CFTC Rulemaking Under Dodd-Frank Paused

Section 6a was amended in 2010 by Dodd-Frank to state, in a new Section 6a(a)(2)(A), that the Commission “shall ' establish limits on the amount of positions that may be held by any person with respect to contracts of sale for future delivery or with respect to options on the contracts or commodities traded or subject to the rules of a designated contract market.” The “position limit” envisioned by Section 6a(a)(2)(A) is a restriction on the number of derivative contracts (short or long) in a commodity that a trader may own during a given period.

Position Limits Rule

The Commission promulgated a Position Limits Rule explicitly and solely on the basis that Dodd-Frank had utilized the term “shall” in mandating Commission action and that therefore the Commission did not have to make a finding that the rules were necessary to protect interstate commerce or that position limits were necessary to regulate fluctuations in the market. As Commissioner Gary Gensler stated: “Congress did not give the Commission a choice.”

The Commission, then, acted “prophylactically” in imposing position limits based on its “reasonable judgment” that the limits were necessary to protect interstate commerce. In other words, the Commission utilized what it regarded as mandatory Congressional language in Dodd-Frank to avoid formal findings of fact and rational exegesis of how the proposed rule rationally dealt with the issues raised in the findings. (See Business Roundtable v. SEC, 647 F.3d 1144 (DC Cir. 2011)

Indeed, one of the Commissioners voting for the position limits stated emphatically that the Commission had not heard “any reliable economic analysis to support either the contention that excessive speculation is affecting the market ' or that position limits will prevent the excessive speculation.”

The Court's Findings

The district court, on summary judgment, found that Section 6a was ambiguous as to whether the Commission was required to find that position limits are necessary and appropriate prior to imposing them. First, the court noted that Section 6a(a)(1), the original Commodities Exchange Act provision, clearly and unambiguously requires the Commission to make a finding of necessity prior to imposing position limits.

Second, the court found that after the Dodd-Frank amendment, the new Section 6a(a)(2)(A) did not expressly incorporate or reject the “finding” requirement of Section 6a(a)(1). Therefore, the former subsection did not clearly modify or relate to the latter subsection. Unless the Commission had initially resolved this statutory ambiguity, it could not have validly acted as it did in enacting the Position Limits Rule because it had mistakenly proceeded on the assumption that it was mandated to act without findings.

The Commission had failed to perceive the statutory ambiguity and therefore it could not enact the Rule in accordance with law because it had not understood the law. The court vacated the Rule by remanding the matter to the Commission for further consideration of its position on the necessity for findings.

This case presents no mysteries on its surface, being concerned with statutory construction of a tiny provision of Dodd-Frank. However, the back-story to the case presents nearly the ineluctable motivations of Congress and the Commission.

Let's assume that Congress, in drafting Dodd-Frank, wanted immediate action to regulate the securities markets. Sen. Christopher Dodd (D-CT) had announced that he would not run for re-election in 2010. Rep. Barney Frank (D-MA) lost his chairmanship of the House Financial Services Committee after the Republican victories in the 2010 mid-term elections and subsequently announced that he would retire in 2013. It is reasonable to assume that Dodd and Frank would wish that the Commission take action on position limits before the Republican ascendency could alter or repeal the legislation.

However, if Congress' anxieties about legacy and repeal were the first considerations in passing the legislation in 2010, why use the term “shall” in Section 6a(a)(2)(A)? Left unspoken by the court is the fact that the seemingly inadvertent use of “shall” is the key to any ambiguity about the intent of the Dodd-Frank amendment. Yet, as any first-year law student knows, “shall” should not be used when “must” is intended. This maxim is so fundamental that it
appears in every Contracts textbook.

'Shall' and 'Must'

The Commission and Congress, having access to the best legal consultants available, could not have been ignorant of the clear strictures of statutory interpretation. For example, the Office of the Federal Register's guidelines for the drafting of regulations state that “shall” imposes an obligation to act, but may be confused with prediction of future action. Therefore, “To impose a legal obligation, use 'must'.” See www.archives.gov/federal-register/write/legal-docs/clear-writing.html.

If one assumes that Congress had the goal of eliminating the lengthy and expensive traditional rule-making process, why, then, didn't Congress draft Section 6a(a)(2)(A) to state that the Commission “[must] ' establish limits on the amount of positions”? Either the choice of “shall” was a grotesque error, or Congress thought it was a better choice. The latter interpretation requires Congress or the Commission to have deemed the ambiguous term superior to the clearer one.

While the Commission, in defending the ISDA case, and Congress, in submitting a separate amicus curiae brief for selected House members and Senators, pulled out all the stops in seeking to extract a mandatory intent from Section 6a(a)(2)(A), the question of the original Congressional drafting remains unanswerable.

