The Consumer Federation of America (CFA) is leading a coalition of groups that wants federal regulators to make the rules governing swaps involving pension plans and endowments as strict as possible.
The American Benefits Council, Washington, recently visited the Commodity Futures Trading Commission (CFTC) to make the case that use of provisions in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 that are meant to help pension fund managers avoid risky swap arrangements could do more harm than good, by making it difficult or impossible for pension plans to buy the swaps needed to manage plan risk.
But representatives from the CFA, Washington, and allied groups, such as Better Markets, Washington, and Americans for Financial Reform, Washington, visited the CFTC earlier this month to say they think the CFTC and the U.S. Securities and Exchange Commission should be strict about applying the “special entity” rules in the Dodd-Frank Act swap provisions.
A swap is an arrangement that one party can use to trade an income stream with another party.
Investors, speculators and others use swaps to manage risk from variations in, or speculate on, changes in, interest rates, exchange rates and the likelihood that debtors will default on their obligations.
Because of concerns that sophisticated swap dealers and swap market participants had fooled unsophisticated pension fund managers and endowment managers into using complicated, unexpectedly risky swaps in the years leading up to the financial crisis that started in 2007, Congress included Dodd-Frank Act provisions that require swap dealers to take special precautions when doing business with special entities, such as pension plans governed by the Employee Retirement Income Security Act (ERISA), that might have less sophisticated managers and advisors than banks or insurers.
Swap dealers and other swap market participants, such as counterparties, are supposed to verify that special entities have independent advisors that understand swaps and the risks the entities will be assuming if they enter into specific swap arrangements.
The Dodd-Frank Act has given the SEC and the CFTC joint responsibility for overseeing swaps, and the agencies have been working on regulations implementing the provisions. The regulatory efforts come under the heading Business Conduct Standards with Counterparties.
“The American Benefits Council argued that ERISA plans are supposed to be advised by prudent experts who are putting the plans’ interests first and that, if fiduciaries put any faith in the kindness of counterparties, that would be a violation of fiduciary responsibilities.
Strict application of the rule also could make it difficult for swap dealers to enter into swap arrangements with special entities, because, technically, the dealers and other would-be counterparties could never act both as plan advisors and as swap counterparties.
Consumer representatives such as Barbara Roper of CFA and colleagues visited the CFTC offices to say they like the approach the CFTC has taken to special entity standards and hate the SEC approach.