Yesterday, the U.S. Court of Appeals for the D.C. Circuit issued an important opinion regarding a rulemaking by the Commodity Futures Trading Commission. The Investment Company Institute and the U.S. Chamber of Commerce had challenged new CFTC rules that would force some mutual funds and other investment companies that had previously been exempt from registration to register with the CFTC. The court's decision in favor of the CFTC is an unfortunate validation of the CFTC's poor rulemaking practices.
The court ruled in the CFTC's favor with respect to each of challenged components. First, the court ruled that the CFTC did not have to explain that its new narrower exemption policy is better than the one it replaced, but only had to offer "a reasoned explanation for its regulation"--a "low bar" that the court concluded the CFTC had cleared. Second, the court deferred to the CFTC on the agency's decisions with respect to certain details of the rules. Third, the court held that the CFTC provided adequate opportunity for notice and comment on the cost-benefit analysis and did not need to provide an opportunity to comment on the guidance it included in the final rule.
Finally--and most importantly--the court held that the CFTC had given adequate consideration to the costs and benefits associated with its rulemaking. This holding is significant, because the CFTC's cost-benefit analysis reads more like an ex post justification for the rule than an earnest attempt by the agency to understand the rule's costs and benefits and inform its decision-making. The agency itemized the paperwork burdens of the rule, but did not consider the costs that the rule would place on new industry entrants or the potential for the additional regulatory requirements to interfere with funds' ability to serve investors. The CFTC explained that requiring firms to register with the CFTC increases consumer confidence and "upgrade[s] the overall quality of market participants," but did not explain why these benefits would accrue from registration of entities already registered with the SEC. Moreover, the CFTC raised--and the court repeated--the benefit that comes from the CFTC's unique authority to pursue registered entities for violations under its statutes and regulations, but the CFTC also can go after entities that are not registered with it for such violations.
Before promulgating a regulation, the Commodity Exchange Act requires the CFTC to "consider the costs and benefits . . . in light of" five enumerated considerations. The court opined that this provision does not clearly require "rigorous, quantitative economic analysis." The court's lenient interpretation of the statutory language frees the CFTC to continue its check-the-box approach to cost-benefit analysis. To prevent this, Congress should craft an indisputably clear mandate that the CFTC and other financial regulators perform--and make available for public comment--rigorous and, when possible, quantitative economic analyses of their rules.