On December 4, 2013, the Securities Industry and Financial Markets Association, the International Swaps and Derivatives Association, Inc., and the Institute of International Bankers filed a lawsuit challenging the CFTC’s final cross-border guidance issued in July of 2013 (the “Guidance”).[1] The amended complaint[2] primarily argues that, in issuing the Guidance, the CFTC issued “a sweeping, international compliance directive that it characterized as mere ‘guidance,’”[3] instead of promulgating an actual rule governing the extraterritorial reach of the rules under Title VII of the Dodd-Frank Act that complied with the requirements of the Administrative Procedure Act (“APA”) and the Commodity Exchange Act (“CEA”), such as cost-benefit analysis.[4] Put simply, the plaintiffs argue that the CFTC “purposefully circumvented the congressionally-required procedures for CFTC rulemaking.”[5] Despite its purported status as mere non-binding guidance, the amended complaint notes that the CFTC has repeatedly made clear that the Guidance is intended to bind the CFTC staff and the public in the manner of a rule.[6] The amended complaint further argues that, in promulgating many Title VII rules (such as the clearing requirement rule and the swap data repository reporting rule), despite public comments, the CFTC failed to address how those rules would apply extraterritorially and failed to consider the costs and benefits of the application of the rules to foreign entities and entities engaged in cross-border transactions.[7]
More specifically, the plaintiffs make the following arguments. First, the CEA provides that the promulgation of any “regulation” by the CFTC requires the evaluation of the costs and benefits of the proposed rule in light of various considerations.[8] However, the CFTC did not engage in any cost-benefit analysis before issuing the Guidance, despite its rule-like binding effect.[9] Second, the APA requires that an agency give interested persons sufficient opportunity to participate in a rulemaking.[10] Among other issues, fair notice was not given of how the Guidance would expand the extraterritorial application of the Title VII rules.[11] Third, an agency is required under the APA to respond adequately to public comments before promulgating a rule, which the CFTC failed to do in connection with the Guidance.[12] Fourth, the APA forbids an agency from acting in an “arbitrary” or “capricious” manner in adopting new rules.[13] The Guidance failed to explain the application of Dodd-Frank swaps provisions to non-U.S. entities, and, given the attenuated connection of such entities to the United States, such application qualifies as arbitrary and capricious.[14] Fifth, the CEA provides that the application of Dodd-Frank swaps provisions to activities outside of the United States requires “a direct and significant connection with activities in, or effect on, commerce of the United States.”[15] But pursuant to the Guidance, certain entities and transactions, such as non-U.S. affiliate conduits, may be regulated despite lacking a “direct and significant” connection with or effect on U.S. commerce.[16] Sixth, the CFTC promulgated the Title VII rules without evaluating their costs and benefits and responding adequately to public comments with respect to their cross-border application, issuing the guidance instead for that purpose.[17]
The amended complaint therefore asks that the court, inter alia: (i) vacate and set aside the guidance in its entirety; and (ii) enjoin the CFTC from applying or enforcing the Title VII rules extraterritorially until promulgating a cross-border rule consistent with the APA and the CEA.[18]
[1] Interpretive Guidance and Policy Statement Regarding Compliance with Certain Swap Regulations, 78 Fed. Reg. 45,292 (July 26, 2013). The Guidance and related topics have been addressed previously in Derivatives in Review. See “‘U.S. Person’ Definitions Under the Final Exemptive Order and the Final Guidance, Application to Certain Foreign Branches, and Determination for Collective Investment Vehicles” posted on August 26, 2013.
[2] Amended Complaint, Securities Industry and Financial Markets Association v. CFTC, Civil Action No. 13-CV-1916 (D.D.C. Dec. 27, 2013).
[3] Id. at 3.
[4] Id. at 2. The complaint notes that Commissioner O’Malia has indicated his concern as well, stating that “[a]voiding cost-benefit analysis by labeling the document as guidance is unacceptable.” Id. at 4.
[5] Id. at 29.
[6] Id. at 3.
[7] Id. at 10-29.
[8] Id. at 52-53.
[9] Id.
[10] Id. at 53-54.
[11] Id.
[12] Id. at 54-55.
[13] Id. at 55-56.
[14] Id.
[15] Id. at 56-57.
[16] Id.
[17] Id. at 59.
[18] Id. at 64.