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May 14, 2010 01:00 AM

E-mail: Labor has 'no problem' with swaps legislation

Doug Halonen
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    The Department of Labor sees “no problem” with pending Senate legislation that pension industry officials say could eliminate the use of swaps and other derivatives by all defined benefit and defined contribution plans, according an e-mail from a senior Senate Agriculture Committee staffer obtained by Pensions & Investments.

    The legislation, approved by the Agriculture Committee on April 20 and now before the full Senate, would require swap dealers to take on a fiduciary obligation when offering to enter or entering into a swap with a pension plan. Officials at pension industry organizations say those provisions would essentially block deals with DB plans because the swap dealer would have a conflict of interest, acting as a fiduciary to the plan while also being on the receiving end of the deal.

    The bill also could do away with many stable value options in DC plans, because many of the “wraps,” or interest-rate guarantees, issued for stable value products could be considered swaps under the legislation, pension group leaders said.

    In a May 11 e-mail to executives at the National Association of Manufacturers, the Business Roundtable and the U.S. Chamber of Commerce, Patrick J. McCarty, a senior Senate Agriculture Committee staffer, wrote: “The DOL told us that they see no ERISA PT (prohibited transaction) problems with our fiduciary duty on swap dealers legislation — which doesn’t use the ERISA fiduciary duty standard.”

    “DOL also indicated as well that they didn’t see the proposed fiduciary duty presenting a problem for pension plan stable value plan options and the swap wrappers which are used,” Mr. McCarty wrote.

    Neither Phyllis Borzi, assistant secretary of Labor for the Employee Benefits Security Administration, nor Michael L. Davis, EBSA deputy assistant secretary, had returned calls for comment.

    Industry officials who didn’t want to be identified claim their efforts to remove the swap provisions are being impeded by the DOL’s argument that they are not prohibited transactions under ERISA. Those officials said the legislation would thwart swap deals with plans even if the fiduciary obligation of the swap dealer is not under ERISA.

    “The DOL input has not been helpful,” said Michael Griffith, a legislative analyst for the Committee on Investment of Employee Benefit Assets. “The concern is that if swap dealers don’t feel like they can legally enter into a transaction with a pension plan, then it has the same effect of being a prohibited transaction under ERISA.”

    “We’re really talking about a substantial risk of losing stable value investments” in defined contribution plans,” added Ed Ferrigno, vice president of Washington affairs, Profit Sharing/401(k) Council of America.

    Mr. McCarty could not be reached for comment.

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