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NEW YORK MERCANTILE EXCH. v. CFTC

December 29, 1977

NEW YORK MERCANTILE EXCHANGE, Plaintiff,
v.
COMMODITY FUTURES TRADING COMMISSION, and WILLIAM T. BAGLEY, JOHN V. RAINBOLT, II, READ P. DUNN, GARY L. SEEVERS, and ROBERT L. MARTIN, COMMISSIONERS OF THE COMMODITY FUTURES TRADING COMMISSION, Defendants



The opinion of the court was delivered by: BRODERICK

MEMORANDUM ORDER

 VINCENT L. BRODERICK, U.S.D.J.

 On June 16, 1977, the Commodity Futures Trading Commission instituted an administrative proceeding before an administrative law judge *fn1" to determine whether the New York Mercantile Exchange (the "Exchange") has violated the Commodity Exchange Act as amended ("the Act"), 7 U.S.C. ┬ž 1, et seq. (Supp. 1977). Plaintiff Exchange thereupon commenced this action, and has moved by order to show cause for a preliminary injunction seeking, inter alia, to enjoin the Commodity Futures Trading Commission and its Commissioners (the "Commission") from pursuing the administrative proceeding. *fn2" The defendant Commission has moved pursuant to Fed. R. Civ. P. 12(b)(1) and (6) to dismiss the action on the grounds that: (1) the court lacks subject matter jurisdiction in that the Exchange has failed to exhaust its administrative remedies; and (2) the Exchange has failed to state a claim upon which relief may be granted.

 On September 14, 1977, I denied the Exchange's application for a temporary restraining order. On the bases set forth herein, I grant the Commission's motion to dismiss for failure by the Exchange to exhaust its administrative remedies. I do not reach the merits of the Exchange's application for a preliminary injunction.

 The Exchange is a board of trade which has been designated as a "contract market" for trading in futures contracts under Section 5 of the Act. *fn3" The Commission is an independent agency of the United States created on October 23, 1974 to administer and enforce the Act, including those provisions applicable to the Exchange and other "contract markets". *fn4" The Commission is the successor to the Secretary of Agriculture and the Commodity Exchange Commission, which had previously been responsible for administration and enforcement of the Act.

 In the proceeding sought to be enjoined, the Commission charges that the Exchange violated various provisions of the Act and the Commission regulations thereunder, in that the Exchange, with respect to futures contracts in potatoes, failed to use due diligence to secure compliance by its own members with an Exchange rule, *fn5" and failed to take emergency action to prevent or eliminate market disruption. *fn6"

 In 1974 the Act, originally enacted in 1922, was extensively amended. One thrust of the amendments, as noted, was to establish the Commission as the agency to administer and enforce the Act. Another thrust -- which is at the heart of the problem before me -- was to change those statutory provisions which pertain to approval by the administrative agency of the rules and regulations of designated contract markets.

 Prior to the 1974 amendments, Section 5a(8) of the Act required the Exchange (and other designated contract markets) to enforce those of its own by-laws, rules, regulations and resolutions "which have not been disapproved by the Secretary of Agriculture . . ." *fn7" Under Section 5a(8) as amended, the Exchange is required to enforce all of its own by-laws, rules, regulations and resolutions "which have been approved by the Commission," and it is required to revoke and not enforce any of its own by-laws, rules, regulations or resolutions "which has been disapproved by the Commission." *fn8" Section 5a(12) of the Act as amended requires the Exchange to submit to the Commission for approval all of its rules relating to trading requirements and to the terms and conditions of contracts of sale. *fn9"

 While the amendments to the Act became law on October 24, 1974, Section 5a(12) and the amendment to Section 5a(8) were effective 180 days thereafter, or on April 21, 1975. The Commission was authorized but not required to approve or modify the rules of the Exchange in the interim. *fn10"

 Congress recognized that review by the Commission of contract market rules would take time. When delays occurred in the nomination and confirmation of members of the Commission, a law was enacted authorizing the Commission to defer, for a period not to exceed 90 days from April 21, 1975, the effective dates of certain of the amendments to the Act, including Section 5a(12) and the amendments to Section 5a(8). *fn11"

 On April 18, 1975, the Commission announced in the Federal Register that it could not complete by April 21, 1975, the approval functions required of it by Section 5a(8) of the Act, as amended. *fn12" The notice stated that the Commission "believes that it will need at least the full 90 days" to complete its review function, and that it was exercising its authority *fn13" to defer the effective date of the amended Section 5a(8) until July 18, 1975. Apparently rule review under Sections 5a(8) and 5a(12) could not be accomplished with respect to existing Exchange rules and by-laws by July 18; and as of the initiation of this action before me, the Commission had not yet approved any Exchange regulations under Section 5a(8) as amended.

 On July 17, 1975, the Commission promulgated Regulation 1.53. *fn14" That regulation requires enforcement by the Exchange as a designated contract market, pending formal Commission review, of those Exchange by-laws, rules, regulations and resolutions in existence on July 18, 1975.

 The Exchange challenges Regulation 1.53 as an illegal attempt by the Commission to impose by regulation an obligation Congress specifically eliminated in its amendments to the statute. Thus the Exchange characterizes Regulation 1.53 as "an administrative repeal of Section 5a(8) . . . in excess of the statutory jurisdiction and authority of the Commission." *fn15" The Supreme Court has held the doctrine of exhaustion of administrative remedies inapplicable to situations in which an agency's action was entirely outside its statutory jurisdiction. Leedom v. Kyne, 358 U.S. 184, 3 L. Ed. 2d 210, 79 S. Ct. 180 (1958). This forms the basis for the Exchange's assertion that exhaustion of administrative remedies is not required as a predicate for this action.

 Before addressing the Exchange's challenge to the validity of Regulation 1.53, other facets of the statutory and ...


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