WASHINGTON — The Commodity Futures Trading Commission’s proposed business-conduct standards go beyond the Dodd-Frank Act mandates and may cause swap dealers to refuse to engage in swaps with state and local issuers and pension plans, industry groups warned Thursday.
The warnings emerged as several agencies — the CFTC, the Securities and Exchange Commission and the Municipal Securities Rulemaking Board — are each seeking comments on separate sets of proposed rules providing guidance on fiduciary and related obligations imposed on muni advisers and swap dealers under the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Dodd-Frank established a comprehensive new regulatory framework for swaps and certain security-based swaps, providing for registration and regulation of swap dealers and major swap participants, or MSPs. The act created recordkeeping and real-time reporting regimes, enhanced the CFTC’s enforcement authority, and gave the agency rulemaking authority to impose business conduct requirements on swap dealers and MSPs in their dealings with counterparties, including “special entities.” Special entities include state and local governments, public-sector employee benefit plans and endowments.
The act authorized the CFTC to establish duties for swap dealers and MSPs who offer or enter into swaps with special entities. It says a swap dealer who “act[s] as an adviser” to a special entity must promote the entity’s “best interests” and make “reasonable efforts” to determine that a recommended swap is in the entity’s best interests.
In its proposed business conduct rules for swap dealers and MSPs, which were issued for public comment on Dec. 22, the CFTC took an expansive view, saying swap dealers “act as an adviser” by making swap recommendations to a special entity. A swap dealer who “merely provides” general transactional, financial or market information to a special entity, or who provides swap terms in response to a competitive bid request does not fall within the definition of acting as an adviser.
In a comment letter filed Thursday, two industry groups, the Securities Industry and Financial Markets Association and the International Swaps and Derivatives Association, expressed concern about the proposed rules’ impact on state and local governments and public-sector pensions, saying they could effectively bar them from the swap market.
Swap dealers “may avoid transacting with municipalities because compliance with the proposed rules would likely cause [a swap dealer] to be deemed a 'municipal adviser’ under Dodd-Frank and, as a result, become subject to a fiduciary duty,” the letter said.
In their letter, SIFMA and ISDA also said the CFTC should only treat a swap dealer as an adviser when it provides advice to a special entity pursuant to a written agreement, the advice serves as a “primary basis” for the special entity’s investment decisions, and the advice will be “individualized” based on the special entity’s particular needs.
Such a standard, they said, would avoid making a swap dealer into a fiduciary “merely because the [swap dealer] provides a required scenario analysis, conducts a required suitability assessment, evaluates the qualifications of its counterparty’s representative or otherwise complies with the requirements of the proposed rule.”
SIFMA and ISDA are not the only groups commenting who have expressed concern about the proposed rules’ application to special entities. According to a comment posted on the CFTC’s website, in a business conduct meeting with commission staff last month, a coalition of energy groups called the Not for-Profit Electricity End Users said municipalities that enter into swaps for commodities such as electricity should be exempt from special-entity requirements when they are obligated to deliver the commodity. In such cases, they noted, municipalities are akin to experts, and do not need the additional safeguards provided to special entities.
The CFTC is accepting comments on its proposed business standards until Feb, 22.
