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: 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).