## Facts

- Federal law generally requires commodity pool operators (CPOs) to register with the Commodity Futures Trading Commission (CFTC) and comply with disclosure, recordkeeping, and reporting obligations.
- The CFTC historically used Rule 4.5 to exclude certain entities, including registered investment companies, from CPO regulation subject to conditions tied to limited derivatives use and marketing restrictions.
- Over time, Rule 4.5 shifted from tighter limits (including a margin-based ceiling and hedging-related conditions) to a broader exclusion that largely exempted many registered investment companies from CPO regulation.
- After the Dodd–Frank Act and a petition urging renewed oversight, the CFTC amended Rule 4.5 (2012) to narrow the exclusion for registered investment companies by, among other things, reinstating a 5% trading threshold, treating swaps as relevant derivatives exposure, and tightening conditions related to hedging and marketing.
- Trade associations representing affected market participants sued, alleging the amendments were unlawful under the Administrative Procedure Act (APA) and the Commodity Exchange Act (CEA).
- The district court granted summary judgment to the CFTC, and the associations appealed.

## Issues

1. Whether the CFTC acted arbitrarily or capriciously by narrowing the Rule 4.5 exclusion without adequately addressing the rationale for the earlier, broader approach.
2. Whether the CFTC satisfied the CEA’s requirement to consider the costs and benefits of its rulemaking, including claimed duplicative regulation and compliance costs.
3. Whether the CFTC reasonably justified key design choices, including the inclusion of swaps, the hedging-related limitations, and the reinstated 5% threshold.
4. Whether the rulemaking complied with APA notice-and-comment requirements, including whether the final rule was a logical outgrowth of the proposal.

## Decision

- The D.C. Circuit affirmed summary judgment for the CFTC and upheld the amended Rule 4.5.
- The court held the CFTC provided a reasoned explanation for its policy change and acknowledged it was revising its earlier approach.
- The court held the CFTC’s discussion of costs and benefits met the CEA’s consideration requirement and did not require rigid quantification.
- The court upheld the inclusion of swaps, hedging-related limitations, and the 5% threshold as reasonable line-drawing supported by the agency’s experience and the administrative record.
- The court held the notice-and-comment process was adequate because the final provisions were in the proposal or were logical outgrowths.

## Legal Principles

- When an agency changes policy, it must acknowledge the change and supply a reasoned explanation, but it need not prove the new policy is superior to the old one.
- Under the APA, a rule is upheld if the agency’s reasoning is rational, tied to statutory purposes, and supported by the administrative record; courts generally defer to reasonable regulatory line-drawing within the agency’s competence.
- A statutory requirement that an agency “consider” costs and benefits obligates reasoned consideration and responsiveness to material comments, not necessarily a quantified cost-benefit analysis.
- Notice-and-comment is satisfied when interested parties have a meaningful opportunity to comment and the final rule is a logical outgrowth of the proposed rule.

## Conclusion

The D.C. Circuit upheld the CFTC’s amendments narrowing Rule 4.5’s exclusion for registered investment companies, concluding the agency reasonably explained its policy shift, adequately considered costs and benefits under the CEA, made permissible design choices about derivatives exposure limits (including swaps and a 5% threshold), and followed lawful notice-and-comment procedures.


Inv. Co. Inst. v. Commodity Futures Trading Comm’n, 720 F.3d 370 (D.C. Cir. 2013)