September 8, 2010 

David A. Stawick, Secretary 

Commodity Futures Trading Commission 

Three Lafayette Centre 

1155 21st Street, N.W. 

Washington, D.C. 20581 

Elizabeth M. Murphy, Secretary 

U.S. Securities and Exchange Commission 

100 F Street, N.E. 

Washington, D.C. 20549 

Dear Mr. Stawick and Ms. Murphy: 

 I am writing on behalf of the American Benefits Council (the “Council”) to express 

the views of major employee benefit plans across the country with respect to a critical set of 

issues arising under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the 

“Dodd-Frank Act”). More specifically, pursuant to requests for public comments from both 

the Commodity Futures Trading Commission (“CFTC”) and the Securities and Exchange 

Commission (“SEC”),1

 this letter addresses certain business conduct standards that may be 

applied with respect to swaps involving employee benefit plans. 

The Council is a public policy organization principally representing Fortune 500 

companies and other organizations that assist employers of all sizes in providing benefits to 

employees. Collectively, the Council's members either sponsor directly or provide services 

to retirement and health plans that cover more than 100 million Americans. 

 Swaps play a critical role with respect to our members’ pension plans. Pension plans 

use swaps to manage risk, such as interest rate, currency, and equity risk, and to thereby 

reduce the volatility of the plan funding obligations imposed on the companies maintaining 

the plans. If swaps were to become materially less available to pension plans, funding 

volatility would increase substantially, forcing companies in the aggregate to reserve 

billions of additional dollars to satisfy possible funding obligations. Those greater reserves 

would have an enormous effect on the capital that would be available to businesses to 

create and retain jobs and for other activities that promote economic growth. In addition, 

increasing asset volatility can jeopardize the security of plan benefits and undermine 

employers’ commitment to provide new benefits, both of which adversely affect 

participants. 

 

1

 See, e.g., CFTC Release: PR 5856-10 (July 21, 2010) (topic III); Speech by Chairwoman Mary Schapiro 

(July 27, 2010). 
2 

 Accordingly, the issues addressed in this letter are of great importance to our 

members, to the pension plan system more generally, and to the economy. We look 

forward to working with you to ensure that the new rules strengthen plans, as intended, so 

that workers’ retirement security is enhanced. It is critical that the new rules not be 

interpreted in such a way as to undermine such security. 

Specifically, I am writing today with respect to new section 4s(h)(5) of the 

Commodity Exchange Act (“CEA”) (as added by section 731 of the Dodd-Frank Act), which 

sets forth certain business conduct standards that the CFTC may impose on swap dealers 

and major swap participants (“MSPs”) that offer to enter into or enter into a swap with a 

“special entity”. That section provides: 

(5) SPECIAL REQUIREMENTS FOR SWAP DEALERS AS 

COUNTERPARTIES TO SPECIAL ENTITIES.— 

 (A) Any swap dealer or major swap participant that offers to enter or 

enters into a swap with a Special Entity shall— 

 (i) comply with any duty established by the Commission for 

a swap dealer or major swap participant, with respect to a 

counterparty that is an eligible contract participant within the 

meaning of subclause (I) or (II) of clause (vii) of section 1a(18) 

of this Act, that requires the swap dealer or major swap 

participant to have a reasonable basis to believe that the 

counterparty that is a Special Entity has an independent 

representative that— 

 (I) has sufficient knowledge to evaluate the 

transaction and risks; 

 (II) is not subject to a statutory disqualification; 

 (III) is independent of the swap dealer or major swap 

participant; 

 (IV) undertakes a duty to act in the best interests of the 

counterparty it represents; 

 (V) makes appropriate disclosures; 

 (VI) will provide written representations to the Special 

Entity regarding fair pricing and the appropriateness 

of the transaction; and 

 (VII) in the case of employee benefit plans subject to 

the Employee Retirement Income Security act [sic] of 

1974, is a fiduciary as defined in section 3 of that Act 

(29 U.S.C. 1002); and 

 (ii) before the initiation of the transaction, disclose to the 

Special Entity in writing the capacity in which the swap 

dealer is acting; and 

(B) the Commission may establish such other standards and requirements 

as the Commission may determine are appropriate in the public interest, 

for the protection of investors, or otherwise in the furtherance of the 

purposes of this Act. 
3 

A parallel provision with respect to security-based swaps is contained in section 15F(h)(5) 

of the Securities Exchange Act of 1934 (as added by section 764 of the Dodd-Frank Act)2

. 

Our comments below apply equally to the CEA and the Securities Exchange Act. 

Generally, a “special entity” is defined to mean a Federal agency, a State or local 

governmental entity, an employee benefit plan, a governmental plan, or an endowment. 

