The Department of Labor (the “DOL”) has released a much-anticipated Advisory Opinion on the treatment of cleared swaps for ERISA plans. Advisory Opinion 2013-01A, issued in response to a request on behalf of the Securities Industry and Financial Markets Association (SIFMA), provides favorable answers to questions raised in connection with key functions in the central clearing system established pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). Specifically, the Advisory Opinion resolves concerns raised by central clearing counterparties (CCPs) and clearing members that performing clearing services or functions for a plan, account or fund subject to ERISA might cause them to be subject to ERISA in performing those services or functions.

Generally, a “clearing member” is a member of a CCP through which customers (including ERISA plans and other accounts holding plan assets), hold their cleared swaps with the CCP and post their cleared swaps margin. In connection with its clearing functions, the clearing member is generally required to guarantee the customer’s swap obligations to the CCP, and would have certain remedies against the customer in the event of default by the customer or certain other circumstances with respect to the customer, including the right to liquidate a customer’s positions in order to cover its obligations. The Advisory Opinion was requested because it was unclear how these actions would be viewed by the DOL, which is charged with enforcing the fiduciary and prohibited transaction rules under ERISA.

The DOL addressed similar concerns some 30 years ago in Advisory Opinion 82-49A, issued in response to a request on behalf of the Futures Industry Association. In that Advisory Opinion, the DOL addressed the treatment of initial and maintenance margin in the context of futures contracts. The DOL concluded that assets received from an ERISA plan as margin would not be treated as “plan assets,” that the plan’s asset in this situation consisted of the contractual rights embodied in the futures contract and in its agreement with its futures commission merchant, and that the holder of assets pledged as margin was not an ERISA fiduciary with respect to those assets. However, in the wake of Dodd-Frank, banks and brokers expressed uncertainty whether the DOL would take a similar position with respect to cleared derivatives. The effect of this uncertainty has been to stall negotiations on arrangements to provide clearing services to ERISA plans and other accounts holding plan assets.

In Advisory Opinion 2013-01A, issued on February 7, the DOL concludes that a clearing member will not be treated as a fiduciary under ERISA when exercising agreed account liquidation and related rights following a default by a pension plan on its obligations under a cleared swap. The new Advisory Opinion generally follows the reasoning of the 1982 Advisory Opinion and, in addition, refers several times to the DOL’s understanding that when Congress enacted the Dodd-Frank Act, it did not intend for clearing members to be performing their functions in a fiduciary capacity. The DOL also concludes, however, that while the CCP would not be considered a service provider to an ERISA plan by reason of performing its functions, the clearing member would be performing its functions as a service provider and therefore would be a party in interest to the ERISA plan. To address clearing members’ concerns about possible prohibited transactions, the Advisory Opinion states that when an investment manager enters into cleared swaps using the QPAM exemption, the exemption generally would extend to cover (as “subsidiary transactions”) any clearing-related actions undertaken by the clearing member pursuant to contractual authorizations negotiated by the QPAM, including extensions of credit to the ERISA plan (such as a guarantee of the plan’s obligations) and any exercise of contractual rights in connection with a default.

While clearing members will need to review their forms to be certain they comport with the expectations set out by the DOL in the Advisory Opinion, they can now proceed to negotiate cleared swap arrangements with ERISA plans and accounts holding plan assets with confidence that an appropriately negotiated agreement will not cause them to become subject to ERISA. Managers of funds and accounts holding plan assets should, as a consequence, see an end to the freeze on cleared swap negotiations for ERISA investors.