August 29, 2011 

VIA ELECTRONIC SUBMISSION TO: COMMENTS@SEC.GOV

Ms. Elizabeth M. Murphy 

Secretary 

Securities and Exchange Commission 

100 F Street, NE 

Washington, DC 20549-1090 

With a copy to: 

Mr. David A. Stawick 

Secretary 

Commodity Futures Trading Commission 

Three Lafayette Centre 

1155 21st Street, NW 

Washington, D.C. 20581 

Re: Business Conduct Standards for Security-Based Swap Dealers and Major 

Security-Based Swap Participants; File Number S7-25-11; RIN 3235-AL10 

Dear Ms. Murphy: 

BlackRock, Inc. (“BlackRock”) 1 is pleased to offer its comments on the Securities and 

Exchange Commission’s (“SEC”) proposed rules (the “Proposed Rule”)2

 under the Securities 

Exchange Act of 1934, as amended (“Exchange Act”) that are intended to implement 

provisions of Title VII (“Title VII”) of the Dodd-Frank Wall Street Reform and Consumer 

Protection Act of 2010 (the “Dodd-Frank Act”) relating to external business conduct standards 

for security-based swap dealers (“SBS Dealers”) and major security-based swap participants 

(“Major SBS Participants”). 

BlackRock supports the Dodd-Frank Act’s objectives of creating a comprehensive regulatory 

framework for swaps that will reduce systemic risk, increase price transparency, and promote 

market integrity while maintaining liquidity. As the voice of and a fiduciary for our clients, 

BlackRock has a vested interest in the development of sustainable and fair business conduct 

standards that protect investor interests and promote the Dodd-Frank Act’s objectives. 

The Proposed Rule would implement the Dodd-Frank Act's requirements related to business 

conduct standards for SBS Dealers and Major SBS Participants. These statutory provisions 

are substantially identical to those addressed by the Commodity Futures Trading Commission 

(“CFTC”) in its December 2010 proposed rule for external business conduct standards (the 

 

1

 BlackRock is one of the world’s leading asset management firms, and one of the largest managers of assets of employee 

benefit plans subject to the Employee Retirement Income Security Act of 1974, as amended (“ERISA”). We manage over 

$3.65 trillion on behalf of institutional and individual clients worldwide through a variety of equity, fixed income, cash 

management, alternative investment, real estate and advisory products as of June 30, 2011. Our client base includes 

corporate, public, multi-employer pension plans, insurance companies, third-party mutual funds, endowments, foundations, 

charities, corporations, official institutions, banks, and individuals around the world. 2

 76 Fed. Reg. 137 (July 18, 2011). Capitalized terms used, but not otherwise defined, shall have the meanings in the Proposed

Rule.
August 29, 2011 

Page 2 of 10 

“CFTC External Business Conduct Release”),3

 which generated vigorous debate among 

industry participants including BlackRock.4

 We appreciate the time the SEC has spent 

consulting with the CFTC in developing the Proposed Rule. The SEC’s Proposed Rule 

demonstrates an understanding of, and addresses, many of the issues raised by the CFTC 

External Business Conduct Release. Overall, we believe the Proposed Rule represents a 

thoughtful and helpful effort to provide workable solutions to some of the industry’s concerns 

over the adverse consequences of the CFTC External Business Conduct Release. In 

particular, BlackRock notes the following positive changes as compared with the CFTC’s 

External Business Conduct Release: 

 

 Providing a “safe harbor” that enables an SBS Dealer to avoid classification as an 

“advisor” to a special entity, if (i) the special entity makes certain representations, (ii) the 

SBS Dealer has a reasonable basis to believe that the special entity is advised by a 

qualified independent representative as defined in the Proposed Rule and; (iii) the SBS 

Dealer discloses to the special entity that it is not undertaking to act in the best interests 

of the special entity; 

 Proposing that the SBS Dealer can rely on representations from the special entity or the 

independent representative without the need, absent special circumstances, to conduct 

independent diligence; and 

 Providing that the institutional suitability requirement generally would not apply to 

special entities. 

