Court Denies CFTC’s Motion to File Supplemental Authority in Cross-Border Guidance Case

After the CFTC’s continuing back-and-forth with SIFMA, ISDA and the Institute of International Bankers (the “Associations”), the United States District Court for the District of Columbia denied the CFTC’s motion to file a supplemental declaration and two exhibits in the Cross-Border Guidance Case.

The filing consisted of the supplemental declaration of CFTC Assistant General Counsel Martin B. White, as well as two additional documents:  (i) SIFMA’s “Note Regarding Non-U.S. Affiliate Participation in Swaps Market” and (ii) a copy of an article published by POLITICO Pro, titled “Banks Outline Pushback on Swap Guarantee Worries,” which the CFTC believed would serve to weaken the Associations’ argument that the CFTC had improperly adopted a rule regulating cross-border activities without compliance with the appropriate administrative procedures.

Related news: Associations Submit Response to CFTC’s Second Notice of Supplemental Authority in CFTC Cross-Border Guidance Case (July 30, 2014).

 

Associations Submit Response to CFTC’s Second Notice of Supplemental Authority in CFTC Cross-Border Guidance Case

SIFMA, ISDA and the Institute of International Bankers (the “Associations”) submitted a response to the CFTC’s second notice of supplemental authority, which brought the Court’s attention to the July 11, 2014 decision in National Mining Association v. McCarthy (“NMA“). 

According to the CFTC’s second notice of supplemental authority, the analysis of NMA reiterates that established law and general statements of policy are not subject to pre-enforcement judicial review under the Administrative Procedure Act, and concludes that the legal effect on regulated entities must be established to determine whether an agency action is a policy statement or legislative rule. 

In their response, the Associations assert that, although NMA concerns an Environmental Protection Agency guidance document (“EPA Guidance”) that is “factually distinguishable” from the Cross-Border Guidance, the legal principles set forth in NMA confirm that the Cross-Border Guidance is “unmistakably legislative.” The Associations state that, unlike the Cross-Border Guidance, the EPA Guidance imposes no requirements and only recommends a consideration to be weighed by state regulators; therefore, the NMA Court concluded that, “as a legal matter,” the EPA Guidance “is meaningless.”

Additionally, the Associations observe, NMA acknowledged the EPA’s notice that state authorities are free to ignore the EPA Guidance. By contrast, the Associations explain, the CFTC maintains that “even courts must defer to the Cross-Border Rule,” and confirmed the legal effect by issuing an “Exemptive Order” to give regulated entities more time to “transition to” and “come into compliance with” the Cross-Border Guidance’s provisions. 

The Associations went on to discuss other distinctions between the EPA Guidance and the Cross-Border Guidance in order to demonstrate that the Cross-Border Guidance cannot be viewed as a general statement of policy. The Associations explain, by way of example, that the EPA Guidance was issued by intermediate agency officials, whereas the Cross-Border Guidance was issued by a full vote of the CFTC’s commissioners.

Lofchie Comment:  Here is the key paragraph from the NMA decision explaining why the “guidance” at issue was merely guidance and not a rule:

“As EPA acknowledged at oral argument, ‘The Guidance has no legal impact.  . . .’  The Final Guidance does not tell regulated parties what they must do or may not do in order to avoid liability. The Final Guidance imposes no obligations or prohibitions on regulated entities. . . . The Final Guidance may not be the basis for an enforcement action against a regulated entity. Moreover, the Final Guidance may not be relied on by EPA as a defense in a proceeding . . . [a]nd the Final Guidance does not impose any requirements in order to obtain a permit or license. As a matter of law, state permitting authorities and permit applicants may ignore EPA’s Final Guidance without facing any legal consequences.”

In short, even if the CFTC “wins” its case (despite some of its arguments seeming quite strained), its reliance on the NMA decision would make it impossible for the CFTC to enforce its guidance/rule, which would seem to render the CFTC’s victory somewhat meaningless.  Given that, in its cross-border rulemaking, the SEC found that the great majority of swaps involved cross-border elements, can it really be the case that the CFTC intended to enforce its derivatives rules without any rules clearly establishing the agency’s jurisdiction?  That would seem a terribly imprudent way to establish regulatory authority.

In light of the above, the CFTC either loses its case or ends up with “guidance” that the CFTC has itself argued has no legal effect. Wouldn’t it make sense for the CFTC to go back to the drawing board and actually propose a rule? The CFTC’s task in this regard should be made significantly easier, since the SEC has already adopted a rule, and it would make sense for the CFTC to piggyback on the SEC’s rulemaking as this would have the added benefit of establishing one set of requirements to which U.S. institutions would be subject, rather than one set of rules under the securities laws and another under the CEA.

See also: These Lofchie YouTube Selections demonstrate one instance of guidance; and another exemplar of guidance.

See: Associations Response to CFTC’s Second Notice of Supplemental Authority
Related news: CFTC Submits Reply in Support of Its Motion to File Supplemental Declaration in CFTC Cross-Border Guidance Case (July 26, 2014); Associations Submit Opposition to CFTC Motion to File Supplemental Declaration in SIFMA v. CFTC Cross-Border Guidance Case (July 24, 2014); Parties Submit Supplemental Briefs in SIFMA v. CFTC Cross-Border Guidance Case (July 22, 2014); CFTC Files Supplemental Declaration in CFTC Cross-Border Guidance Case (July 18, 2014).

