Opinion ID: 931605
Heading Depth: 2
Heading Rank: 2

Heading: Cost-Benefit Analysis

Text: 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 12 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 13 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 14 “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 15 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. 16 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.