We urge the SEC and CFTC to continue to work together to harmonize their rules and 

recommend that the CFTC incorporate the many constructive differences in approach that the 

SEC has proposed. If the SEC and the CFTC adopt different approaches, the complexity of 

complying with the rules will dramatically increase and result in the need to develop different 

compliance processes for swaps and security-based swaps. This will force market 

participants to engage in protracted contractual negotiations if they wish to continue using 

these products. We believe such roadblocks are unnecessary, particularly since the statutory 

business conduct standards that provide the basis for the CFTC and SEC proposals are 

nearly identical and swaps and security-based swaps are similar products. In fact, under the 

CFTC’s and SEC’s proposed product definitions, it is possible for swaps and security-based 

swaps to migrate back and forth between the regulators. Different regulatory requirements 

can only lead to confusion and interpretive difficulties in the future. Additionally, costs to 

clients would increase substantially and execution of transactions would be delayed without 

any corresponding benefit or increased protection to the client. 

 

We further believe that the Proposed Rule (as well as the CFTC External Business Conduct 

Release) should only apply when parties enter into swaps whose principal terms are 

negotiated on a bi-lateral basis. The Dodd-Frank Act empowers the CFTC and the SEC to 

require clearing of certain swaps and security-based swaps and, subject to few exceptions, 

imposes an exchange-trading mandate for swaps and security-based swaps subject to the 

clearing requirement. This use of mandatory trading on execution facilities, such as swap 

execution facilities, designated contract markets or registered national securities exchanges 

(collectively referred to as “Exchanges”), and mandatory clearing of eligible swaps, will 

provide regulatory oversight to the swaps and security-based swaps markets. 

 

3

 See CFTC External Business Conduct Release, 75 Fed. Reg. 245 (December 22, 2010). 4

 See BlackRock Comment Letter in response to the CFTC External Business Conduct Release, dated February 22, 2011 Re: 

Business Conduct Standards for Swap Dealers and Major Swap Participants with Counterparties (the “CFTC Comment 

Letter”).
August 29, 2011 

Page 3 of 10 

However, the Proposed Rule (and the CFTC External Business Conduct Release) is written in 

the context of the current environment for swaps and security-based swaps where parties 

enter into bi-lateral, negotiated agreements. In fact, the concerns addressed by the Proposed 

Rule simply will not be an issue for most swaps entered into through Exchanges and then 

cleared through registered clearing organizations and their clearing members. In the 

exchange traded environment, when transacting in a central limit order book there is no 

bi-lateral negotiation with the market participant (dealer) over the terms of the swap and the 

Exchange electronically facilitates the matching of trades. In addition, because clearing of 

swaps and security-based swaps results in the central clearing house as the ultimate 

counterparty to all market participants, market participants when seeking the best price for a 

transaction, will not be dependent on the underlying credit of other market participants. 

Given the salient differences between the current, bi-lateral swap and security-based swap 

environment and the exchange-traded environment contemplated by the Dodd-Frank Act, 

BlackRock believes the following rule would be appropriate: when a swap or security-based 

swap is cleared and exchange-traded, the counterparty to the trade should be viewed as 

fungible, rendering compliance with the specific requirements of the Proposed Rule (as well 

as the CFTC External Business Conduct Release) unnecessary. As a practical matter, it is 

anticipated that parties to exchange-traded swaps and security-based swaps may know the 

identity of their counterparty before the transaction is executed, because the Exchange may, 

in addition to a central limit order book, provide a request for quote system (where the 

participants can seek quotes from specific counterparties to limit information leakage due to 

the sensitivity of the trade (e.g., size of trade or liquidity of underlying asset)). If mere 

knowledge of a counterparty’s identity triggers compliance with the Proposed Rule, the 

outcome will be time delay, additional complexity, individual negotiation and potentially higher 

costs (wider bid/ask spreads) for clients – precisely the result that the trading and clearing 

requirements of the Dodd-Frank Act seek to avoid. We do not believe Congress intended that 

the mere identification of an SBS Dealer or Major SBS Participant as a liquidity provider to a 

trade conducted through a highly-regulated venue would trigger the provisions of the 

business conduct standards. 

Separately, as we commented to the CFTC, we believe that, at this time, the SEC should not 

adopt business conduct standards beyond those that Congress specifically mandated. Once 

other core components of the Dodd-Frank Act have been implemented, including the trading 

of security-based swaps on Exchanges, and the SEC has gained familiarity with the 

post-Dodd-Frank Act security-based swaps marketplace, it then may be appropriate for the 

SEC to adopt rules that go beyond the statutory standards. 

