Impact of Financial Reform Legislation on Derivatives
Transactions Involving Employee Benefit Plans
The Dodd-Frank Wall Street Reform and Consumer Protection
Act (the "Act") contains a number of provisions that may
substantially affect employee benefit plans that enter into
swaps and other derivative transactions.
The Act authorizes the Commodity Futures Trading Commission
(CFTC) and the Securities and Exchange Commission (SEC) to
impose responsibilities on "swap dealers," "security-based
swap dealers," "major swap participants" and "major
security-based swap participants" (collectively, "Swap
Participants") that deal with employee benefit plans (as such
term is defined in Section 3 of ERISA), governmental plans (as
such term is defined in Section 3 of ERISA) as well as other
"special entities." The terms "swap" and "security-based
swap" are defined broadly.
In transactions with "special entities," Swap Participants
will be required to disclose in writing the capacity in which
they are acting, and have a "reasonable basis" to believe that
the special entity has an independent representative that
fulfills the following criteria:
(1) Has sufficient knowledge to evaluate the transaction
(2) Is not subject to a statutory disqualification;
(3) Is independent of the Swap Participant;
(4) Undertakes a duty to act in the best interests of the
counterparty it represents;
(5) Makes appropriate disclosures;
(6) Will provide written representations to the special
entity regarding fair pricing and the appropriateness of the
(7) In the case of employee benefit plans subject to ERISA,
is a fiduciary as defined under ERISA.
Further, if a Swap Participant acts as an "advisor" to a
"special entity, " then it may not defraud the entity and has
a "duty to act in the best interests of the special entity."
It must also "make reasonable efforts to obtain
such information as is necessary to make a reasonable
determination that any swap recommended by the Swap
Participant is in the best interests of the special entity,"
including information on the "special entity's" financial
status, tax status, and investment or financing objectives.
We expect that Swap Participant counterparties to swaps
(including existing swaps) with employee benefit plans and
governmental plans will be requesting extensive
representations from such plans covering the various
provisions of the Act applicable to "special entities,"
including a representation that the counterparty is not
serving as an "advisor" to the plan.
We further expect that any interpretive issues relating to
the definition of "special entity" will be addressed in
forthcoming guidance from the relevant regulatory agencies.