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Nature of Suit Code: 890
Nature of Suit: Other Statutory Actions
Cause of Action: 

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United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued May 6, 2013 Decided June 25, 2013

No. 12-5413

INVESTMENT COMPANY INSTITUTE AND CHAMBER OF

COMMERCE OF THE UNITED STATES OF AMERICA,

APPELLANTS

v.

COMMODITY FUTURES TRADING COMMISSION,

APPELLEE

Appeal from the United States District Court

for the District of Columbia

(No. 1:12-cv-00612)

Eugene Scalia argued the cause for appellants. On the

briefs were Robin S. Conrad and Rachel Brand. Daniel T. Davis

entered an appearance. 

Steven G. Bradbury and Susan Ferris Wyderko were on the

brief for amici curiae Mutual Fund Directors Forum, et al. in

support of appellants.

Jonathan L. Marcus, Deputy General Counsel, U.S.

Commodity Futures Trading Commission, argued the cause for

appellee. With him on the brief were Dan M. Berkovitz, General

Counsel, Robert A. Schwartz, Nancy R. Doyle, and Martin B.

White, Assistant General Counsel, and Melissa Chiang, Counsel.

USCA Case #12-5413 Document #1443082 Filed: 06/25/2013 Page 1 of 20
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John M. Devaney, Martin E. Lybecker, Dennis M. Kelleher,

and Stephen W. Hall were on the brief for amici curiae The

National Futures Association, et al. in support of appellee.

Before: GARLAND, Chief Judge, BROWN, Circuit Judge, and

SENTELLE, Senior Circuit Judge.

Opinion for the Court filed by Senior Circuit Judge

SENTELLE.

SENTELLE, Senior Circuit Judge: The Investment Company

Institute and the Chamber of Commerce of the United States

brought this action against the Commodity Futures Trading

Commission (CFTC), seeking a declaratory judgment that

recently adopted regulations of the Commission regarding

derivatives trading were unlawfully adopted and invalid, and

seeking to vacate and set aside those regulations and to enjoin

their enforcement. The district court granted summary judgment

in favor of the Commission. Because we agree with the district

court that the Commission did not act unlawfully in

promulgating the regulations at issue, we affirm.

I. BACKGROUND

A. Regulatory History

The Commodity Exchange Act (CEA), Title 7, United

States Code, Chapter 1, establishes and defines the jurisdiction

of the Commodity Futures Trading Commission. Under this

Act, the Commission has regulatory jurisdiction over a wide

variety of markets in futures and derivatives, that is, contracts

deriving their value from underlying assets. See 7 U.S.C. § 2(a). 

In addition to establishing the regulatory authority of the

Commission, the CEA also directly imposes certain duties on

regulated entities. As relevant here, the Act requires that

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Commodity Pool Operators (CPOs) register with CFTC and

adhere to regulatory requirements related to such issues as

investor disclosures, recordkeeping, and reporting. 7 U.S.C.

§§ 6k, 6n; 17 C.F.R. §§ 4.20–4.27. The CEA defines CPOs as

entities “engaged in a business that is of the nature of a

commodity pool, investment trust, syndicate, or similar form of

enterprise” that buy and sell securities “for the purpose of

trading in commodity interests.” 7 U.S.C. § 1a(11)(A)(i). The

CEA, however, empowers CFTC to exclude an entity from

regulation as a CPO if CFTC determines that the exclusion “will

effectuate the purposes of” the statute. Id. § 1a(11)(B).

Since 1985, the Commission has exercised its authority to

exclude “otherwise regulated” entities through § 4.5 of its

regulations. See Commodity Pool Operators, 50 Fed. Reg.

15,868 (Apr. 23, 1985) (codified at 17 C.F.R. § 4.5). Under the

version of § 4.5 that applied before amendments of 2003,

otherwise regulated entities could claim exclusion by meeting

certain regulatory conditions. These conditions included that the

entity: 

(i) Will use commodity futures or commodity options

contracts solely for bona fide hedging purposes . . . [;] (ii)

Will not enter into commodity futures and commodity

options contracts for which the aggregate initial margin and

premiums exceed 5 percent of the fair market value of the

entity’s assets . . . [;] (iii) Will not be, and has not been,

marketing participations to the public as or in a commodity

pool or otherwise as or in a vehicle for trading in the

commodity futures or commodity options markets; [and,]

(iv) Will disclose in writing to each prospective participant

the purpose of and the limitations on the scope of the

commodity futures and commodity options trading in which

the entity intends to engage[.]

