The CFTC garnered a win in the Dodd-Frank litigation saga. On Wednesday, federal district court Judge Beryl Howell, in a nearly hundred-page opinion, supported the CFTC's expansive interpretation of its post-Dodd-Frank mission and its lax interpretation of its cost-benefit analysis mandate. The decision came in response to a joint challenge by the Investment Company Institute and the Chamber of Commerce to a rulemaking that broadens the CFTC's regulatory oversight over investment companies already registered with and regulated by the Securities and Exchange Commission.
The court's analysis is, in many places, frustrating. It relies on statements cherry-picked by the CFTC to suggest that the SEC had admitted its own ineffectiveness as a regulator of investment companies engaged in derivatives. In reality, as the SEC explained in a recent concept release, registered investment companies' activities, "including their use of derivatives are regulated extensively" by the SEC. Looking to legislative history of tangential relevance, the court accepted the CFTC's rulemaking as a natural outgrowth of Dodd-Frank. The court also dismissed the plaintiffs' objection that the challenged rule was adopted before the swap definition was finalized, a key term for understanding the implications of the challenged rule.
Of broader significance, however, is the passing grade the court gave the CFTC on its cost-benefit analysis. The court distinguished the CFTC's cost-benefit analysis from the SEC analyses that the D.C. Circuit has found to be flawed in a number of recent cases: in contrast to the SEC, which "had not considered costs in a reasonable or responsible way," "the CFTC adequately identified, considered, and evaluated the costs and benefits of the Final Rule." The court's acceptance of an analysis that celebrates imprecisely defined benefits without adequately exploring costs is disappointing. The court called plaintiffs out for "throwing everything in the proverbial kitchen sink at the CFTC" to get the rule overturned, but the kitchen sink approach is exactly the method employed by the CFTC in its cost-benefit analyses. It is unfortunate that the CFTC has gotten the green light from a court to continue using that approach.