Moreover, as the SEC is aware, there are several other regulatory projects underway which 

involve financial services firms and their role in providing services or advice. In particular, the 

Department of Labor (“DOL”) has proposed a new rule setting forth the circumstances under 

which a person is considered to be a “fiduciary” for purposes of ERISA, by reason of providing 

investment advice to an employee benefit plan subject to ERISA (“Plan”) or a Plan’s 

participants and beneficiaries (“Proposed Fiduciary Definition”).5

 We remain concerned that 

compliance with the Proposed Rule, in particular the requirement to act in the best interests of 

a special entity, could render an SBS Dealer a fiduciary for purposes of ERISA.6

 We 

appreciate that the SEC noted in the preamble to the Proposed Rule that it has been 

 

5

 75 Fed. Reg. 204 (Oct. 22, 2010). 

6 During the House-Senate conference, Congress struck a provision from the Senate version of H.R. 4173 that would have 

imposed a fiduciary duty on a dealer entering into a swap as a counterparty to a defined category of entities, including 

employee benefit plans. Thus, it is clear that Congress did not intend to impose fiduciary status on a counterparty.
August 29, 2011 

Page 4 of 10 

consulting with the staff of the DOL and will continue to do so. This coordination is critical to 

ensure that Plans will not be precluded or restricted from entering into security-based swaps 

to hedge their risk or generate targeted investment returns. 

As currently drafted, neither the preamble to the Proposed Rule nor the operative language 

provides the specificity and clarity that is needed to address the industry’s concerns. Citing to 

the letter from Phyllis Borzi to Gary Gensler, dated April 28, 2011, the SEC stated that “[t]he 

determination whether an SBS Dealer is acting as an advisor . . . is not intended to prejudice 

the determination whether the SBS Entity is otherwise subject to regulation as an ERISA 

fiduciary.”7

 It is not clear what the SEC intended by this statement, which, read literally only 

amounts to an acknowledgment that there are different rules (administered by a separate 

agency) that determine whether a person is an ERISA fiduciary. Ms. Borzi’s letter also does 

not resolve the issue. She expressed, in a non-binding document, that the DOL did not intend 

to impose ERISA fiduciary obligations on persons who are merely counterparties. The letter 

does not resolve whether fiduciary status may flow from complying with additional duties. We 

urge the SEC to draft its rules in such a way that compliance would not require the SBS 

Dealer to act in a manner that could render it a fiduciary. Furthermore, the SEC should state 

expressly that compliance with the Proposed Rule, standing alone, is not intended to impose 

fiduciary status on the SBS Dealer. As indicated in our CFTC Comment Letter, regulatory 

business conduct standards should neither alter the nature of the relationship between SBS 

Dealers, Major SBS Participants and their counterparties (and when the counterparty is a 

special entity between the SBS Dealer and the special entity) nor create confusion regarding 

the responsibilities of those parties. 

In addition, we support the SEC’s approach in not applying certain business conduct 

standards to Major SBS Participants where the Dodd-Frank Act does not expressly impose 

such standards. We believe this is consistent with the statutory language of Section 764 of 

the Dodd-Frank Act, as well as the statutory definitions of Major Swap Participant and Swap 

Dealer which make it clear that these entities fall into entirely separate categories.8

 While it 

may be appropriate to impose business conduct standards for a dealer’s interactions with 

customers (as compared to other dealers), the imposition of such duties on Major SBS 

Participants, who, by definition, are not dealers, do not have customers, and rarely if ever 

trade with other buy-side counterparties, will likely result in compliance costs and burdens that 

far exceed any benefits. 

We recommend that the SEC take a more consistent approach to distinguishing between 

Major SBS Participants and SBS Dealers. There is no requirement in the Dodd-Frank Act that 

the SEC must subject SBS Dealers and Major SBS Participants to identical or substantially 

identical regulation. As such, we believe the SEC should not apply to Major SBS Participants 

the requirements to disclose “material information” provided orally to their counterparties, to 

provide contemporaneous written records of such oral disclosures and to provide daily marks 

for uncleared swaps. Major SBS Participants are transacting with their counterparties at 

arms-length and should not have to develop systems to track and deliver this information, 

particularly since SBS Dealers will be counterparties to Major SBS Participants in nearly all 

instances. However, if the SEC concludes that such requirements are necessary for Major 

SBS Participants, the SEC should make such requirements inapplicable to transactions with 

an SBS Dealer and should allow all other counterparties to opt out of receiving such 

disclosures. 

