EBSA provides guidance on application of ERISA to certain “cleared swap” transactions conducted pursuant to Dodd-Frank Act

The Employee Benefits Security Administration (EBSA) has issued guidance on the application of ERISA to certain “cleared swap” transactions conducted pursuant to provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). Specifically, EBSA addressed: (1) whether a clearing member is a fiduciary under ERISA §3(21)(A)(i) when, upon default by a pension plan of its obligations under a cleared swap, the clearing member exercises various account liquidation rights that were negotiated between the clearing member and a plan fiduciary at the outset of a swap transaction; (2) whether the clearing members or central counterparty (CCP) is a party in interest under ERISA §3(14)(B) with respect to the plan engaging in a swap; and (3) whether the exercise of these default rights or status as a party in interest may result in certain “prohibited transactions” under ERISA §406.

On the first issue, the DOL is of the view that such granted contractual rights in the event of a default or other events that are agreed upon and may reasonably indicate that the customer is at risk of defaulting do not necessarily amount to the type of authority or control over plan assets contemplated under ERISA §3(21)(A)(i). As a result, it is the Department’s opinion that a clearing member would not be exercising any authority or control with regard to plan assets and would not be a plan fiduciary solely by reason of liquidating the swap contracts in a plan’s account and selling any collateral posted as margin in order to pay off losses suffered by such account.

Secondly, the DOL is of the view that the CCP does not provide services to the plan, and will not be deemed to be a party in interest with respect to the plan solely by reason of providing clearing services for the plan’s clearing member. Furthermore, because the rights and obligations under the agreement between the clearing member and its customer will be subject to agency regulation and the CCP’s default rules, actions taken by the CCP pursuant to those rules with respect to plan customer accounts upon clearing member default would not necessarily amount to the type of authority or control over plan assets contemplated under ERISA §3(21)(A)(i). With respect to the clearing member representing the plan, however, it is the opinion of the Department that, by virtue of a direct contractual agreement with the plan in the procurement of the clearance of swap transactions and other services, such as the collection and transmission, and/or receipt, of margin payments from the plan, the clearing member is providing services to the plan and as a result would be a party in interest with respect to the plan within the meaning of section ERISA §3(14)(B).

Thus, according to the DOL, when facilitating a swap transaction involving a plan, a clearing member is a service provider, and therefore a party in interest with respect to the plan. As a result, certain transactions between the plan and the clearing member that occur in connection with swap transactions are prohibited under ERISA §406(a) unless an exemption applies. ERISA §406(a)(1)(B) prohibits the direct or indirect lending of money or other extension of credit between a plan and a party in interest. An “extension of credit” includes the guarantee of an obligation. As a result, the clearing member’s guarantee of the plan’s obligations to the CCP would be a prohibited transaction.

With respect to the agreement with the clearing member for services and an extension of credit, PT Class Exemption 84-14 provides relief for transactions involving an investment fund in which a plan has an interest that is managed by a “qualified professional asset manager” (QPAM). Certain conditions apply, including, in section I(c) of the exemption, that the terms of the transaction at issue be “negotiated on behalf of the investment fund by, or under the authority and general direction of, the QPAM” and that such QPAM “makes the decision on behalf of the investment fund to enter into the transaction.” The Department takes the view that section I(c) will be satisfied if the agreement entered into by the QPAM sets forth all the material terms of the provision of services and guarantee by the clearing member.

Source: EBSA Advisory Opinion No. 2013-01A.

For more information, visit http://www.wolterskluwerlb.com/rbcs.

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer’s Benefits Reports.

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