basis that the law required the agency to set position limits, Commissioner Dunn expressed grave doubt as to whether the rule was either necessary or likely to be effective. Two financial industry organizations -- the International Swaps and Derivatives Association and the Securities Industry and Financial Markets Association -- sued under the Administrative Procedure Act, claiming that the Dodd-Frank Act clearly required the agency to make a finding that the limits were necessary before promulgating them.
Judge Wilkins disagreed with both parties, finding that the Act was ambiguous as to whether the agency needed to predicate its rulemaking on a factual finding that the position limits in the rule were necessary to prevent excessive speculation or that Congress had already made this finding when it passed the Act and the agency was without discretion as to whether the limits were necessary. Judge Wilkins found that the agency proceeded under the mistaken impression that the statute clearly required it to promulgate the position limits rule, regardless of whether the agency found the limits necessary. He therefore vacated the rule and remanded the issue to the agency to reconsider the rule on the basis that the Dodd-Frank Act is ambiguous concerning whether the agency has discretion to make a finding on the necessity for position limits.
This is the first judicial vacatur of a CFTC rule promulgated under Dodd-Frank. It will undoubtedly be followed by others, given the extreme complexity of the task and the vigorous opposition the agency faces from a well-financed and sophisticated industry.
Judge Wilkins' opinion in Civil Action No. 2011-2146 can be downloaded from opinion
Judge Wilkins disagreed with both parties, finding that the Act was ambiguous as to whether the agency needed to predicate its rulemaking on a factual finding that the position limits in the rule were necessary to prevent excessive speculation or that Congress had already made this finding when it passed the Act and the agency was without discretion as to whether the limits were necessary. Judge Wilkins found that the agency proceeded under the mistaken impression that the statute clearly required it to promulgate the position limits rule, regardless of whether the agency found the limits necessary. He therefore vacated the rule and remanded the issue to the agency to reconsider the rule on the basis that the Dodd-Frank Act is ambiguous concerning whether the agency has discretion to make a finding on the necessity for position limits.
This is the first judicial vacatur of a CFTC rule promulgated under Dodd-Frank. It will undoubtedly be followed by others, given the extreme complexity of the task and the vigorous opposition the agency faces from a well-financed and sophisticated industry.
Judge Wilkins' opinion in Civil Action No. 2011-2146 can be downloaded from opinion
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