D.C. District Court Rejects Challenge To CFTC Rule 4.5 Amendments

On December 12, 2012, the U.S. District Court for the District of Columbia dismissed a lawsuit challenging recent amendments to Rule 4.5 (the "Amended Rule") promulgated by the Commodity Futures Trading Commission (the "CFTC") under the Commodity Exchange Act. The Amended Rule has been a topic of intense focus by the mutual fund industry because it will subject many registered investment companies and their investment advisers to regulatory oversight by the CFTC and the National Futures Association (the "NFA"). The court rejected in their entirety the principal claims advanced on behalf of the mutual fund industry by the plaintiffs, the Investment Company Institute and the U.S. Chamber of Commerce, finding that "the CFTC considered the relevant factors [and] acted well within its discretion," and that the CFTC's regulatory action was neither arbitrary nor capricious. The text of the court's opinion can be found here.

Investment advisers to registered investment companies that do not qualify for the exclusions from registration under the Amended Rule will be required to register with the CFTC by December 31, 2012, although they will not have to comply with certain recordkeeping, reporting and disclosure requirements until 60 days following the effectiveness of the final "harmonization" rule. As of the date of this alert, the CFTC had not announced when the final harmonization rule will be adopted.

The Amended Rule

Under the Commodity Exchange Act and the rules promulgated thereunder, an investment company that trades in commodity futures, options on commodities or commodity futures, swaps or certain other products is considered a "commodity pool," obligating its "operator" (typically the primary investment adviser) to register with the CFTC as a "commodity pool operator" ("CPO") unless the fund satisfies the requirements for one or more exemptions under rules promulgated by the CFTC. The amendments to Rule 4.5 limit the availability of one of these exemptions, relied upon by many mutual funds, by reinstating and augmenting certain trading limits and marketing restrictions on the use of CFTC-regulated derivatives that the CFTC had previously eliminated in 2003 as part of a broader approach to deregulation of derivatives markets. Rule 4.27, a new rule proposed at the same time as the amendments to Rule 4.5, requires advisers to mutual funds that are registered as CPOs to submit reports to the CFTC. Furthermore, because many investment advisers...