 

7

 See 76 Fed. Reg. at 42423. 8

 See BlackRock Comment Letter in response to the CFTC External Business Conduct Release, dated April 12, 2011 Re: Swap 

Dealers and Major Swap Participants Should Not be Treated as Identical Twins.
August 29, 2011 

Page 5 of 10 

BlackRock also has the following specific comments with respect to the Proposed Rule. 

I. The SBS Dealer Should be Permitted to Rely on Simple Representations Regarding the 

Qualifications of the Independent Representative 

BlackRock is proud to be a fiduciary for its clients and, in its role as an asset manager, 

expects that it will often fulfill the role of independent representative for its special entity 

clients. Section 15Fh-5 of the Proposed Rule requires an SBS Dealer to have a 

reasonable basis to believe that a counterparty that is a special entity has a qualified 

independent representative. In contrast with the CFTC External Business Conduct 

Release, the SEC has proposed that an SBS Dealer could rely on written representations 

regarding the various qualifications of the independent representative to provide the 

reasonable basis for its belief that the independent representative is qualified. BlackRock 

generally supports this approach, which is consistent with what it recommended in the 

CFTC Comment Letter. This standard would be more consistent with market practice and 

therefore more time and cost-effective to implement. In our view, the SEC should extend 

this approach to the Proposed Rule as a whole, so that SBS Dealers would be more able 

to rely on representations regarding the qualifications of a special entity’s independent 

representative. 

We support the SEC’s inclination to limit an SBS Dealer’s ability to rely on representations 

in certain circumstances, but we believe an actual knowledge standard is more 

appropriate than an objective reasonableness standard. Simply put, we believe that an 

SBS Dealer should be permitted to rely on representations unless it knows that the 

representation is not accurate. This standard would be easier to administer than the 

proposed alternative, which would permit an SBS Dealer to rely on a counterparty’s 

representation unless the SBS Dealer has information that would cause a reasonable 

person to question the accuracy of the representation. For example, under the proposed 

reasonableness standard, the SBS Dealer will be forced to continuously analyze whether 

its collected information about a counterparty raises sufficient questions to require further 

diligence. Reasonable minds (e.g., the SBS Dealer and the independent representative) 

may differ on the relevance of the available information, and this will result in protracted 

discussions and negotiations between the SBS Dealer and the representative – all to the 

detriment of the client. 

Absent knowledge that a representation is inaccurate, an SBS Dealer should never be 

required to undertake further diligence regarding the qualifications or independence of a 

representative. The additional diligence would be intrusive, time consuming and 

unnecessary. Requiring an SBS Dealer to conduct this type of diligence also would 

confuse the role of the SBS Dealer, who, absent an advisory relationship, is engaging in 

an arm’s-length transaction with its counterparty, and should not be called upon to 

evaluate the experience and capabilities of the special entity representative. Moreover, 

this type of requirement would come very close to having the SBS Dealer “approve” the 

special entity’s representative. In our view, the special entity is best situated to evaluate 

the qualifications of its own representative. 

Further, we believe that for Plans, the required representation should be limited to a 

statement that the representative is, and has acknowledged to the Plan that it is, an 

ERISA fiduciary and qualifies as a qualified professional asset manager (“QPAM”) within 

the meaning of Prohibited Transaction Class Exemption 84-14 (the “QPAM Exemption”) 

or an in-house asset manager (“INHAM”) within the meaning of Prohibited Transaction 

Class Exemption 96-23 (the “INHAM Exemption”). ERISA imposes statutory duties on 
August 29, 2011 

Page 6 of 10 

Plan fiduciaries that more than satisfy the requirements of the Proposed Rule. As an 

ERISA fiduciary, a Plan representative has a statutory duty to act solely in the best 

interests of the Plan and its participants and beneficiaries and with the care, skill, 

prudence, and diligence under the circumstances then prevailing that a prudent man 

acting in a like capacity and familiar with such matters would use in the conduct of an 

enterprise of a like character and with like aims. Further, an ERISA fiduciary is prohibited 

under Section 406(b) of ERISA from engaging in self-dealing transactions, including 

transacting with a party in whom the fiduciary has an interest that may affect its best 

judgment as a fiduciary.9

 In addition, both QPAMs and INHAMs are subject to regulatory 

oversight by other agencies, including the SEC or the Office of the Comptroller of the 

Currency.10 Considering the high standard of care applicable to an ERISA fiduciary, 

ERISA’s broad prohibited transaction rules, and the specific requirements needed to 

qualify as a QPAM or INHAM, we believe that additional representations should be 

unnecessary; they would only result in increased costs and time in completing 

negotiations and documentation, without any corresponding benefit or protection to the 

Plan. 