 

House Financial Services Committee Holds Meeting to Consider Markups of Bills Relating to Banks and Bank Regulators

The House Financial Services Committee held a meeting to consider the markups of bills relating to Regulation D under the banking law, the Bank Holding Company Act, and the Federal Reserve Accountability and Transparency Act. 

The Regulation D Study Act (H.R. 3240), which would instruct the Comptroller General of the United States to study the impact of Regulation D on depository institutions, consumers and monetary policy, including the requirement that depository institutions maintain reserves in accordance with the Federal Reserve Act and Regulation D, was agreed to by a voice vote. 

A voice vote was requested for the markup of a bill to amend the Bank Holding Company Act of 1956 (H.R. 3913), which would require agencies to make considerations relating to the promotion of efficiency, competition and capital formation before issuing or modifying certain regulations. 

Additionally, a voice vote was requested for the markup of the Federal Reserve Accountability and Transparency Act of 2014 (H.R. 5018), which would establish requirements for policy rules and blackout periods of the Federal Open Market Committee, as well as for certain activities of the Board of Governors of the Federal Reserve System, and would serve other purposes. 

See: Markup; Webcast of the Markup.
Related news: House Financial Services Committee Schedules Markup of Bills Relating to Banking and Bank Regulators (July 26, 2014).

 

House Financial Services Committee Schedules Markup of Bills Relating to Banking and Bank Regulators

The House Financial Services Committee scheduled a markup for July 29, 2014 to consider six bills, including the Regulation D Study Act (H.R. 3240) (referring to Regulation D under banking law relating to deposits, not Regulation D under the Securities Act relating to private placements), the Federal Reserve Accountability and Transparency Act of 2014 (H.R. 5018) (the “Accountability Act”), and a bill to amend the Bank Holding Company Act of 1956 (H.R. 3913). 

Lofchie Comment:  The Accountability Act would place a variety of constraints on the Federal Reserve, including that it conduct a cost-benefit analysis of new rules and a follow-up study of the results of any rulemakings.  The bill to amend the Bank Holding Company Act would not have any substantive provisions; rather, it would only amend the purpose of the BHCA to require the various banking regulators, as well as the SEC and the CFTC, to take account of “efficiency, competition, and capital formation” in promulgating new rules.  In fact, the SEC is already required to take these considerations into effect.  See Section 3(f) of the Securities Exchange Act. 

While it may be the case that such non-substantive amendments are not very meaningful, it seems odd that the various financial regulators operate under statutory requirements that are not directed at any overarching common purpose.  The absence of a common purpose is significant as the responsibilities of the various regulators have come to intrude much more upon each other following the adoption of the Dodd-Frank Act.  To give an obvious example, the regulation of swap dealers and swap transactions by the CFTC has a significant impact (whether positive or negative) on competition in the swaps market and on the efficiency of hedging.  It would seem reasonable that the CFTC should take these factors into account in its rulemaking, given that the SEC is required to do so.  Similarly, the banking regulators have become much more active in promulgating rules that determine capital constraints under which SEC-registered broker-dealers operate; accordingly, it would also seem reasonable to require the banking regulators to take these same factors into account that the SEC is directed to consider.

See: House Financial Services Committee Announcement. 

 

CFTC Submits Reply in Support of Its Motion to File Supplemental Declaration in CFTC Cross-Border Guidance Case

In response to SIFMA, ISDA, and the Institute of International Bankers (the “Associations”) opposition to the CFTC’s request to file a supplemental declaration, the CFTC submitted a reply to the Court stating that the Associations’ opposition only underscores the declaration’s relevance to the CFTC Cross-Border Guidance case. 

According to the CFTC, the Associations have advanced inconsistent theories regarding how to interpret CEA Section 2(i).  The CFTC explained that one of these theories, which coincides with the CFTC’s interpretation, is supported by an internally-circulated SIFMA document filed in the CFTC’s supplemental declaration (“SIFMA’s Note”).

Additionally, the CFTC explained that despite the Associations’ argument in its opposition that SIFMA’s Note only mentioned the word “guidance” once, it “clearly” refers to the CFTC Guidance as guidance, which is “direct evidence” contradicting the Associations’ claims that “they reasonably believe the Guidance to be a binding rule.”

The CFTC further argued that SIFMA’s Note demonstrates that there were multiple reasons for Plaintiff’s members to de-guarantee swaps.  Consequently, there was no coercion by the CFTC guidance to de-guarantee so there is no standing in this case.  According to the CFTC, “if SIFMA’s Note is not considered, there is no evidence at all of why the Plaintiffs’ members have changed their business practices, disabling the Court from assuring itself of its own jurisdiction.”

See: CFTC’s Reply in Support of Motion to File Supplemental Declaration. Related news: Associations Submit Opposition to CFTC Motion to File Supplemental Declaration in SIFMA v. CFTC Cross-Border Guidance Case (July 24, 2014); Parties Submit Supplemental Briefs in SIFMA v. CFTC Cross-Border Guidance Case (July 22, 2014); CFTC Files Supplemental Declaration in CFTC Cross-Border Guidance Case (July 18, 2014).