Finding Ambiguity – The Future Of Mandatory Rule Making Under The Dodd-Frank Act

by Allen Matkins

When Congress says that an agency “shall” adopt a rule, is there any room for discretion on the part of the agency?  That was the question for U.S. District Court Judge Robert L. Wilkins in International Swaps & Derivatives Ass’n v. U.S. Commodity Futures Trading Comm’n, Civil Action No. 11-cv-2146 (RLW) (D. D.C. Sept. 28, 2012).  The case involved the validity of the Commodity Futures Trading Commission’s recently adopted position limits rule.  Without getting into the arcana of derivative regulation, suffice it to say that the rule limits the number of contracts that a trader may own in a given period.  This rule was also of immense public interest – the CFTC received over 15,000 comment letters on its proposed rule. 

The fundamental dispute between the parties revolved around what Congress intended when it enacted the Dodd-Frank Act amending Section 4a of the Commodity Exchange Act (codified at 7 U.S.C. § 6a).  The plaintiffs, two industry trade groups, argued that Congress’ intent was clear and unambiguous – the CFTC was required to make findings of necessity in promulgating the position limits rule.  The CFTC argued just as forcefully that the statute was clear and unambiguous – the CFTC was not required to make findings of necessity.  If Judge Wilkins agreed with either side’s position, both the court and the CFTC would be required to follow the mandate of Congress.  To students of administrative law, this is “step one” of the analytical framework established by the U.S. Supreme Court in Chevron U.S.A. Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837 (1984).

Judge Wilkins, faced with two sides each arguing that the statute was clear and unambiguous, decided that the statute was ambiguous.  Under “step two” of Chevron, a court is normally entitled to give deference to the agency’s interpretation of an ambiguous statute.  However, deference is not owed when an agency mistakenly believes that its interpretation is compelled by Congress.  Here, the CFTC conceded that it was not entitled to deference under Chevron step two because the CFTC (as noted above) took the position that the statute was clear and unambiguous.  At this point, one might expect that Judge Wilkins would have resolved the ambiguity by supplying the “correct” interpretation of Section 4a of the CEA, as amended by the Dodd-Frank Act.  That’s not what he did, however.  Instead, Judge Wilkins vacated the rule and remanded the case to the agency.  In doing so, he pointedly expressed no view on whether the position advanced by the CFTC is permissible.

This case has significant implications for rulemaking pursuant to the Dodd-Frank Act.  The Congressional Research Service identified in this report more than 300 provisions of the Dodd-Frank Act that require or permit rulemaking.  But when Congress said that an agency “shall issue” or “shall amend” rules, is that statutory command clear and unambigous?  Has Congress ordered the agency to ”damn the torpedoes” and proceed “full speed ahead” with rule making without regard to pre-existing requirements as previously interpreted by the agency?  This case illustrates that what may seem a clear command may not be so clear after all.  It is also important to recognize that the CFTC may yet adopt a positions limit rule.  Having determined that the statute is ambiguous, the CFTC is free to fill in the gaps and resolve the ambiguity.  Under step two of Chevron, a reviewing court is required to defer to the agency’s interpretation if it is reasonable and consistent with the statutory purpose.  In the future, a smarter play by an agency may be to take the position that the statute is ambiguous and claim Chevron deference for its interpetation.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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