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Id. at 15,883. These conditions were amended slightly in 1993,

when CFTC promulgated a rule removing the bona fide hedging

requirement and excluding bona fide hedging from the trading

threshold. Commodity Pool Operators, 58 Fed. Reg. 6,371,

6,372 (Jan. 28, 1993). Under these conditions, there was no

automatic exclusion for registered investment companies, or

“RICs,” regulated by the Securities and Exchange Commission

pursuant to the Investment Company Act of 1940, 15 U.S.C.

§§ 80a-1 to -64. Therefore, a commodity pool operator that was

also a registered investment company was included within

CFTC’s regulatory definition of CPOs unless it met all of the

§ 4.5 requirements for exclusion.

In 2000, Congress enacted the Commodity Futures

Modernization Act of 2000, Pub. L. No. 106-554, 114 Stat.

2763. That statute barred CFTC and SEC from regulating most

“swaps,” a type of derivative involving the exchange of cash

flows from financial instruments. See 7 U.S.C. § 2(d). 

Responsive to the statutory change, the Commission amended

its requirements for exclusion to eliminate the five percent

ceiling. See Additional Registration and Other Regulatory

Relief for Commodity Pool Operators and Commodity Trading

Advisors, 68 Fed. Reg. 47,221, 47,224 (Aug. 8, 2003). These

2003 amendments “effectively excluded RICs from the CPO

definition,” freeing registered investment companies from most

CFTC CPO regulations. Investment Company Institute v. CFTC,

891 F. Supp. 2d 162, 172 (D.D.C. 2013). CFTC viewed its 2003

amendments as consistent with the deregulatory spirit of the

2000 statute. See 68 Fed. Reg. at 47,223.

In 2010, the Commission began shifting back to a more

stringent regulatory framework. This shift came in the wake of

the 2007–2008 financial crisis, which many attributed to poorly

regulated derivatives markets, when Congress passed the DoddFrank Wall Street Reform and Consumer Protection Act, Pub.

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L. No. 111-203, 124 Stat. 1376 (2010) (codified as amended in

scattered sections of the U.S. Code). As relevant here, DoddFrank repealed several statutory provisions that had excluded

certain commodities transactions from CFTC oversight. Id.

§§ 723, 734. Dodd-Frank also gave CFTC regulatory authority

over swaps, and amended the statutory definition of commodity

pool operators to include entities that trade swaps. Id. §§ 721(a),

722. Dodd-Frank, however, did not affect CFTC’s authority to

set exclusion requirements for CPOs.

B. Rulemaking Process

After Congress passed Dodd-Frank, the National Futures

Association (NFA), to which all CPOs must belong, filed a

petition of rulemaking with CFTC requesting that CFTC amend

§ 4.5 to limit the scope of its exclusion for registered investment

companies. See Petition of the National Futures Association, 75

Fed. Reg. 56,997 (Sept. 17, 2010). In NFA’s view, mutual

funds were using the relaxed § 4.5 standards to evade CFTC

oversight of their derivative operations, reducing transparency

and potentially harming the public because no other regulator

had rules equivalent to CFTC’s. See Investment Company

Institute, 891 F. Supp. 2d at 175–76. Therefore, NFA asked

CFTC to restore the trading threshold and public marketing

prohibition requirements to § 4.5 for any registered investment

company seeking exclusion from CPO status. See 75 Fed. Reg.

at 56,998. In essence, NFA sought a return to the pre-2003

regulatory framework, but only for registered investment

companies. 