If the SEC requires more than a representation that the independent representative to a 

Plan is a fiduciary and a QPAM or INHAM (or in cases where the special entity is not a 

Plan), then, at a minimum, the SEC should explicitly state that “appropriate and timely 

disclosure of material information concerning the security-based swap” as required by 

Section 15Fh-5(a)(4) of the Proposed Rule does not require that information be provided 

before executing a trade. Advance notification should not be necessary where the special 

entity has granted the independent representative the discretionary authority to make 

trading decisions and is relying on the representative to make decisions in its best 

interests. It also may be counterproductive, particularly in volatile markets where speed of 

execution is critical. 

II. The Proposed Rule Establishes a New Standard of Independence that is Unnecessary 

The SEC’s proposed Rule 15Fh-2(c) does not adopt the troubling “material relationship” 

requirement proposed in the CFTC External Business Conduct Release and instead 

substitutes a rule that would “deem” a representative to be independent if it is not, and 

within one year was not, an associated person of the SBS Dealer and the representative 

has not received more than ten percent of its gross revenues over the past year, directly 

or indirectly, from the SBS Dealer. However, the SEC’s proposal lacks clarity and would 

require significant and costly enhancements to compliance systems. Compliance with 

this rule would be particularly problematic in instances where a corporate transaction 

changes the identity of associated persons during the look-back year. Notably, prior to 

2005, the QPAM Exemption had a one-year look back rule, which the DOL eliminated in 

response to industry concerns regarding workability in light of consolidation and changes 

in the financial services industry. The goal of ensuring independence is satisfied if the 

representative and the SBS Dealer are not “associated persons” at the time of the 

transaction. We believe that the burden of complying with the one-year lookback would 

outweigh any benefits. 

In addition, the “gross revenue test” should be limited to direct revenue received by the 

representative from the SBS Dealer only and not its affiliates. In any event, the Proposed 

 

9

 See DOL Regulation 2550.408b-2(e). 10 A QPAM must be an investment adviser registered under the Investment Advisers Act of 1940 (the “Adviser’s Act”), a bank as 

defined in Section 202(a)(2) of the Adviser’s Act, a savings and loan association or an insurance company and must satisfy 

specific capital requirements. An INHAM must be a registered investment adviser under the Adviser’s Act.
August 29, 2011 

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Rule does not clearly delineate what constitutes “indirect” compensation. If broadly 

construed, the term could encompass revenue received by the representative or an 

affiliate (such as a parent company) that has no relationship to entering into 

security-based swaps and would not in any way affect the independence of the parties 

(e.g., interest paid on a corporate loan from the representative’s parent to the SBS 

Dealer’s parent). As an administrative matter, determining what would comprise indirect 

compensation and establishing a compliance system to track that indirect compensation 

represents a significant and time consuming burden, the costs of which would likely be 

passed on to special entities. 

As we commented to the CFTC, with respect to Plans relying on the QPAM Exemption in 

entering into a security-based swap, this new independence requirement would need to 

be satisfied in addition to the independence requirements contained in the QPAM 

Exemption. In our view, if the requirements of the QPAM Exemption are satisfied with 

respect to a security-based swap entered into on behalf of a Plan, the separate 

independence requirements in the Proposed Rule should not apply. The multiple different 

rules that are designed to achieve a similar purpose will only increase the administrative 

burden of compliance with the Proposed Rule, without any corresponding benefit. 

Lastly, the independent representative should not be required to be independent of the 

special entity. In 2010, the QPAM Exemption was amended to permit affiliates of a plan 

sponsor to act as a QPAM on behalf of the plan sponsor’s Plan, subject to additional 

protections. Adding a further independence requirement to the SEC’s Proposed Rule 

would make this relief unavailable with respect to security-based swaps and would be 

inconsistent with the legislative history of the business conduct standard provisions of the 

Dodd-Frank Act. 

