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Guest Article
(From the January 30, 2012 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)
Final "Business Conduct Rules" for Swap Dealers Include Safe Harbor for ERISA Plans
The Commodity Futures Trading Commission (CFTC) included a safe-harbor for ERISA plans under the "business conduct standards" for swap dealers under the Dodd-Frank Act ("Act"). In a letter to the CFTC, the Department of Labor affirmed that the final rule will not require swap dealers to engage in conduct that will cause them to become ERISA fiduciaries.
The Act requires a swap dealer who "acts as an advisor" to a "special entity" to perform certain duties consistent with the purpose of the Act, which is generally to reduce risk, increase transparency and promote market integrity with regard to swaps. "Special entities" include employee benefit plans subject to Title I of ERISA, governmental plans as defined in ERISA § 3, and any other employee benefit plan defined in ERISA § 3 that elects to be a special entity. A swap dealer "acts as an advisor" if it recommends a swap or trading strategy involving a swap that is tailored to the particular needs of the special entity. A swap dealer that "acts as an advisor" must: (1) make a reasonable determination that any swap or trading strategy it recommends is "in the best interests of the special entity," and (2) make reasonable efforts to obtain the information to make that determination, including the special entity's financial status (and future funding needs), tax status, investment objectives, and capability to withstand changes in the market. Benefits practitioners were concerned that these activities would make swap dealers into ERISA fiduciaries and, thereby, cause the transaction to be a prohibited transaction under ERISA. To avoid inadvertently becoming an ERISA fiduciary, swap dealers presumably would avoid transactions with ERISA pension plans and impair the ability of those plans to use swaps to manage funding volatility.
The final regulation provides a safe-harbor for ERISA plans that are subject to Title I of ERISA. It provides that a swap dealer will not "act as an advisor" to the plan — and, as a result, not be required to perform the fiduciary-like duties required under the business conduct standards — if:
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A second generic safe harbor is also provided under the regulation. It is available to any special entity, including not only ERISA plans subject to Title I, but governmental plans and electing ERISA plans as well. Under the generic safe harbor, a swap dealer will not "act as an advisor" to the special entity if: (1) the swap dealer discloses that it is not undertaking to act in the best interests of the special entity and does not express an opinion on whether the special entity should enter into a recommended swap, and (2) the special entity represents in writing that it will not rely on recommendations provided by the swap dealer but will rely on advice from a qualified independent representative.
In a letter to the CFTC the Department of Labor stated that the new rule will not require swap dealers to engage in conduct that will cause them to become ERISA fiduciaries:
The Department of Labor has reviewed these final business conduct standards and concluded that they do not require swap dealers or major swap participants to engage in activities that would make them fiduciaries under the Department of Labor's current five-part test defining fiduciary advice 29 C.F.R. § 2510.3-21(c). In the Department's view, the CFTC's final business conduct standards neither conflict with the Department's existing regulations, nor compel swap dealers or major swap participants to engage in fiduciary conduct. Moreover, the Department states that it is fully committed to ensuring that any changes to the current ERISA fiduciary advice regulation are carefully harmonized with the final business conduct standards, as adopted by the CFTC and the SEC, so that there are no unintended consequences for swap dealers and major swap participants who comply with these business conduct standards. |
The regulations will become effective 60 days after they are published in the Federal Register.
| 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, Bart Massey 202.220.2104, Tom Pevarnik 202.879.5314, Sandra Rolitsky 202.220.2025, Deborah Walker 202.879.4955. Copyright 2012, Deloitte. |
BenefitsLink is an independent national employee benefits information provider, not formally affiliated with the firms and companies who kindly provide much of the content and advertisements published on this Web site, including the article shown above. |