Mutual fund group sues regulator on new rules
CFTC faces challenge on futures contracts
In a rare public showdown, the mutual fund industry is taking a regulator to court over new rules governing funds that use futures contracts.
At the heart of the matter: an explosion of new funds that offer investors exposure to commodities, such as grains and metals. Others use futures to amplify gains and losses on stocks and bonds.
The Commodity Futures Trading Commission, which regulates the commodity markets, says it has the authority under the Dodd-frank Act to require these funds to conform to CFTC rules and oversight.
The Investment Company Institute, the funds’ trade group, disagrees, and brought suit Tuesday against the CFTC. It’s the first lawsuit by the ICI against a federal regulator since 1971.
Many funds use futures and other complex investments, such as swaps. The $1.8 billion PowerShares DB Agriculture fund, for example, aims to track a broad basket of agricultural commodities, such as sugar, corn and wheat. The fund parks most of its money in cash, such as Treasury bills, and uses futures to track commodity prices.
Other funds use futures and swaps to manage risk. Many international funds, for example, can use futures to hedge against big moves in the value of the U.S. dollar. The ICI is surveying its members to see how many funds would be affected by the CFTC’S ruling, but estimates it to be in the hundreds.
The ICI, joined by the U.S. Chamber of Commerce, says in the lawsuit that mutual funds are already heavily regulated, and that the CFTC didn’t weigh the costs and benefits of additional regulation.
Funds affected by the rule would have to disclose more information to shareholders, and would have to get additional licenses to operate. “The rules will impose significant costs to funds, which will be passed on to shareholders without clearly providing fund investors with protections over and above those SEC rules and regulations,” says Susan Wyderko, president of the Mutual Fund Directors Forum.
The CFTC had no comment on the lawsuit. However, in its rulemaking statement, it said that many funds were operating as commodities pools, yet ducking CFTC regulation because they were registered as mutual funds. The CFTC also argued that companies that use futures and options should meet minimal standards of fitness and competency.