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.”