On February 11, 2011, CFTC proposed new regulations that

would amend § 4.5 “to reinstate the pre-2003 operating criteria”

for all registered investment companies. Commodity Pool

Operators and Commodity Trading Advisors: Amendments to

Compliance Obligations, 76 Fed. Reg. 7,976, 7,984 (Feb. 11,

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2011). One notable difference from the 2003 framework is that

because of Dodd-Frank’s extension of CFTC authority to swaps,

the regulations proposed that swaps be included in the trading

thresholds. See id. at 7,989. The proposed regulations also

required certified regular reports from CPOs, a requirement that

would be contained in a new § 4.27. See id. at 7,978. CFTC

provided four explanations for these proposed regulations: First,

the regulations would align CFTC’s regulatory framework “with

the stated purposes of the Dodd-Frank Act.” Id. Second, they

would “encourage more congruent and consistent regulation of

similarly situated entities among Federal financial regulatory

agencies.” Id. Third, they would “improve accountability and

increase transparency of the activities of CPOs” and commodity

pools. Id. Fourth, they would make it easier to collect data for

the Financial Stability Oversight Council (“FSOC”), a new body

created by Dodd-Frank charged with “identify[ing] risks to the

financial stability of the United States.” Id.; Dodd-Frank Act

§ 112 (codified at 12 U.S.C. § 5322).

After the public comment period expired, CFTC

promulgated a Final Rule amending § 4.5 and adding § 4.27

largely as proposed. See Commodity Pool Operators and

Commodity Trading Advisors: Compliance Obligations, 77 Fed.

Reg. 11,252 (Feb. 24, 2012), as corrected due to Fed. Reg. errors

in its original publication, 77 Fed. Reg. 17,328 (Mar. 26, 2012);

see also 17 C.F.R. §§ 4.5, 4.27. The primary difference between

the proposed rule and the Final Rule is that, to be eligible for

exclusion, a RIC’s non-bona fide hedging trading must be less

than or equal to five percent of the liquidation value of the

entity’s portfolio, or the aggregate net notional value of such

trading must be less than or equal to “100 percent of the

liquidation value of the pool’s portfolio.” 77 Fed. Reg. at

11,283. As the appellants do not directly challenge the

aggregate net notional value threshold, we decline to define it

further and fill the Federal Reporter with irrelevant financial

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lingo.

In its Final Rule, CFTC justified its decision to return to the

pre-2003 regulatory framework on the basis of “changed

circumstances [that] warrant revisions to these rules.” Id. at

11,275. According to CFTC, the 2003 “system of exemptions

was appropriate because [registered investment companies]

engaged in relatively little derivatives trading.” Id. Since the

2003 amendments, however, such companies have engaged in

“increased derivatives trading activities” and “now offer[]

services substantially identical to those of registered entities

[that] are not subject to the same regulatory oversight.” Id.

Given this changed circumstance, and Dodd-Frank’s “more

robust mandate to manage systemic risk and to ensure safe

trading practices by entities involved in the derivatives

markets,” CFTC considered it necessary to narrow the

exclusions from its derivatives regulation. Id. Following this

rule change, RICs that do not satisfy the exclusion requirements

must register with CFTC per § 4.5.

In adopting the heightened disclosure requirements, CFTC

explained that “there currently is no source of reliable

information regarding the general use of derivatives by

registered investment companies.” Id. Such information would

be useful to CFTC and FSOC in performing their statutory

mandates of regulating commodities trading and identifying

systemic financial risks. See id. at 11,281. 

Several commenters called the Commission’s attention to

possible inconsistencies with or redundancies to SEC

compliance requirements. In response to those commenters, and

concurrently with the issuance of the Final Rule, CFTC issued

a notice of proposed rulemaking to harmonize CFTC and SEC’s

compliance requirements. See Harmonization of Compliance

Obligations for Registered Investment Companies Required To

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Register as Commodity Pool Operators, 77 Fed. Reg. 11,345

(Feb. 24, 2012). In this notice, CFTC stated that it may change

certain disclosure requirements to harmonize them with SEC

requirements but, importantly, it does not plan to change the

new reporting requirements promulgated in the Final Rule and

contained in 17 C.F.R. § 4.27. See id.; see also Investment

Company Institute, 891 F. Supp. 2d at 183. The § 4.27 reporting

requirements, however, are suspended for registered investment

companies until CFTC and SEC promulgate a Final Rule on

harmonization. See id. at 183–84.

