The opinion of the court was delivered by: Moran, District Judge.
As an investor in the commodities market, plaintiff challenges
his futures contract brokers' practice of retaining the interest
made by investing plaintiff's margin funds. Plaintiff claims that
because section 4(d) of the Commodity Exchange Act (the Act),
7 U.S.C. § 6d, treats such money as belonging to the customer, any
interest accrued on such money also belongs to the customer.
Defendants argue that while plaintiff's argument sounds logical,
it is contrary to congressional intent. They have moved for
dismissal under Rule 12(b)(6) of the Federal Rules of Civil
Procedure, on the ground that their interpretation of the Act
precludes plaintiff's claims. Because the Act has been
definitively interpreted as supporting defendants' views, the
court grants defendants' motion as to plaintiff's claims based on
7 U.S.C. § 6d.
The House solution was to prevent FCMs from using margin money
at all for any purpose. 79 Cong.Rec. 8587 (1935). The Senate felt
that this was too harsh:
80 Cong.Rec. 6612-13 (1936) (remarks of Senator Pope). The Senate
adopted the agency's suggestions and § 4d(2) was amended. The
amendment was to "provide some limitation under which the
commission men may use [customer funds] to invest" while
rectifying "the evils which have heretofore existed in relation
to the investment of money coming from clients. . . ." 80
Cong.Rec. 7911 (1936) (remarks of Senator Norris).
The senators' language and purpose directly supports Regulation
1.29, when read with Regulations 1.25 through 1.28. Congress
wanted to ensure that customers' margin funds did not disappear.
Regulations 1.25 ensures this by requiring FCMs to maintain at
all times funds equivalent to the present market value of the
margin deposited by the customer. Because of this requirement the
FCM must compensate for any decline in the value of an obligation
purchased with customer funds by adding his own funds to the
segregated account. Hence the FCM, not the customer, bears the
risk of any decline in the value of investments purchased with
customer funds. Conversely, Regulation 1.29 recognizes that FCMs
may retain the profits received on such investments. Plaintiff
argues that this scheme fails because
if the FCM purchases Treasury bills with the
customer's margin deposits the FCM receives interest
earned, but if the customer, instead of depositing
cash, purchases T-bills himself (and uses those as
his margin deposit), he receives the interest earned.
(Plaintiff's answering memorandum in opposition to defendants'
and amici memorandum in support of a motion to dismiss, p. 2).
Plaintiff misses a key point in his argument: the customer who
gives an FCM a T-bill as margin, instead of cash, may gain from
the T-bill, but he or she is also bearing the risk of a decrease
in the instrument's value. The Act's scheme, framed in its
regulations, is simply a codification of the basic proposition
that he or she who bears the risk should also receive the benefit
from such risk. By its language Congress clearly intended to
incorporate this proposition into § 4d of the Act. The Act
restricts investment to "safe" securities, but even those are
subject to fluctuation in value due to changes in interest rates.
If the FCM bore the risk of loss but had no opportunity to gain
there would be no reason to invest at all and the authority to
invest would, as a practical matter, be meaningless. Congress
permitted investment for a limited gain if the FCM accepted the
possibility of a limited loss.
Further support of Regulation 1.29 can be found in Congress'
actions since the Act was passed. Since then Congress has
comprehensively reviewed the federal regulatory framework
governing commodities futures trading on at least four occasions.
See Pub.L. 90-258, 82 Stat. 26 (1968); Commodities Futures
Trading Commission Act of 1974, Pub.L. 93-463, 88 Stat. 1389
(1974); Futures Trading Act of 1978, Pub.L. 95-405, 92 Stat. 865
(1978); Futures Trading Act of 1982, Pub.L. 97-444, 96 Stat. 2294
(1983). Not once did Congress disturb Regulation 1.29, even
though the 1968 and the 1974 legislation included amendments to
§ 4d(2). Although the section was scrutinized, Regulation 1.29
was left intact. From these actions the court can infer
congressional approval of the regulation and the statutory
construction it codifies. North Haven Board of Education v. Bell,
456 U.S. 512, 535, 102 S.Ct. 1912, 1925, 72 L.Ed.2d 299 (1982).
See also Merrill Lynch, Pierce, Fenner & Smith v. Curran,
456 U.S. 353, 382, 102 S.Ct. 1825, 1841, 72 L.Ed.2d 182 (1982); NLRB
v. Bell Aerospace Co., 416 U.S. 267, 274-75, 94 S.Ct. 1757,
1761-62, 40 L.Ed.2d 134 (1973). The inference is particularly
appropriate here because in enacting the 1974 amendments Congress
expressly mandated that
[a]ll rules, regulations and orders heretofore issued
by the . . . [CFTC] under the [Commodity Exchange
Act] to the extent not inconsistent with provisions
of this Act, shall continue in force and effect
unless and until terminated, modified or suspended by
Pub.L. 93-463, 93d Cong.2d Sess. § 411, 88 Stat. 1389 (1974).
This court holds that Congress intended to allow FCMs to keep
interest or other profit made from investing margin monies in
obligations specified by the Act.
Even if congressional intent was not as clear as we think it
is, Regulation 1.29 is legal as a reasonable administrative
interpretation of congressional intent. Chevron, 104 S.Ct. at
2782 (reasonable interpretation
is correct standard); see also Udall v. Tallman, 380 U.S. 1, 16,
85 S.Ct. 792, 801, 13 L.Ed.2d 616 (1965); Itel Corp. v. U.S.R.R.
Retirement Bd., 710 F.2d 1243, 1244-45 (7th Cir. 1983). Further
where, as here, Congress expressly delegates rule-making
authority to the agency, the agency's regulations are given
"controlling weight." Chevron, 104 S.Ct. at 2782; see also
Production Tool v. Employment and Training Administration,
688 F.2d 1161, 1165 (7th Cir. 1982). As a final blow to plaintiff's
attack, Regulation 1.29 — written only one year after passage of
the original Act — has
peculiar weight as a contemporaneous construction of
a statute by the men charged with the responsibility
of setting its machinery in motion; making the parts
work efficiently and smoothly while they are yet
untried and new.
Norwegian Nitrogen Products Co. v. U.S.,
, 315, 53
S.Ct. 350, 358, 77 L.Ed. 796 (1927). See also Miller v. Youakim,
, 144, 99 S.Ct. 957, 968, 59 L.Ed.2d 194 (1979)
(administrative interpretations are especially persuasive where,
as here, the agency participated in developing the provision).
Thus, legal standards for the review of administrative
interpretation all point to the legality of Regulation 1.29.
Because we find that defendants are entitled to interest and
profit from investing plaintiff's margin funds, we find
plaintiff's claim that he is entitled to such funds under § 4d(2)
of the Act insufficient to state a claim upon which relief can be
granted.*fn4 Marchese v. Shearson, Hayden, Stone, Inc., C.V.
78-4298-WMB, (C.D.Calif., June 27, 1985). See also Crabtree
Investments, Inc. v. Merrill Lynch, Pierce, Fenner & Smith, Inc.,
577 F. Supp. 1466 (M.D.La. 1984).
Plaintiff's other claim is based upon the Racketeer Influenced
and Corrupt Organizations Act (RICO). But that claim is dependent
upon illegal conduct under § 4d(2) of the Act, and there is none.
Accordingly, we dismiss the RICO count as well.
Plaintiff's claims under the Commodity Exchange Act and the
RICO Act are dismissed for failure to state a claim upon which
relief can be granted under Rule 12(b)(6) of the Federal Rules of