The Commodity Futures Trading Commission has once again prevailed in a legal challenge brought by the Investment Company Institute and the U.S. Chamber of Commerce. The industry groups sought to overturn rulemaking requiring mutual fund companies that invest in commodities to register with it.

The U.S. Court of Appeals for the District of Columbia Circuit ruled in favor of the CFTC in a decision issued Tuesday, upholding an earlier ruling in federal district court. In its decision, the court rejected arguments that the CFTC's rulemaking would be an unnecessary cost and compliance burden because mutual funds are already overseen by the Securities and Exchange Commission.

Last year, the CFTC removed established exemptions for registered investment companies (RICs) once they exceed established thresholds for commodity investments. RICs can utilize futures, options and swaps only for “bona fide hedging,” unless the initial margins and premium for non-hedging activities do not exceed 5 percent of the fund's liquidation value. Otherwise, they must register with the CFTC as commodity pool operators and adhere to new reporting, disclosure, and recordkeeping requirements. As CPOs, they must also become members of the National Futures Association, a self-regulatory organization, and meet its additional compliance rules and licensing examinations.

In their initial lawsuit, as well as an appeal filed in December, ICI and the Chamber protested what they said would be an overlapping, potentially conflicting regulatory regime. They presented a case that the CFTC's rulemaking was “arbitrary and capricious,” thereby violating the Administrative Procedure Act.

Among their arguments was that the CFTC violated the APA in its rulemaking by failing to explain why it changed from more generous exemption requirements that had existed since 2003 to more stringent ones.

“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,” the court wrote, rejecting that contention.

The three-judge panel also rejected claims that the CFTC, by engaging in a multistep rulemaking process (with some regulations becoming final only after harmonization with those of the SEC), made it impossible to determine the costs and benefits of its rule. They claimed the CFTC counted benefits that may not materialize and depend on the harmonization rule, while ignoring potential costs that also might arise.

The court also shot down this argument, writing that the CFTC “had no obligation to consider hypothetical costs that may never arise.”

An argument by the appellants that the CFTC failed to consider the relevant costs and benefits of its rule because it had not yet adopted a definition of “swaps” also faied to sway the court, which countered that the Dodd-Frank Act provides a “detailed definition” and that a more extensive definition was not necessary.