C. Procedural History

The Investment Company Institute and the Chamber of

Commerce filed suit in the district court against CFTC, alleging

that CFTC violated APA and CEA requirements in

promulgating the amendments to § 4.5 and § 4.27. Investment

Company Institute, 891 F. Supp. 2d at 184. The business

associations moved for summary judgment, and CFTC crossmoved for summary judgment and moved to dismiss in part. Id.

at 167. The district court granted CFTC’s motion to dismiss in

part, ruling that the associations’ challenge to certain

compliance obligations (other than those arising under § 4.27)

was unripe because the Final Rule states that those obligations

are subject to change during the harmonization process. Id. at

205. The associations do not appeal that dismissal. The

associations do, however, appeal the district court’s grant of

summary judgment in favor of CFTC with regard to the other

issues raised in the associations’ complaint.

II. DISCUSSION

Federal Rule of Civil Procedure 56(a) provides that

summary judgment is appropriate “if the movant shows that

there is no genuine dispute as to any material fact and the

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movant is entitled to judgment as a matter of law.” Our review

of a district court’s grant of summary judgment is de novo. 

Calhoun v. Johnson, 632 F.3d 1259, 1261 (D.C. Cir. 2011). 

There being no genuine dispute as to any material fact, the only

question before us is whether CFTC is entitled to judgment as a

matter of law. See Sherley v. Sebelius, 689 F.3d 776, 780 (D.C.

Cir. 2012). Under the APA, we must “hold unlawful and set

aside agency action, findings, and conclusions found to be . . .

arbitrary, capricious, an abuse of discretion, or otherwise not in

accordance with law.” 5 U.S.C. § 706(2). “Although the ‘scope

of review under the “arbitrary and capricious” standard is

narrow and a court is not to substitute its judgment for that of

the agency,’ we must nonetheless be sure [CFTC] has

‘examine[d] the relevant data and articulate[d] a satisfactory

explanation for its action including a rational connection

between the facts found and the choice made.’” Chamber of

Commerce v. SEC, 412 F.3d 133, 140 (D.C. Cir. 2005) (quoting

Motor Vehicle Mfrs. Ass’n v. State Farm Mut. Auto. Ins. Co.,

463 U.S. 29, 43 (1983)).

Appellants contend that CFTC violated the APA in its

rulemaking by: (1) failing to address its own 2003 rationales for

broadening CPO exemptions; (2) failing to comply with the

Commodity Exchange Act and offering an inadequate

evaluation of the rule’s costs and benefits; (3) including swaps

in the trading threshold, restricting its definition of bona fide

hedging, and failing to justify the five percent threshold; and, (4)

failing to provide an adequate opportunity for notice and

comment. We address each contention in turn.

A. Change in Agency Position

The appellants first contend that CFTC failed to explain

why it changed from its more generous exemption requirements

that had existed since 2003 to the more stringent requirements

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contained in the Final Rule. Though it is true that the Final Rule

stated that investment companies are increasing their

participation in derivatives markets, the 2003 rule was explicitly

designed to promote liquidity in the commodities markets by

making it easier for registered investment companies to

participate in derivatives markets. CFTC, according to the

appellants, completely failed to address the liquidity issue, and

therefore its change in position was arbitrary and capricious.

We disagree. An agency changing course “need not

demonstrate to a court’s satisfaction that the reasons for the new

policy are better than the reasons for the old one; it suffices that

the new policy is permissible under the statute, that there are

good reasons for it, and that the agency believes it to be better.” 

FCC v. Fox Television Stations, Inc., 556 U.S. 502, 515 (2009). 

Appellants do not argue that the new rule is impermissible under

CFTC’s statutory framework. Instead, appellants argue that

CFTC had an obligation to address the rule’s impact on

liquidity. But the APA imposes no heightened obligation on

agencies to explain “why the original reasons for adopting the

displaced rule or policy are no longer dispositive.” Id. at 514

(internal quotation marks and citation omitted). So long as

CFTC provided a reasoned explanation for its regulation, and

the reviewing court can “reasonably . . . discern[]” the agency’s

path, we must uphold the regulation, even if the agency’s

decision has “less than ideal clarity.” Bowman Transp., Inc. v.

