The newspaper world is abuzz with news of the ICI and Chamber of Commerce's joint decision to sue the CFTC yesterday. The suit comes as the CFTC and SEC are expected to approve the final rules regulating firms using swaps derivatives today.

The legal tussle is over a change in CFTC Rule 4.5 set for April 24 that would make as many as 500 mutual funds register with the CFTC as commodity pool operators due to their use of swaps.

Bloomberg positions the suit as "one of several brought by the financial industry as it pushes back against tighter regulations passed in the wake of the 2008 credit crisis."

Bloomberg also highlights the partisan rift on the CFTC. It quotes CFTC Chairman Gary Gensler, a Democrat, as saying that “It is critical to bring the pools that have been in the dark since 2003 back into the light."

Republican Commissioner Jill Sommers is quoted as stating that justification for the Rule 4.5 amendment is "sorely lacking." Bloomberg does not point out that Sommors' vote was the only one against the rule last February when it passed 4-1 (Reuters does report that fact).

"It's just incredible to me. It's just mindless yearning for the old ways," Bloomberg quotes outgoing Representative Barney Frank (D-MA) as saying.

Reuters focuses on the legalities of the case. It reports that the suit revolves around whether the CFTC properly weighed the costs against the rules benefits. This is the second recent suit against the CFTC, Reuters reports.

Such arguments have been succesfully used against the SEC and other regulators over the past decade, the Reuters story claims.

Bart Chilton, one of the CFTC's Democrats fired back against the strategy in an email to Reuters which says:

"Would-be litigants should perhaps start to be very circumspect about this scatter-gun approach to federal litigation. Federal judges don't like their courtrooms to be used as logjams to create regulatory slow-go's and no-go's, and it's quite clear that('s) what such frivolous cases have become."

The ICI and Chamber of Commerce tapped one of the Washington lawyers who has the most success using this tactic, adds Reuters. That lawyer is Gibson Dunn partner Eugene Scalia.

Yes, he is the son of that Scalia -- U.S. Supreme Court Justice Antonin Scalia. Recently, Eugene Scalia won four cases against the SEC, including one over a rule that would have classified equity-indexed annuities as securities.

"Quite similarly here, the CFTC has rushed forward to regulate investment companies without having first determined that there was some gap and shortfall in the existing regulatory apparatus that required them to enter the fray," Scalia told Reuters.

InvestmentNews misses the Scalia connection, but it does pick up ICI's Paul Stevens on the concern that the rules would sweep up funds using swaps on broad indices such as the S&P 500.

"Every adviser will be required to continually monitor there funds with the new rules in mind. Others may choose not to use derivatives at all — to the detriment of their investors,” said Stevens.

The trade pub also picks up the technical issue of the SEC barring mutual funds from showing the past performance of similar products or pools in prospectuses while the CFTC requires such disclosures in registration documents.

Across the pond, the Financial Times takes a unique view of the case, noting that it may slow the SEC's adoption of new rules.

The British paper's SEC sympathetic tone is summed up by the statement from SEC Chair Mary Schapiro Congressional testimony yesterday in which she claimed the SEC is "still under-resourced to the task that we face."

PDF of the complaint 

Edited by: HFD


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