III. Suggestions with Respect to the Safe Harbor from the Definition of Advisor 

Under Section 15Fh-2(a) of the Proposed Rule, an SBS Dealer will not be considered an 

advisor to a special entity if (a) the special entity represents that it will rely on advice from 

an independent representative and not the SBS Dealer, (b) the SBS Dealer has a 

reasonable basis to believe that the special entity is advised by a qualified independent 

representative, and (c) the SBS Dealer discloses to the special entity that it is not 

undertaking to act in the special entity’s best interest. This “safe harbor” approach 

provides a useful means for an SBS Dealer to avoid designation as an advisor, which is 

critical to enabling Plans to continue to enter into security-based swaps. 

BlackRock does not believe that any particular level of specificity should be required in 

these representations, which are relatively straightforward. Additional diligence should 

not be required before the SBS Dealer may rely on these representations, because any 

such diligence would interfere with the relationship between the special entity and its 

independent advisor and could result in the SBS Dealer second-guessing the special 

entity’s choice of representative. 

As a technical matter, we note that when a Plan and its representative rely upon the 

QPAM Exemption in entering into a security-based swap, one of the conditions of the 

QPAM Exemption is that the QPAM – not the Plan – must make the decision to enter into 

the transaction. Thus, requiring the special entity to represent that it will rely on advice 

from the qualified representative could be viewed as inconsistent with the requirements of 

the QPAM Exemption. Thus, we suggest that Section 15Fh-1(a)(1)(ii) be revised to 

provide that either the special entity will rely on advice from a qualified independent 
August 29, 2011 

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representative or, if the special entity or its representative is relying on the QPAM 

Exemption or the INHAM Exemption, the decision to enter into the transaction is made by 

a QPAM or INHAM. 

IV. The Requirement that an Advisor Act in the “Best Interests” of a Special Entity Should be 

Eliminated from the Proposed Rule 

Similar to the CFTC External Business Conduct Release, Section 15Fh-4(b) of the 

Proposed Rule requires that, if a SBS Dealer acts as an advisor, it must act in the best 

interests of the special entity. This requirement is troubling because an SBS dealer could 

meet the definition of an advisor while acting as a counterparty in an arm's length 

transaction. Because we are concerned that an SBS Dealer might become an unwitting 

advisor to its counterparties by providing basic information, we believe the "best interests" 

requirement should be omitted from any final rules the SEC adopts in this area. 

Requiring that an SBS Dealer act in the best interests of a counterparty who is a special 

entity would confuse the roles of the parties and have an adverse impact on the flow of 

information regarding investment and trading strategies. Special entities engage 

independent representatives to develop investment strategies and to provide advice and 

make decisions regarding the swaps that will best enable them to achieve their 

investment objectives. Sophisticated asset managers, including BlackRock, are fully 

capable of assessing whether a swap is in the best interests of its client, including a 

special entity. 

The requirement that an SBS Dealer act in the best interests of a special entity when 

acting as an advisor could pose particularly acute problems for Plans. Absent an express 

exemption from the DOL, the requirement would almost certainly result in the SBS Dealer 

being considered a fiduciary for ERISA purposes. This could effectively preclude Plans 

from entering into security-based swaps. Congress clearly did not intend to prevent Plans 

from transacting in these instruments (as manifested by the carve-out from the Major SBS 

Participant definition for certain security-based swap positions held by Plans), and the 

SEC should revise the Proposed Rule to ensure that Plans will be able to enter into 

security-based swaps. Put differently, the SEC should not adopt a rule that stands an 

arm's-length relationship on its head by turning an SBS Dealer into an ERISA fiduciary. 

To avoid this result, if the SEC retains the best interests requirement, it should specifically 

state that acting in the best interests of a counterparty should not be interpreted to mean 

that the SBS Dealer is acting as an ERISA fiduciary. 

We further suggest that acting in the best interests of a special entity be defined as 

complying with Section 15Fh-3(g) of the Proposed Rule and NASD Rule 2010(d). These 

rules require that communications be based on principles of fair dealing and good faith, be 

fair and balanced and provide a sound basis for evaluating the facts in regard to any 

particular transaction. This standard effectively requires the SBS Dealer to provide “both 

sides of the story” and provides protection to the special entity without converting the SBS 

Dealer into a fiduciary. 

