On April 28, 2011, a senior official at the Department of Labor (“DOL”) provided a letter to the CFTC addressing concerns regarding whether the business conduct standards under Dodd-Frank and related proposed CFTC rules for swap dealers and major swap participants could cause a counterparty to a swap with a plan covered by the Employee Retirement Income Security Act of 1974 (“ERISA”) to become a fiduciary to the plan. The issue was addressed in the context of the DOL’s proposed expanded definition of fiduciary investment adviser, which we have previously covered here and here. The DOL’s proposed rule change can be found here.

The letter addressed the fact that there is some question about whether a swap dealer or major swap participant could become a fiduciary by virtue of providing a plan with information regarding a swap’s value, risk characteristics or other information material to the transaction as required by the proposed CFTC business conduct rules. The letter also noted that there may be some concern about whether in light of the business conduct standards a swap counterparty can successfully assert that its interests are sufficiently “adverse” so as to permit reliance on the proposed exception from the definition of fiduciary investment adviser for adverse counterparties.  

The letter addressed these concerns by stating that, “[i]n DOL’s view, a swap dealer or major swap participant that is acting as a plan’s counterparty in an arm’s length bilateral transaction with a plan represented by a knowledgeable independent fiduciary would not fail to meet the terms of the counterparty exception solely because it complied with the business conduct standards set forth in the CFTC’s proposed regulation.” The letter also stated that, “[e]ven if the plan’s swap counterparty complies with the business conduct standards, it is not ‘undertaking to provide impartial investment advice’ within the meaning of the DOL regulation when it engages in a bilateral arm’s length transaction with a plan.”

In a welcome and potentially significant clarification, the letter also indicated that a swap dealer or major swap participant that is acting as both an advisor and a counterparty to an ERISA plan under the business conduct rules can rely on the counterparty exception under the proposed DOL regulation. The letter stated that, “[a]s the CFTC recognized in the preamble to the proposed business conduct standards, ‘a swap dealer has an inherent conflict of interest when it acts as both an advisor and as a counterparty to a Special Entity.’ For example, under the business conduct standards, swap dealers can both recommend and enter into swaps with plans and, when the swaps move against the plans, the dealers can keep the resulting profits. Accordingly, the parties’ interests are ‘adverse’ within the meaning of the DOL's proposed regulation.” (internal citation omitted).

As a related note, in its proposing release for business conduct standards for certain security-based swap participants discussed immediately above, the SEC cited the DOL letter stating that the staffs of the SEC, DOL and CFTC are coordinating with one another to address similar concerns under the SEC’s proposed rules.

The DOL letter can be found here.