Arkansas-Best Freight Sys., Inc., 419 U.S. 281, 286 (1974). 

CFTC’s regulation clears this low bar. CFTC explicitly

acknowledged that it was changing its position from its 2003

rulemaking. The Final Rule detailed the changed circumstances

that prompted CFTC to amend the rule, including increased

derivatives trading by investment companies (an issue inherently

tied to liquidity) and a perceived lack of market transparency

that could lead to a buildup of systemic risk. See 77 Fed. Reg.

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at 11,275, 11,277. It is clear that the Commission, in adopting

the changes and the rule, was attempting to respond to those

changed circumstances by adding registration and reporting

requirements. As is clear from our discussion of the regulatory

and statutory history above, the Commission’s requirements

followed a congressional shift evidenced in the Dodd-Frank

Act—legislation expressly relied upon by the Commission. See

id. at 11,252. Such reasoned decisionmaking is an acceptable

way to change CFTC’s past rules, cf. Fox, 556 U.S. at 517, the

appellants’ policy disagreements with CFTC notwithstanding. 

The law requires no more.

B. Cost-Benefit Analysis

Appellants next contend that CFTC failed to adequately

consider the costs and benefits of the rule. The Commodity

Exchange Act requires that CFTC “consider the costs and

benefits” of its actions and “evaluate[]” those costs and benefits

“in light of” five factors: “(A) considerations of protection of

market participants and the public; (B) considerations of the

efficiency, competitiveness, and financial integrity of futures

markets; (C) considerations of price discovery; (D)

considerations of sound risk management practices; and (E)

other public interest considerations.” 7 U.S.C. § 19(a)(2). As

a reviewing court, “[o]ur role is to determine whether the

[agency] decision was based on a consideration of the relevant

factors and whether there has been a clear error of judgment.” 

Center for Auto Safety v. Peck, 751 F.2d 1336, 1342 (D.C. Cir.

1985) (internal quotation marks omitted) (quoting State Farm,

463 U.S. at 43). 

First, appellants argue that CFTC ignored existing SEC

regulations that could provide the necessary information about

investment companies’ activities in derivatives markets. 

Appellants point to two recent cases in which we vacated SEC

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regulations because SEC had failed to address existing

regulatory requirements to determine whether sufficient

protections were already present. See Business Roundtable v.

SEC, 647 F.3d 1144, 1154 (D.C. Cir. 2011); American Equity

Inv. Life Ins. Co. v. SEC, 613 F.3d 166, 179 (D.C. Cir. 2010). 

According to the appellants, CFTC similarly failed to consider

whether existing regulations made its proposed regulation

unnecessary.

We are unconvinced. In its Final Rule, CFTC explicitly

discussed SEC’s oversight in the derivatives markets: “In its

recent concept release regarding the use of derivatives by

registered investment companies, the SEC noted that although

its staff had addressed issues related to derivatives on a case-bycase basis, it had not developed a ‘comprehensive and

systematic approach to derivatives related issues.’” 77 Fed.

Reg. at 11,255 (quoting Use of Derivatives by Investment

Companies Under the Investment Company Act of 1940, 76

Fed. Reg. 55,237, 55,239 (Sept. 7, 2011)). CFTC surveyed the

existing regulatory landscape and concluded that it “is in the

best position to oversee entities engaged in more than a limited

amount of non-hedging derivatives trading.” Id.; see also id. at

11,278. CFTC found that its registration and reporting

requirements could fill gaps in current regulations, explaining

that only it has the authority “to take punitive and/or remedial

action against registered entities for violations of the CEA or of

the Commission’s regulations.” Id. at 11,254. It explained how

the new § 4.27 forms would collect information from entities

registered under § 4.5 that would not otherwise be collected by

SEC. See id. at 11,275. Further, CFTC issued a harmonization

proposal to ensure that its rules do not duplicate or contradict

SEC regulations. See 77 Fed. Reg. 11,345.

