Guest Article

(From the June 6, 2011 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

Dodd–Frank Looms over Retirement Plan Sponsors and Administrators

As the enforcement agencies propose regulations to implement the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Act"), ERISA retirement plan sponsors are watchful over how the new rules will impact their plans. The Act establishes a new regulatory framework for "swaps" in order to reduce risk, increase transparency, and promote market integrity with regard to those arrangements. However, it appears the Act could impact the ability of defined benefit plans to use swaps to manage funding volatility, and of defined contribution plans to offer stable–value funds as investment alternatives.

Swaps in ERISA Pension Plans

The Act modifies the Commodity Exchange Act to add business conduct standards for swap dealers. Swap dealers that "act as advisors" to an ERISA plan are held to higher standards: they have a duty to "act in the best interest" of the plan. (See § 731 of the Act, which adds new § 4(h) to the CEA.) The proposed regulation defines "acting as an advisor" very broadly, to include "where a swap dealer recommends a swap or trading strategy that involves the use of swaps." However, the definition specifically excludes where a swap dealer provides general transactional, financial or market information — or provides swap terms in response to a competitive bid request from the plan. The comment period on the proposed regulation closed on June 3, 2011.

Stable-Value Contracts in Defined Contribution Plans

More recently, the enforcement agencies proposed a regulation that will define "swap," "security-based swap" and other key terms under the Act. At this time it is unclear whether stable–value contracts will fall within the definition of swaps so as to be subject to the Act's requirements. "Stable value contracts" are defined under the Act as "any contract, agreement or transaction that provides a crediting interest rate and guaranty or financial assurance of liquidity at contract or book value prior to maturity" that are offered by a bank, insurance company or other State or federally regulated financial institution to an individual or commingled fund available as an investment in a participant–directed ERISA employee benefit plan, an eligible deferred compensation plan under Code § 457(b), a Code § 403 (b) plan, or a qualified tuition program under Code § 529. (See § 719(d)(2) of the Act.)

The Act requires the Commodity Futures Trading Commission and the Securities Exchange Commission to conduct a study within 15 months of the date of enactment — i.e., by October 21, 2011 — to determine whether stable value contracts are included in the definition of swaps and, if so, whether an exemption is appropriate and in the public interest. The Commissions are further required to issue regulations implementing their determinations. Until those regulations become effective, the transparency and accountability provision (i.e., Title VII) of the Act do not apply to stable value funds. According to the regulation preamble, the Commissions are currently conducting this study. The comment period on the proposed regulation closes on July 22, 2011.

The information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations. If you have any questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact: Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Mary Jones 202.378.5067, Stephen LaGarde 202.879-5608, Erinn Madden 202.220.2692, Tom Pevarnik 202.879.5314, Sandra Rolitsky 202.220.2025, Deborah Walker 202.879.4955. Copyright 2011, Deloitte.