## Facts

- The Board of Trade of the City of Chicago (CBOT) sought approval to list futures contracts based on the Dow Jones Transportation Average (20 stocks) and Dow Jones Utilities Average (15 stocks).
- Both indexes were price-weighted; one utility stock exceeded 12% of the Utilities Average’s weight.
- Under the Commodity Exchange Act (CEA), these stock-index futures required joint SEC and CFTC approval.
- The agencies had issued a nonbinding Joint Policy Statement indicating, among other criteria, that a qualifying “broad-based” index should include at least 25 domestic issuers and, if price-weighted, no single stock should exceed 10% of index weight.
- The SEC approved options on these Dow Jones indexes but denied approval for the corresponding futures.
- The SEC’s denial relied primarily on the Joint Policy Statement’s numerical screens, concluding the indexes were not “broad-based” and therefore did not reflect “a substantial segment” of the market; it did not clearly base denial on manipulation susceptibility.
- The CFTC disagreed with the SEC’s view that the statute required “broad-based” indexes meeting the policy statement’s numerical thresholds.
- CBOT petitioned the Seventh Circuit for review of the SEC’s order.

## Issues

1. Whether the SEC lawfully denied approval by treating the Joint Policy Statement’s numerical thresholds as effectively controlling in deciding whether the underlying indexes reflected “a substantial segment” of the market under the CEA.
2. Whether the SEC’s interpretation and application of the “substantial segment” requirement, and its reasoning in denying approval, were arbitrary, capricious, or contrary to law.

## Decision

- The Seventh Circuit set aside the SEC’s denial order and remanded.
- The court held the SEC’s reasoning was legally flawed because it substituted nonbinding policy-statement screens for the statute’s standards.
- The court rejected the SEC’s narrow reading that “substantial segment” effectively required a “broad-based” index meeting fixed numerical criteria.
- The court criticized the SEC’s underdeveloped treatment of manipulation concerns and its inconsistent posture in approving options on the same indexes.

## Legal Principles

- An agency may use a policy statement as guidance, but may not apply nonbinding criteria as dispositive rules that replace statutory standards without lawful rulemaking or statutory authorization.
- The CEA requirement that an index reflect “a substantial segment” of the market is qualitative; a substantial industry sector may qualify even if the index contains relatively few component stocks.
- Agency action is arbitrary and capricious when the agency fails to connect its decision to the statutory text, relies rigidly on extra-statutory benchmarks, or offers an inadequate explanation for key statutory factors.
- In a joint-regulatory regime, unexplained inconsistency between agencies’ views, and internal inconsistency in an agency’s treatment of closely related products, can weigh against deference and support vacatur for inadequate reasoning.

## Conclusion

The court vacated the SEC’s denial of approval for CBOT’s proposed futures because the SEC treated nonbinding policy-statement thresholds as controlling and failed to apply and explain the CEA’s statutory standards—especially the qualitative “substantial segment” requirement—on a reasoned basis.


Bd. of Trade of Chi. v. SEC, 187 F.3d 713 (7th Cir. 1999)