These explanations suffice to justify the marginal benefit

of CFTC regulation of registered investment companies in the

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derivatives markets, and distinguish this case from Business

Roundtable and American Equity. In Business Roundtable, we

vacated an SEC rule because SEC had “failed adequately to

address whether the regulatory requirements of the [Investment

Company Act] reduce the need for, and hence the benefit to be

had from” additional regulations. 647 F.3d at 1154. In

American Equity, we determined that SEC acted in an arbitrary

and capricious manner because it completely failed to “assess

the baseline level of price transparency and information

disclosure under state law.” 613 F.3d at 178. In fact, SEC had

stated that it considered state regulatory regimes “not relevant.” 

Id. As the district court rightly held, these cases are “plainly

distinguishable” from the present case. Investment Company

Institute, 891 F. Supp. 2d at 219. As the district court noted,

unlike the SEC in the other two cases, “CFTC did consider

whether RICs were otherwise regulated, and concluded that

CFTC regulation was necessary” despite the existing SEC

regime. Id. at 217. Moreover, CFTC issued a notice of

proposed rulemaking for a harmonization, the entire purpose of

which was to synchronize SEC and CFTC regulations, further

distinguishing this case from American Equity and Business

Roundtable.

Appellants next argue that CFTC, by engaging in a multistep rulemaking with some regulations becoming final now and

other regulations becoming final only after harmonization with

SEC regulations, made it impossible to determine the costs and

benefits of its rule. The thrust of the appellants’ argument is that

CFTC counted benefits that may not materialize and depend on

the harmonization rule while ignoring costs that may result from

that rule. 

We again reject the appellants’ argument. In its Final Rule,

CFTC explicitly listed and analyzed the five statutory factors

that it must take into account when “consider[ing]” and

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“evalulat[ing]” the costs and benefits of a rule. 7 U.S.C. § 19(a);

see 77 Fed. Reg. at 11,275–83. It had no obligation to consider

hypothetical costs that may never arise. The statute only

requires the Commission to address costs and benefits “[b]efore

promulgating a regulation.” 7 U.S.C. § 19(a)(1). CFTC stated

that it had not finalized several disclosure requirements (not

including the requirements in § 4.27) and would not do so until

after harmonization. See 77 Fed. Reg. 11,345. We see at least

two good reasons that CFTC need not count costs from these

potential disclosure requirements. First, the statute does not

mandate it, and second, it would be quite literally impossible to

calculate the costs of an unknown regulation. And as the

Supreme Court has emphasized, “[n]othing prohibits federal

agencies from moving in an incremental manner.” Fox, 556

U.S. at 522. CFTC counsel correctly stated at oral argument that

CFTC must consider and evaluate the costs and benefits of its

harmonization rulemaking during that rulemaking, and the

appellants can challenge that rule when it is finalized. See Oral

Arg. Recording at 33:30–34:30. As the district court opined,

“The time for any challenge to any new compliance obligations

is when the final harmonization rule has been released and the

nature of those obligations is clear.” Investment Company

Institute, 891 F. Supp. 2d at 205. 

The appellants also assert that the agency improperly

counted hypothetical benefits, but this assertion is incorrect. It

was appropriate for CFTC to count the benefits flowing from its

registration and disclosure requirements in § 4.5 and § 4.27, as

the specifics of those requirements are finalized and not subject

to the harmonization rule.1

 The appellants further complain that

1

Unlike the cost posited by the appellants as unconsidered, the

benefits upon which the Commission relies are not hypothetical. The

Commission’s analysis relies upon the benefits as being established in

the ungarnished application of § 4.5 and § 4.27, not in the

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CFTC failed to put a precise number on the benefit of data

collection in preventing future financial crises. But the law does

not require agencies to measure the immeasurable. CFTC’s

discussion of unquantifiable benefits fulfills its statutory

obligation to consider and evaluate potential costs and benefits. 

See Fox, 556 U.S. at 519 (holding that agencies are not required

to “adduce empirical data that” cannot be obtained). Where

Congress has required “rigorous, quantitative economic

analysis,” it has made that requirement clear in the agency’s

statute, but it imposed no such requirement here. American

Financial Services Ass’n v. FTC, 767 F.2d 957, 986 (D.C. Cir.

