DISTRICT COURT NULLIFIES CFTC’S EFFORT TO PROTECT OUR DEMOCRACY FROM ELECTION GAMBLING: KalshiEx LLC v. CFTC, No. 1:23cv3257 (D.D.C.); KalshiEx LLC v. CFTC, No. 24-5202 (D.C. Cir.).
Last year, an exchange known as KalshiEX LLC attempted to offer an “event contract” that would allow speculators to gamble up to $100 million on the outcome of congressional elections The CFTC firmly rejected that effort in September 2023, but in keeping with standard industry practice these days, Kalshi went to federal court to challenge the order.
Unfortunately, on September 12th, the U.S. District Court for the District of Columbia issued its opinion holding that as a threshold matter, the CFTC lacked the statutory authority to review and ban the contract. The court adopted an exceedingly narrow reading of the law, asserting that because elections, viewed in isolation, are neither games nor an illegal activity under any laws, the Kalshi contract would not involve “gaming” or “unlawful” activity. The court essentially put blinders on and ignored the obvious reality: Trading in the Kalshi contract plainly amounts to gambling or “gaming” on elections, and that activity is strictly illegal under numerous state laws.
The stakes are high, as gambling on elections threatens to undermine our democracy, harm countless investors, and place the already under-staffed CFTC in the untenable position of trying to police election fraud and manipulation. The CFTC promptly filed an appeal in the D.C. Circuit, along with a motion for a stay of the district court’s order pending appeal. Oral argument on the motion for a stay pending appeal was held on Thursday, September 19, 2024. The judges grilled both sides but they clearly harbor some doubts about the need for a stay while the appeal proceeds. Meanwhile, the CFTC proposed a rule in May 2024 that would clearly prohibit gambling on political contests, and a bill has been introduced on the Hill to ensure that no contracts involving any political elections or contests may be traded.
DEPARTMENT OF LABOR APPEALS DISTRICT COURT ORDERS THAT PUT A HOLD ON PROTECTIONS FOR RETIREMENT SAVERS WHILE LITIGATION UNFOLDS: Federation of Americans for Consumer Choice, Inc. v. Department of Labor, No. 6:24-cv-00163, (E.D. Tex.) (May 2, 2024); American Council of Life Insurers v. United States Department of Labor, No. 4:24-cv-00482 (N.D. Tex.).
In April of 2024, the Department of Labor (“DOL”) finalized a rule that will help protect retirement savers from advisers who peddle subpar investments to their clients to enrich themselves with fees and commissions. A group of insurance industry plaintiffs have launched two separate attacks in Texas district courts seeking to nullify the rule. In July, each court issued a stay to prevent the DOL’s rule from going into effect during the litigation.
On September 20, 2024, the DOL appealed those stays in the Fifth Circuit. Given the Fifth Circuit’s past hostility to the DOL’s attempts to curb conflicts of interest among financial advisers, we are not optimistic that the appellate court will afford relief and allow the rule to take effect while the litigation unfolds.
If the appellate court doesn’t rescind those stays and allow the rules to go into effect, retirement savers will lose money every day at the hands of advisers who peddle inferior investments to line their own pockets.
FEDERAL APPEALS COURTS REBUKES INDUSTRY EFFORT TO DERAIL SEC RULE THAT PROTECTS PROXY ADVICE FIRMS: U.S. Chamber of Commerce, et al v. SEC, et al, No. 23-5409 (Sept. 10, 2024); U.S. Chamber of Commerce, et al v. SEC, et al, No. 3:22-cv-00561 (M.D. Tenn. Apr. 24, 2023).
In 2022, the SEC rolled back a number of burdensome and unnecessary requirements applicable to the firms that advise shareholders about how to vote their proxies on important matters of board composition and corporate policy. Among the rescinded provisions was a requirement that the proxy advice firm give notice of its advice to the company holding the vote and furthermore provide the company with an opportunity to respond in writing prior to the vote. These reforms were staunchly opposed by shareholders but heavily favored by company managers seeking to limit the influence of proxy advice firms and minimize what they perceive as interference with corporate governance.
The Chamber of Commerce challenged these rule changes in federal court. The district court in the Middle District of Tennessee upheld the SEC’s rule, and on September 10, 2024, the Sixth Circuit court of appeals delivered a 2-1 decision affirming that decision, in what many view as a stinging rebuke of the Chamber’s now-typical legal arguments against SEC rulemakings. One by one, the Court rejected the challengers’ arguments, noting that the arguments were “deficient” and “unfounded,” “fail to persuade,” “strain credulity,” and were “misleading at best.” Specifically, the Court held that the SEC’s change in regulatory position was not an arbitrary or capricious change or “about-face,” that the SEC had adequately assessed the economic consequences of the rule, and that the 30-day comment period satisfied applicable legal requirements.
The case is important for multiple reasons. It protects the ability of proxy advice firms to provide independent and timely advice to shareholders on the increasingly complex decisions that face public companies. It also represents a refreshing example of judicial review that applies the law to the facts without an ideological bias and exposes the strained arguments now routinely pressed by the regulated industry when it seeks to nullify important investor protections. The decision stands in stark contrast to a contrary decision from the Fifth Circuit in National Association of Manufacturers v. SEC, in which the Court found that the SEC failed to adequately explain its rescission of the 2020 proxy rules in violation of the APA.