V. The SEC’s Exemptions for Transactions Executed on an Exchange Are Too Narrow 

The SEC has proposed an exception from the requirements in Section 15Fh-4 (acting in 

the best interests of a special entity) and 15Fh-5 (independence of the special entity) if the 

transaction is executed on an Exchange and the SBS Dealer does not know the identity of 

the counterparty at any time up to and including execution of the transaction. Similarly, 
August 29, 2011 

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certain requirements of Section 15Fh-3 of the Proposed Rule (i.e., verifying that the 

counterparty is an eligible contract participant and providing certain disclosure) apply only 

if the counterparty knows the identity of the SBS Dealer. In our view, these exceptions are 

drawn too narrowly and may discourage market participants from executing 

security-based swaps on electronic platforms. Specifically, the proposed disclosure 

requirements may impair execution times, vitiating a primary advantage of electronic 

trading. These consequences would be contrary to one of the key objectives of the 

Dodd-Frank Act, which is to facilitate electronic trading and clearing. As discussed above, 

we believe that the Proposed Rule (as well as the CFTC External Business Conduct 

Release) should not apply to any swaps or security-based swaps that are executed on 

Exchanges regardless of when the identity of the counterparties becomes known.11

VI. The Requirement to Provide a Daily Mark Should Not Make the SBS Dealer a Fiduciary 

Section 15Fh-3 of the Proposed Rule specifies the circumstances under which an SBS 

Dealer would be required to provide a daily mark to its counterparty. The Proposed 

Fiduciary Definition provides that an “appraisal” concerning the value of securities or other 

property provided to a Plan may be considered “advice”. Thus, there is a risk that the 

provision of a daily mark as required by the Proposed Rule could cause an SBS Dealer to 

be considered a fiduciary under the DOL’s Proposed Fiduciary Definition. In the preamble 

to the Proposed Rule, the SEC recognized the issue and indicated that it was coordinating 

with the DOL.12 We urge the SEC to state expressly that the provision of a daily mark is 

not an appraisal or valuation, but rather is a daily pricing requirement that will assist the 

counterparty in timely assessing the performance of its positions. 

VII. The SEC Should Clarify the Definition of Special Entity 

The SEC has requested comments on the scope of the term “special entity” in Section 

15Fh-2(e) of the Proposed Rule.13

BlackRock urges the SEC to confirm that collective investment vehicles or pooled funds in 

which a Plan invests are not themselves special entities when the vehicles or funds enter 

into a security-based swap with an SBS Dealer. These vehicles or funds may contain 

assets of Plans, but nothing in the special entity statutory provisions suggests that 

Congress intended those vehicles or funds to be special entities. Instead, the special 

entity provisions focus on instances where Plans are the swap counterparty. The SEC 

should not attempt to expand the statute’s reach beyond its literal language to extend the 

special entity provisions to swaps entered into by these collective investment vehicles or 

pooled funds. 

The SEC should further clarify that the Proposed Rule does not apply to foreign pension 

and employee benefit plans. We do not believe Congress intended the special entity 

definition to include these foreign entities. Moreover, extending the reach of the Proposed 

Rule to foreign pension and employee benefit plans that have no connection with the 

 

11 We recognize, however, that some trades might be bilaterally negotiated and the Exchange merely used to process the trade. 

It may be appropriate to apply the requirements of the Proposed Rule in these circumstances. Negotiated trades executed on 

an Exchange will be subject to the rules of the Exchange and, thus, it should be relatively straight forward to identify and 

separate them from the majority of fungible trades conducted through the Exchange. This approach could be easily 

understood by market participants and monitored for compliance by regulators. 12 76 Fed. Reg. 137, at 42410, n. 99. 13 If the SEC determines to expand the entities that are ‘”employee benefit plans” as suggested by some of its questions, we 

believe that it should seek further public comment on a specific proposal. A determination of special entity status is of such

importance to SBS Dealers, Major SBS Participants and special entities alike that it should not be announced only in a final 

rule.
August 29, 2011 

Page 10 of 10 

United States represents an unnecessary attempt to extend the SEC’s authority outside 

the United States and creates the potential for conflict with other regulatory regimes. 

Conclusion 

We believe that the Proposed Rule represents an important step in providing safeguards for 

the financial markets and that it provides workable solutions to many of the issues raised by 

the CFTC’s External Business Conduct Release. However, as set forth above, we remain 

concerned regarding the potential adverse impact of a number of the provisions of the 

Proposed Rule. Accordingly, we recommend that the SEC adopt the changes outlined above. 

BlackRock welcomes the opportunity to further discuss its views on this important topic with 

the SEC staff. 

Sincerely, 

Joanne Medero