On December 12, 2012, the US District Court for the District of Columbia in Investment Company Institute v. US CFTC upheld a CFTC rule issued under the Dodd-Frank Act that rescinded CPO registration exclusions for certain funds that participate in the futures and swaps markets. These funds must now register as commodity pool operators (CPOs) under CFTC Regulations (see Legal Update, Final Rules Amending CPO, CTA Registration and Compliance Obligations Issued by CFTC).

The plaintiffs, two business associations, challenged the sufficiency of the rulemaking process underlying the rule, which amended 17 C.F.R. §§ 4.5 and 4.27. Plaintiffs also argued that the CFTC overextended its regulatory reach to registered investment companies that are already heavily regulated under federal securities laws. The Court rejected this attempt to strike down the rule, holding that the CFTC has the authority to regulate derivatives trading as well as broad discretionary power to set eligibility requirements for commodity pools.

The CFTC recently lost a similar challenge brought by an industry advocacy group to its Dodd-Frank swaps rules when ISDA brought a lawsuit against the CFTC, also in the US District Court for the District of Columbia, over its recently enacted commodity position limits rules (see Legal Update, CFTC Commodity Position Limits Rules Vacated by DC District Court). The SEC also lost when the same court held that SEC's proxy access Rule 14a-11 was arbitrary and capricious and should be vacated (see Legal Update, DC Circuit Strikes Down SEC Proxy Access Rule 14a-11).

Prior to this CPO ruling, it appeared as though the CFTC was going to have a difficult time justifying to courts that their Dodd-Frank-enacted regulations satisfied certain basic requirements under the CEA, including that a cost-benefit analysis of the rules be conducted and that the rules be "necessary for the CFTC to fulfill its systemic-risk mitigation mandate" under Section 15(a) of the CEA.

However, regulators have taken greater care in recent rulemakings to ensure that these basic Dodd-Frank rulemaking mandates are satisfied. The Court held that the CFTC fulfilled its obligation under the CEA to consider the cost and benefits of its proposed rule. The Court was "satisfied that the CFTC considered the relevant factors, acted well within its discretion, and that there was nothing arbitrary or capricious about the CFTC's actions in promulgating the Final Rule with respect to Sections 4.5 and 4.27."