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Regulation and Compliance > Federal Regulation

Dodd-Frank: Pension Plans Face Swaps Snarl

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Benefits groups fear conflicts in federal swaps regulations could accidentally make all swaps transactions involving swaps dealers and retirement plans illegal.

The American Benefits Council, Washington, and the Committee on Investment of Employee Benefit Assets, Bethesda, Md., sent representatives to discuss their concerns with officials from the Commodity Futures Trading Commission (CFTC) this week, according to CFTC meeting records.

A swap is a financial arrangement in which one party trades the rights to one payment stream for another payment stream. Swaps users – including managers of large pension plans — often use the arrangements to protect themselves against bond issuer defaults, big changes in interest rates and big changes in exchange rates.

Congress included extensive swaps regulations provisions in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, because of concerns that unregulated, poorly regulated and poorly managed swaps operations had contributed to the credit market freeze that started in 2007 and the ensuing financial crisis.

The CFTC, which shares swaps market oversight with the U.S. Securities and Exchange Commission, is now writing regulations to implement the provisions.

Kent Mason, a Washington lawyer who is helping to represent the American Benefits Council at the CFTC, sent the CFTC a comment letter earlier this month saying two regulatory efforts could cause all swaps involving retirement plans governed by the Employee Retirement Income Security Act (ERISA) to cease.

The U.S. Labor Department is trying update and broaden the current narrow definition of the term “plan fiduciary.” Critics argue that the proposed revision is so vague and so broad that many individuals and companies could end up becoming fiduciaries by accident.

The CFTC is implementing Dodd-Frank provisions that require swaps dealers and major swaps participants to make sure that retirement plan advisors who are trying to use swaps know what they are doing before entering into swaps arrangements with those advisors. The proposal is part of a proposed CFTC rule that deals with business conduct standards for swap dealers and major swap participants with counterparties.

A plan fiduciary is supposed to put the plan’s interests first.

“Unfortunately, the proposed business conduct standards interpret ‘advisor’ so broadly that all swap dealers would be treated as advisors, e.g., by reason of providing information on the risks of the swap,” Mason says. “This is an unworkable conflict of interest that would render swaps unavailable to plans. A swap dealer that owes a fiduciary duty to its shareholders to obtain the best possible deal with the plan cannot simultaneously act in the best interests of the plan, which is the dealer’s counterparty.”

A Labor Department official has written in a letter that a “seller’s exception” in the department’s proposed fiduciary definition would keep a swaps dealer from becoming a plan fiduciary, Mason says.

“Unfortunately, we do not read the seller’s exception in the way that the [Labor Department[ does, and, to our knowledge, neither do any of our members (or their internal or external counsel)," Mason says. "The bottom line is that if the regulation is not clarified so that this issue is clear, swaps with plans will likely cease. No major plan will take a chance that it is entering into a prohibited transaction in the face of a regulation that is unclear at best and adverse at worst."

Even though the official who wrote the Labor Department meant to be helpful, the letter is not helpful, because it does not constitute legal authority and cannot be relied on in evaluating the issue as a legal matter, Mason says.

Mason says his clients would like to see federal agencies adopt the following rule: "No action required solely by reason of the business conduct standards will make a swap dealer (or major swap participant "(MSP")) a fiduciary."

"If the agencies are not comfortable incorporating that statement into the law, it is hard to imagine that the private sector can get comfortable with entering into swaps involving [plans governed by the Employee Retirement Income Security Act (ERISA)],” Mason says.

Large employers also are concerned about the idea that the rules would give swaps dealer or major swap participant veto power over plan advisors, Mason says.

“Plans do not want their counterparties to have veto power over their choice of an advisor,” Mason says. “In addition, this veto power could very well make plan advisors hesitant to vigilantly represent the plan’s interests for fear of a future dealer or MSP veto, which would likely put the advisor out of business.”

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