A new regulation proposed by the Commodity Futures Trading Commission promises to throw a huge monkey wrench into the ability of pension plans to enter into swap transactions, ERISA attorneys said.
The proposal, mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act, would require swaps dealers to act in the best interests of a retirement plan when providing any advice on the transactions to the plans — raising a major hurdle to the deals, ERISA attorneys said.
“The CFTC's proposed rule creates an unworkable marketplace that will totally eliminate any advice, recommendations or information being provided by a swaps dealer to a pension plan or a pension plan's adviser,” said A. Richard “Brick” Susko, ERISA attorney with the law firm Cleary Gottlieb Steen & Hamilton LLP, New York.
“At a minimum, this (proposed rule) would have a very adverse impact on the ability of plans to enter into swaps,” added Kent Mason, an ERISA attorney with the law firm Davis & Harman LLP, Washington, and outside counsel to the American Benefits Council, a Washington-based pension industry lobbying group.
Even swaps dealers who are not acting as advisers to the plans would still have to take steps to ensure that the plan's adviser has sufficient knowledge to advise the plan on each swap transaction.
“Requiring a swaps dealer to investigate the knowledge base of the plan's adviser with respect to every swap will be extremely expensive and impractical,” Mr. Mason said.
Melanie Nussdorf, a partner at the law firm Steptoe & Johnson LLP, Washington, said the proposed rule could “cut back enormously on the market color that swap dealers have traditionally provided plans” by requiring the dealers to make sure the plan's adviser has the appropriate expertise.
“In light of the consolidation in the financial industry, it is hard to see how a test of this breadth could be met,” Ms. Nussdorf said.
Added Mr. Susko: “Absent a clear statement from the Department of Labor that compliance with the CFTC regulations will not result in the swaps dealer becoming a fiduciary, swaps dealers will not deal with pension plans.”
Executives for the ERISA Industry Committee had no comment pending further study of the proposal, said Ted Godbout, a committee spokesman.
But Lynn Dudley, ABC senior vice president, policy, said: “If these rules are adopted in their current form, it would make it very difficult for plan sponsors to hedge against volatility, and that's a major problem for defined benefit plans.”
CFTC spokesman Scott Schneider declined to comment on the criticisms about the proposal.
The public will have 60 days to comment on the proposed regulation after it is published in the Federal Register. Mr. Schneider said the agency had sent the proposed rule to the Federal Register, but he didn't know when it would be published.
The full text of the proposed regulation is available on the CFTC's groups/public/@newsroom/documents/file/federalregister120910d.pdf">website