DOL Proposes Carve-out from ERISA Fiduciary Rule for Certain Swap Transactions | Practical Law

DOL Proposes Carve-out from ERISA Fiduciary Rule for Certain Swap Transactions | Practical Law

The Department of Labor (DOL) proposed a carve-out for certain swap dealers and other parties from a rule that would broaden the type of advice that constitutes fiduciary investment advice to ERISA-governed employee benefit plans and IRAs.

DOL Proposes Carve-out from ERISA Fiduciary Rule for Certain Swap Transactions

Practical Law Legal Update 8-609-5267 (Approx. 4 pages)

DOL Proposes Carve-out from ERISA Fiduciary Rule for Certain Swap Transactions

by Practical Law Finance
Published on 22 Apr 2015 • USA (National/Federal)
The Department of Labor (DOL) proposed a carve-out for certain swap dealers and other parties from a rule that would broaden the type of advice that constitutes fiduciary investment advice to ERISA-governed employee benefit plans and IRAs.
On April 14, 2015, the Department of Labor (DOL) issued a proposed rule that would replace the existing regulatory interpretation of "fiduciary investment advice" under Section 3(21) of the Employee Retirement Income Security Act of 1974 (ERISA) by broadening the type of advice that constitutes fiduciary investment advice (see Legal Update, DOL Reproposes Fiduciary Rule for ERISA Plans and IRAs).
As part of the proposed rule, the DOL proposed several carve-outs, including one that would allow swap dealers (SDs), security-based swap dealers (SBSDs), major swap participants (MSPs) and major security-based swap participants (MSBSPs) to avoid becoming ERISA investment advice fiduciaries under Section 3(21) of ERISA when acting as counterparties to a swap or security-based swap (SBS) transaction with an ERISA plan or individual retirement account (IRA).
To be eligible for the carve-out:
  • The ERISA plan or IRA must be represented by a fiduciary of the SD, SBSD, MSP or MSBSP.
  • Before providing any recommendations regarding the transaction, the SD, SBSD, MSP or MSBSP must obtain a written representation from the independent plan fiduciary that the fiduciary will not rely on the recommendations provided by the SD, SBSD, MSP or MSBSP. Recommendations covered by the rule include the rendering of any of the following kinds of advice in exchange for a fee or other compensation:
    • recommendations as to the advisability of acquiring, holding, disposing or exchanging securities or other property, including recommendations to take a distribution of benefits or recommendations as to the investment of securities or other property to be rolled over or otherwise distributed from the plan or IRA;
    • recommendations as to the management of securities or other property, including recommendations as to the management of securities or other property to be rolled over or otherwise distributed from the plan or IRA;
    • appraisals, fairness opinions or similar statements (whether verbal or written) concerning the value of securities or other property if provided in connection with a specific transaction or transactions involving the acquisition, disposition or exchange, of such securities or other property by the plan or IRA; and
    • recommendations of persons who are also going to receive a fee or other compensation for providing any of these types of advice.
  • If an SD or SBSD provides any recommendations regarding the transaction, it must not be acting as an advisor to the plan, within the meaning of the applicable CFTC or SEC business conduct standards.
In addition to these requirements, these entities must comply with any applicable business conduct requirements under Section 4s(h) of the Commodity Exchange Act (CEA) (7 U.S.C. § 6s(h)) and Section 15F of the Securities Exchange Act of 1934 (15 U.S.C. § 78o-10(h)) for SDs or MSPs that act as counterparties to ERISA plans. These requirements include, for example, that SDs and MSPs must have a reasonable basis to believe that the plans have independent representatives who are fiduciaries under ERISA (7 U.S.C. § 6s(h)(5) and 15 U.S.C § 78o-10(h)) (see Practice Note, The Dodd-Frank Act: Final External Business Conduct (EBC) Rules for Swap Dealers and MSPs: Swaps with Special Entities).
The DOL is requesting public comment on the proposed regulation. Comments are due on or before July 21, 2015. Electronic submission (the preferred method) should be submitted via the Federal eRulemaking Portal (http://www.regulations.gov) or by e-mail ([email protected]). Comments submitted by mail should be addressed to the Office of Regulations and Interpretations, Employee Benefits Security Administration, Attn: Conflict of Interest Rule, Room N–5655, US Department of Labor, 200 Constitution Avenue NW., Washington, DC 20210. All submissions must include the agency name (Department of Labor) and must be identified by the Regulatory Identifier Number (RIN) for the rulemaking (RIN 1210–AB32).