1985); cf., e.g., 2 U.S.C. § 1532(a) (requiring the agency to

“prepare a written statement containing . . . a qualitative and

quantitative assessment of the anticipated costs and benefits”

that includes, among other things, “estimates by the agency of

the [rule’s] effect on the national economy”).

Finally, the appellants argue that CFTC failed to consider

the relevant costs and benefits of its rule because it had not yet

adopted a definition of swaps and it did not obtain some market

data suggested by commenters. But Dodd-Frank includes a

detailed definition of “swap,” see 7 U.S.C. § 1a(47). Further,

CFTC stated in a previous proposed rulemaking that “extensive

further definition of the term[] by rule is not necessary.” Joint

Proposed Rule, Further Definition of “Swap,” 76 Fed. Reg.

29,818, 29,821 (May 23, 2011) (internal quotation marks

omitted). Given that the Commission explained the lack of need

for significant additions to the definition in Dodd-Frank, it was

not arbitrary or capricious for it to view any costs resulting from

the lack of a CFTC regulation defining “swap” as minimal. In

harmonization rule. Of course if it should materialize that the

harmonization in some fashion destroys those benefits, appellants

would then be free to raise the resulting imbalance of costs and

benefits in a challenge to the harmonization rule.

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any event, in light of a final rule defining “swap” in essentially

the same way as Dodd-Frank, see Further Definition of “Swap,”

77 Fed. Reg. 48,208 (Aug. 13, 2012), the appellants can show no

“prejudicial error.” 5 U.S.C. § 706.

The appellants also fail to show that CFTC’s refusal to

gather additional market data as suggested by commenters was

arbitrary or capricious. CFTC acknowledged that its data was

limited in some respects, see 77 Fed. Reg. at 11,278, but that is

true in practically any regulatory endeavor. CFTC adequately

considered the costs and benefits of the rule given this

uncertainty, explaining that the commenters provided no data

that “would warrant deviation” from the proposed rule, given the

rule’s “costs and benefits.” Id. CFTC went on to explain that

“[t]hese data limitations are one reason why the Commission is

pursuing additional data collection initiatives under these final

rules.” Id. at 11,278 n.229. In essence, the appellants are

challenging the very method for obtaining the data they want on

the ground that CFTC has not yet obtained the data they want. 

But neither the APA nor the CEA imposes such a catch-22 on

CFTC. We hold that CFTC’s consideration and evaluation of

the rule’s costs and benefits was not arbitrary or capricious.

C. The Rule’s Particulars

The appellants challenge three particular aspects of the

Final Rule. The first is CFTC’s decision to include swap

transactions in the registration threshold, which has the effect of

requiring more investment companies to register pursuant to

§ 4.5. The appellants claim that this decision was arbitrary and

capricious because Dodd-Frank implemented a separate

reporting framework with regard to swaps. Appellants contend

that one of CFTC’s responses to this claim, that participation in

swaps would trigger the registration requirement even if CFTC

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based its threshold only on futures and options, is irrational and

obviously incorrect.

Though we agree that this particular response offers “less

than ideal clarity,” CFTC gave sufficient other explanations for

including swap trades in the § 4.5 trading threshold that we can

“reasonably . . . discern[]” its rationale. Bowman, 419 U.S. at

286. The Final Rule explained that “[t]he Dodd-Frank Act

amended the statutory definition of the terms ‘commodity pool

operator’ and ‘commodity pool’ to include those entities that

trade swaps,” evidencing that swaps were a central concern of

the statute. 77 Fed. Reg. at 11,258. The rule further explained

that CFTC would use information obtained “from CPOs

transacting in swaps” to “help to bring transparency to the swaps

markets, as well as to the interaction of swaps and futures

markets, protecting the participants in both markets from

potentially negative behavior.” Id. at 11,283. Given these

goals, it was not arbitrary or capricious to include swaps in the

§ 4.5 trading threshold.

The second aspect of the rule challenged by the appellants

is its definition of bona fide hedging transactions, a definition

that the appellants claim is too narrow and should encompass

risk management strategies in financial markets. This argument

amounts to nothing more than another policy disagreement with

CFTC, so we must reject it. CFTC adequately explained that it

was rejecting the broader “risk management” definition because

“bona fide hedging transactions are unlikely to present the same

level of market risk [as risk management transactions] as they

are offset by exposure in the physical markets.” Id. at 11,256. 