Members of the House have proposed an answer. On Oct. 10, the Chairs of the House Capital Markets, Oversight and Investigations Subcommittee and the Financial Services Committee, and the Vice Chair of the latter accused the Commission Chair of willful misfeasance in implementing Dodd-Frank:

Over the last two years, during multiple appearances testifying before Congress, you have been repeatedly encouraged to follow Congressional intent and the letter of the law while implementing [Dodd-Frank]. Unfortunately, it appears that advice has gone largely unheeded [as confirmed by the ISDA decision].

It seems unlikely, based on any thorough reading of the decision, that the Commission alone was “using limited resources to pursue ideological and political goals” as alleged in the letter. At best, under the prodding of the very powerful House members and Senators who are the amicus curiae to the ISDA court, all of whom were present at the creation of Dodd-Frank, the Commission felt it necessary to pursue a legally doubtful (if not frivolous) interpretation of “shall” in the amendment. This suggests the opposite of the recent House claim, that the Commission felt it had no choice but to vindicate its understanding of the amendment.

The Ultimate Outcome of The Case

Ultimately, the ISDA case will pass as a footnote to the legislative history of Dodd-Frank as a whole. It is inconceivable that the Commission, having lost so resoundingly, would dare to appeal the summary judgment ruling. It is unlikely that on remand the Commission will decide that Congress had meant “must” in enacting Section 6a(a)(2)(A), given the customary meaning of “shall” as a term of art.

The most likely outcome of the ISDA case is a return to the administrative protocol outlined in Section 6a(a)(1), but within the context of the concerns expressed in the Dodd-Frank amendment with respect to contracts of sale for future delivery or options on those contracts. The prospects for a new Rule now turns on, as one dissenting Commissioner put it, whether the Commission can “determine and define the type and extent of speculation that is likely to cause sudden, unreasonable and/or unwarranted commodity price movements ' ” Such a task is, as foreseen by Congress, unlikely to be easy, even with the deference courts normally accord to agency decisions.

An immense wave of Dodd-Frank litigation will sweep the federal courts this year, following two years of desultory rule-making by the relevant federal agencies. The first such case of note, International Swaps and Derivatives Association v. CFTC, No. 11-cv-2146 (RLW), was terminated by summary judgment on Sept. 28 in the District Court of the District of Columbia, and illustrates the close scrutiny that the creation of administrative rules under Congressional mandate will receive.

The CFTC

The Commodity Futures Trading Commision (CFTC) is charged with preventing excessive speculation in any commodity under Sections 6a(a) of the Commodities Exchange Act, 7 USCA. The Commission has statutory discretion to set position limits on futures and options contracts in commodity derivatives markets to diminish or prevent unreasonable fluctuations or unwarranted changes in the price of a commodity in order to protect interstate commerce.

Section 6a was amended in 2010 by Dodd-Frank to state, in a new Section 6a(a)(2)(A), that the Commission “shall ' establish limits on the amount of positions that may be held by any person with respect to contracts of sale for future delivery or with respect to options on the contracts or commodities traded or subject to the rules of a designated contract market.” The “position limit” envisioned by Section 6a(a)(2)(A) is a restriction on the number of derivative contracts (short or long) in a commodity that a trader may own during a given period.

Position Limits Rule

The Commission promulgated a Position Limits Rule explicitly and solely on the basis that Dodd-Frank had utilized the term “shall” in mandating Commission action and that therefore the Commission did not have to make a finding that the rules were necessary to protect interstate commerce or that position limits were necessary to regulate fluctuations in the market. As Commissioner Gary Gensler stated: “Congress did not give the Commission a choice.”

The Commission, then, acted “prophylactically” in imposing position limits based on its “reasonable judgment” that the limits were necessary to protect interstate commerce. In other words, the Commission utilized what it regarded as mandatory Congressional language in Dodd-Frank to avoid formal findings of fact and rational exegesis of how the proposed rule rationally dealt with the issues raised in the findings. ( See Business Roundtable v. SEC , 647 F.3d 1144 (DC Cir. 2011)

Indeed, one of the Commissioners voting for the position limits stated emphatically that the Commission had not heard “any reliable economic analysis to support either the contention that excessive speculation is affecting the market ' or that position limits will prevent the excessive speculation.”

The Court's Findings

The district court, on summary judgment, found that Section 6a was ambiguous as to whether the Commission was required to find that position limits are necessary and appropriate prior to imposing them. First, the court noted that Section 6a(a)(1), the original Commodities Exchange Act provision, clearly and unambiguously requires the Commission to make a finding of necessity prior to imposing position limits.

