Federal Court Upholds Commodity Pool Registration for Mutual Funds

The U.S. District Court for the District of Columbia dismissed the challenge brought by the ICI and the Chamber of Commerce against a new rule that will require registered funds that in invest in futures and options to register as commodity pool operators. Following Dodd-Frank, the CFTC narrowed the Section 4.5 exemption for registered funds to allow only a de minimis level of futures trading activity. The Court said that administrative agencies are entitled to a great deal of deference when promulgating new regulations within their areas of expertise. The Court stated that the CFTC properly considered the costs and benefits of the new Rule by addressing the five factors requires by the Commodity Exchange Act: protection of markets/public; market efficiency, competitiveness and financial integrity; price discovery; risk management; and the public interest. The Court indicated that the CFTC specifically listed the benefits of the new Rule including increased transparency and regulation of market participants. The Court dismissed the arguments about undue costs because (a) the compliance burden is not yet determined and (b) registered funds already have a compliance infrastructure in place such that any additional compliance burden would not be material.