<nobr>Feb 22, 2011</nobr>

ERIC Urges Agencies to Clarify that Proposed Rules Do Not Inadvertently Limit Employee Benefit Plans Use of Swap Transactions

ERIC News Release
For Immediate Release: February 22, 2011

Washington, D.C. -- The ERISA Industry Committee (ERIC) on February 22 submitted comments to the Commodity Futures Trading Commission (CFTC) and Securities and Exchange Commission (SEC) on proposed rules defining "major swap participant" and "major security-based swap participant" under the Dodd-Frank Wall Street Reform and Consumer Protection Act. The CFTC and SEC issued the proposed rules on December 21, 2010.

ERIC also submitted a separate comment letter to the CFTC on the proposed business conduct standards for swap dealers and major swap participants dealing with Special Entities under the Dodd-Frank Act. These proposed rules were published in the Federal Register on December 22, 2010.

Many employee benefit plans use swaps as an important part of their asset management strategy. Swaps permit plans to hedge against market fluctuations, interest rate changes, and other factors that create volatility and uncertainty with respect to plan funding. Swaps also help plans rebalance their investment portfolios, diversify their investments, and gain exposure to particular asset classes without direct investment.

Comments on Definition of "Major Swap Participant"

ERIC urges the two agencies to exclude from the major participant definitions employee benefit plans that are subject to the fiduciary provisions in Title I of the Employee Retirement Income Security Act (ERISA), noting that the investment activities of ERISA Title I plans are already extensively regulated and pose little risk to the U.S. financial system.

"Fiduciaries of ERISA Title I plans have no incentive to adopt high-risk investment strategies: to the contrary, they face substantial personal liability if they incur losses by making imprudent investments or by investing in instruments whose risks they do not fully understand," said ERIC President Mark Ugoretz.

If the agencies decide, however, to not exclude ERISA Title I plans from all aspects of the major participant definitions, then they should clarify the exclusion for positions maintained by employee benefit plans, and that a variety of different risks are "directly associated with the operation of the plan."

ERIC said that employee benefit plans often use swaps for purposes of portfolio rebalancing, diversification, or gaining exposure to alternative asset classes, and they are essential to the plan's operations. Accordingly, and because swaps and similar hedging is already governed by strong fiduciary regulations, ERIC says the major participant definitions should make clear that swap positions maintained by employee benefit plans should be excluded from Dodd-Frank regulations that were in fact intended to regulate broad-based financial institutions.

Comments on Proposed Business Conduct Standards for Swap Brokers and Major Swap Participants Dealing with Special Entities

ERIC also contends that many of the business conduct standards that apply to swap brokers and major swap participants duplicate protections already fully developed, understood, and strictly enforced under ERISA.

Many of the business conduct standards confer no benefit on ERISA-governed plans, according to ERIC. "The greater danger, however, is that the standards will actually harm these plans by making swap transactions prohibitively expensive, or by discouraging swap dealers and major swap participants from dealing with ERISA-governed plans at all," ERIC argues.

The letter contends that "[t]his is not a hypothetical concern: some ERIC members have already been told by swap dealers that the dealers will cease to engage in swap transactions with ERISA-governed plans if the dealers are subject to the requirements set forth in the proposed rule."

In a separate statement, ERIC President Mark Ugoretz said that, "ERIC's position is consistent with President Obama's initiative on regulatory reform. The President emphasized the importance of bringing order to regulations that have become 'a patchwork of overlapping rules,' that we must seek 'more affordable, less intrusive means' to achieve regulatory objectives and that we must avoid 'excessive, inconsistent and redundant regulation.' The business conduct standards provide an opportunity to put these important principles into practice. To the extent that the business conduct rules require swap dealers to deal fairly and openly, they provide an important new layer of protection; but to the extent that they overlap or conflict with protections already in place under ERISA, they impose unreasonable burdens on ERISA-governed plans."

ERIC's comment letters can be accessed by clicking on the links below.

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For more information:
Ted Godbout
Director, Communications
The ERISA Industry Committee
1400 L Street, NW, Suite 350
Washington, DC 20005
Phone: (202) 789-1400
tgodbout@eric.org
www.eric.org

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The ERISA Industry Committee (ERIC) is a non-profit association committed to representing the advancement of the employee retirement, health, and compensation plans of America's largest employers. ERIC's members provide benchmark retirement, health care coverage, compensation, and other economic security benefits directly to tens of millions of active and retired workers and their families. ERIC has a strong interest in proposals affecting its members' ability to deliver those benefits, their cost and their effectiveness, as well as the role of those benefits in the American economy.

Text Files:

ERIC Comments on Definition of Major Swap Participant

ERIC Comments on Business Conduct Standards

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