It also found that the risk management definition would be

difficult to “properly limit” and make its exclusion “onerous to

enforce.” Id. Given the deference appropriate to such expert

determinations, we reject the appellants’ challenge to this aspect

of the rule. See Rural Cellular Ass’n v. FCC, 588 F.3d 1095,

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1105 (D.C. Cir. 2009) (“The ‘arbitrary and capricious’ standard

is particularly deferential in matters implicating predictive

judgments . . . .”). 

We further reject the appellants’ contention that this aspect

of the rule must be vacated because the bona fide hedging

definition was cross-referenced to another rule that was recently

vacated. See Int’l Swaps & Derivatives Ass’n v. CFTC, 887 F.

Supp. 2d 259 (D.D.C. 2012). The decision vacating the crossreferenced rule had nothing to do with the bona fide exception

in this rule, and the fact that the definition here was crossreferenced instead of reproduced does not make it automatically

invalid.

The third and final particular aspect of the rule challenged

by the appellants is the five percent registration threshold for

§ 4.5, which the appellants argue is too low. Our cases explain

the appropriate deference given to these types of agency

determinations:

It is true that an agency may not pluck a number out of thin

air when it promulgates rules in which percentage terms

play a critical role. When a line has to be drawn, however,

[CFTC] is authorized to make a rational legislative-type

judgment. If the figure selected by the agency reflects its

informed discretion, and is neither patently unreasonable

nor a dictate of unbridled whim, then the agency’s decision

adequately satisfies the standard of review.

WJG Telephone Co. v. FCC, 675 F.2d 386, 388–89 (D.C. Cir.

1982) (internal quotation marks and citations omitted). CFTC

offered a reasoned explanation for its choice of five percent,

finding that “trading exceeding five percent of the liquidation

value of a portfolio evidences a significant exposure to the

derivatives markets.” 77 Fed. Reg. at 11,278. According to the

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Final Rule, the five percent threshold is appropriate because “it

is possible for a commodity pool to have a portfolio that is

sizeable enough that even if just five percent of the pool’s

portfolio were committed to margin for futures, the pool’s

portfolio could be so significant that the commodity pool would

constitute a major participant in the futures market.” Id. at

11,262 (quoting 76 Fed. Reg. at 7,985). We defer to CFTC’s

judgment and hold that adopting the five percent threshold was

neither arbitrary nor capricious.

D. Notice and Comment

Finally, appellants contend that CFTC failed to provide

adequate opportunity for notice and comment both because the

proposal’s cost-benefit discussion did not set out the basis for

the Final Rule’s analysis and because CFTC did not give

commenters notice of the seven-factor marketing test. We

disagree. The APA requires “reference to the legal authority

under which the rule is proposed” and “either the terms or

substance of the proposed rule or a description of the subjects

and issues involved.” 5 U.S.C. § 553(b). The proposed rule

included a separate section entitled “Cost-Benefit Analysis” that

gave adequate notice of CFTC’s approach to the cost-benefit

analysis by setting forth the factors that CFTC would consider

and summarizing expected costs and benefits. See 76 Fed. Reg.

at 7,988.

As for the seven-factor marketing test, no notice and

comment was required. The APA’s notice-and-comment

provision does not apply to “general statements of policy,” 5

U.S.C. § 553(b)(3)(A), and the seven factors were included in

the rule only as guidance. See 77 Fed. Reg. at 11,258–59. The

rule explicitly states that CFTC “will determine whether a

violation of the marketing restriction exists on a case by case

basis through an examination of the relevant facts.” Id. at

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11,259. Even if these factors were not included as a mere

statement of policy, the appellants do not even attempt to show

that any prejudice resulted from this failure to provide notice, as

they must to succeed on such a claim. See 5 U.S.C. § 706;

American Coke & Coal Chemicals Institute v. EPA, 452 F.3d

930, 939 (D.C. Cir. 2006).

III. CONCLUSION

For the foregoing reasons, the decision of the district court

is

Affirmed.

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