Second, the court found that after the Dodd-Frank amendment, the new Section 6a(a)(2)(A) did not expressly incorporate or reject the “finding” requirement of Section 6a(a)(1). Therefore, the former subsection did not clearly modify or relate to the latter subsection. Unless the Commission had initially resolved this statutory ambiguity, it could not have validly acted as it did in enacting the Position Limits Rule because it had mistakenly proceeded on the assumption that it was mandated to act without findings.

The Commission had failed to perceive the statutory ambiguity and therefore it could not enact the Rule in accordance with law because it had not understood the law. The court vacated the Rule by remanding the matter to the Commission for further consideration of its position on the necessity for findings.

This case presents no mysteries on its surface, being concerned with statutory construction of a tiny provision of Dodd-Frank. However, the back-story to the case presents nearly the ineluctable motivations of Congress and the Commission.

Let's assume that Congress, in drafting Dodd-Frank, wanted immediate action to regulate the securities markets. Sen. Christopher Dodd (D-CT) had announced that he would not run for re-election in 2010. Rep. Barney Frank (D-MA) lost his chairmanship of the House Financial Services Committee after the Republican victories in the 2010 mid-term elections and subsequently announced that he would retire in 2013. It is reasonable to assume that Dodd and Frank would wish that the Commission take action on position limits before the Republican ascendency could alter or repeal the legislation.

However, if Congress' anxieties about legacy and repeal were the first considerations in passing the legislation in 2010, why use the term “shall” in Section 6a(a)(2)(A)? Left unspoken by the court is the fact that the seemingly inadvertent use of “shall” is the key to any ambiguity about the intent of the Dodd-Frank amendment. Yet, as any first-year law student knows, “shall” should not be used when “must” is intended. This maxim is so fundamental that it
appears in every Contracts textbook.

'Shall' and 'Must'

The Commission and Congress, having access to the best legal consultants available, could not have been ignorant of the clear strictures of statutory interpretation. For example, the Office of the Federal Register's guidelines for the drafting of regulations state that “shall” imposes an obligation to act, but may be confused with prediction of future action. Therefore, “To impose a legal obligation, use 'must'.” See www.archives.gov/federal-register/write/legal-docs/clear-writing.html.

If one assumes that Congress had the goal of eliminating the lengthy and expensive traditional rule-making process, why, then, didn't Congress draft Section 6a(a)(2)(A) to state that the Commission “[must] ' establish limits on the amount of positions”? Either the choice of “shall” was a grotesque error, or Congress thought it was a better choice. The latter interpretation requires Congress or the Commission to have deemed the ambiguous term superior to the clearer one.

While the Commission, in defending the ISDA case, and Congress, in submitting a separate amicus curiae brief for selected House members and Senators, pulled out all the stops in seeking to extract a mandatory intent from Section 6a(a)(2)(A), the question of the original Congressional drafting remains unanswerable.

Members of the House have proposed an answer. On Oct. 10, the Chairs of the House Capital Markets, Oversight and Investigations Subcommittee and the Financial Services Committee, and the Vice Chair of the latter accused the Commission Chair of willful misfeasance in implementing Dodd-Frank:

Over the last two years, during multiple appearances testifying before Congress, you have been repeatedly encouraged to follow Congressional intent and the letter of the law while implementing [Dodd-Frank]. Unfortunately, it appears that advice has gone largely unheeded [as confirmed by the ISDA decision].

It seems unlikely, based on any thorough reading of the decision, that the Commission alone was “using limited resources to pursue ideological and political goals” as alleged in the letter. At best, under the prodding of the very powerful House members and Senators who are the amicus curiae to the ISDA court, all of whom were present at the creation of Dodd-Frank, the Commission felt it necessary to pursue a legally doubtful (if not frivolous) interpretation of “shall” in the amendment. This suggests the opposite of the recent House claim, that the Commission felt it had no choice but to vindicate its understanding of the amendment.

The Ultimate Outcome of The Case

Ultimately, the ISDA case will pass as a footnote to the legislative history of Dodd-Frank as a whole. It is inconceivable that the Commission, having lost so resoundingly, would dare to appeal the summary judgment ruling. It is unlikely that on remand the Commission will decide that Congress had meant “must” in enacting Section 6a(a)(2)(A), given the customary meaning of “shall” as a term of art.

The most likely outcome of the ISDA case is a return to the administrative protocol outlined in Section 6a(a)(1), but within the context of the concerns expressed in the Dodd-Frank amendment with respect to contracts of sale for future delivery or options on those contracts. The prospects for a new Rule now turns on, as one dissenting Commissioner put it, whether the Commission can “determine and define the type and extent of speculation that is likely to cause sudden, unreasonable and/or unwarranted commodity price movements ' ” Such a task is, as foreseen by Congress, unlikely to be easy, even with the deference courts normally accord to agency decisions.