Opinion

Alison Frankel

Agency scourge Gene Scalia to challenge CFTC’s swaps regulation

By Alison Frankel
December 5, 2011

You don’t have to look very hard for an explanation of why two industry trade groups hired Eugene Scalia of Gibson, Dunn & Crutcher to bring their suit to block the Commodity Futures Trading Commission from enforcing a new rule limiting commodity speculation through derivatives trading. In July, Scalia won a ruling from the U.S. Court of Appeals for the District of Columbia that struck down the Securities and Exchange Commission’s Dodd-Frank-mandated rule requiring corporations to provide stockholders with access to proxy materials on shareholder-nominated board nominees. (The SEC subsequently announced it wouldn’t appeal the ruling.) Nor was the proxy-access victory Scalia’s first whack at federal agency rule-making: he’s managed to overturn two previous SEC rules (see here and here); mounted a landmark challenge to Sarbanes-Oxley whistleblower protections; and won cases striking down a pair of laws requiring certain employers to provide employees with health benefits. For business groups that consider themselves overregulated, Scalia is the man to see.

The suit against the CFTC, filed by the International Swaps and Derivatives Association and the Securities Industry and Financial Markets Association, or SIFMA, isn’t a surprise. The new rule, which sets strict limits on derivative contracts tied to 28 commodities, is supposed to curb speculation. The CFTC, which passed the rule by a 3-2 vote, took the position that Congress required the agency to enact the regulation in Dodd-Frank. But as Reuters has reported, banks and brokerages have fiercely opposed the rule since it was proposed. “Affected parties have been watching from the start,” said Scalia, who declined to specify when the trade groups hired Gibson to litigate.

Friday’s complaint asserts that the CFTC “grossly misinterpreted its authority,” arguing that Congress instructed the agency to set position limits only if the CFTC concluded they were necessary to control speculative trading. The trade groups alleged that the agency found no such evidence; even one of the commissioners who ultimately voted in favor of the new rule, according to the complaint, said at a public hearing that, “No one has presented this agency any reliable economic analysis to support either the contention that excessive speculation is affecting the market we regulate or that position limits will prevent the excessive speculation.”

Scalia told me Monday that the CFTC received an avalanche of contrary comments when it proposed the new rule, yet didn’t take them into account in the final regulation. “Dodd-Frank was an exceedingly lengthy, complicated, and controversial statute that put important responsibilities and demands on federal financial regulatory authorities,” he said. “That’s [got to] include careful review of comments by the public. It’s not going to be enough for agencies to issue rules that are inadequately considered and say Congress made them do it.”

Scalia, who is the son of U.S. Supreme Court Justice Antonin Scalia, said he has no inherent problem with regulation, just with ill-considered rules. “It’s a very American process,” he told me. “The government is required to solicit input from the public and give it very careful consideration.” (In this case, the public of which Scalia speaks are the banks and brokerages that opposed the CFTC rule.) “We think the CFTC misunderstood its statutory responsibility,” he added.

So far, Scalia said, there have only been two litigation challenges to Dodd-Frank rulemaking — the proxy-access and position-limits cases — and he and Gibson Dunn have handled them both.

Interestingly, Scalia has previously appeared opposite SIFMA in NASDAQ’s attempt to package two of its data services and market them at a lower price. Scalia represented NASDAQ; Sidley Austin represents SIFMA, which opposes the packaging. Sidley partner Carter Phillips also advised SIFMA on an Obama Administration proposal to tax big banks; I left a message with Sidley partner Kevin Campion but didn’t hear back.

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