We are writing today with respect to employee benefit plans, including governmental 

plans. However, the statutory analysis is very different for plans subject to the Employee 

Retirement Income Security Act of 1974 (“ERISA”) and plans not explicitly subject to 

ERISA, such as governmental plans. Accordingly, we divide our discussion into two parts: 

ERISA plans and non-ERISA plans. 

 

2

 Section 15F(h)(5) provides as follows: 

(5) SPECIAL REQUIREMENTS FOR SECURITY-BASED SWAP DEALERS AS 

COUNTERPARTIES TO SPECIAL ENTITIES.— 

 (A) IN GENERAL.—Any security-based swap dealer or major security-based 

swap participant that offers to or enters into a security-based swap with a special entity 

shall— 

 (i) comply with any duty established by the Commission for a securitybased swap dealer or major security-based swap participant, with respect to a 

counterparty that is an eligible contract participant within the meaning of subclause (I) or 

(II) of clause (vii) of section 1a(18) of the Commodity Exchange Act, that requires the 

security-based swap dealer or major security-based swap participant to have a 

reasonable basis to believe that the counterparty that is a special entity has an 

independent representative that— 

 (I) has sufficient knowledge to evaluate the transaction and risks; 

 (II) is not subject to a statutory disqualification; 

 (III) is independent of the security-based swap dealer or major 

security-based swap participant; 

 (IV) undertakes a duty to act in the best interests of the 

counterparty it represents; 

 (V) makes appropriate disclosures; 

 (VI) will provide written representations to the special entity 

regarding fair pricing and the appropriateness of the transaction; and 

 (VII) in the case of employee benefit plans subject to the 

Employee Retirement Income Security Act of 1974, is a fiduciary as defined in section 3 of 

that Act (29 U.S.C. 1002); and 

 (ii) before the initiation of the transaction, disclose to the special entity in 

writing the capacity in which the security-based swap dealer is acting. 

 (B) COMMISSION AUTHORITY.—The Commission may establish such other 

standards and requirements under this paragraph as the Commission may determine are 

appropriate in the public interest, for the protection of investors, or otherwise in 

furtherance of the purposes of this Act. 
4 

ERISA PLANS

I. How does clause (i) of new section 4s(h)(5)(A) apply with respect to ERISA plans? 

By its terms, clause (i) of section 4s(h)(5)(A) quoted above only applies where the 

swap dealer or MSP’s counterparty is “an eligible contract participant within the meaning 

of subclause (I) or (II) of clause (vii) of section 1a(18)”. Thus, clause (i) only applies where 

such counterparty is: 

(vii) (I) A governmental entity (including the United States, a State, or a foreign 

government) or political subdivision of a governmental entity; [or] 

(II) A multinational or supranational government entity. 

 As written, clause (i) is initially limited to the above types of entities (referred to here 

as “governmental entities”). However, subclause (VII) refers to “employee benefit plans 

subject to the Employee Retirement Income Security act [sic] of 1974”, and viewed in 

isolation imposes a rule on such plans. This sets up a potential inconsistency in the statute. 

Clause (i) only applies to governmental entities (which are not subject to ERISA), but 

subclause (VII) of clause (i) refers to plans subject to ERISA. The only way to reconcile this 

inconsistency is as follows. Clause (i) is generally limited to situations where the 

counterparty is a governmental entity. However, by reason of subclause (VII), ERISA plans 

are made subject to clause (i), but only with respect to the requirements of subclause (VII). 

Thus, where the counterparty is an ERISA plan, clause (i) requires that the swap dealer or 

MSP must have a reasonable basis to believe that the ERISA plan has a fiduciary as defined 

in ERISA. 

 This interpretation makes sense both from a technical perspective and from a 

congressional intent perspective. From a technical perspective, there is no statutory basis to 

apply any part of clause (i) to ERISA plans other than subclause (VII). 

 From a congressional intent perspective, this also makes sense. In order to function 

as a fiduciary under ERISA, a representative must satisfy, among other things, 

requirements that are similar to those set forth in subclauses (I)-(VI). There was accordingly 

no reason for Congress to apply overlapping rules to a fiduciary that is already highly 

regulated under ERISA. 

 Specifically, consider each of the requirements in section 4s(h)(5)(A)(i)(I)-(VI): 

“(I) has sufficient knowledge to evaluate the transaction and risks”. See 

ERISA section 404(a)(1)(B), which requires ERISA fiduciaries to discharge 

their duties “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”. 
5 

“(II) is not subject to statutory disqualification”. Unless a representative 

satisfies ERISA’s standards, such representative cannot legally be an ERISA 

fiduciary. 

“(III) is independent of the swap dealer or major swap participant”. See 

ERISA section 406(b), which prohibits a fiduciary from acting on behalf of a 

plan if it has conflicted loyalties, which would be the case if the plan’s 

fiduciary were not independent of the opposing party to a swap. 

“(IV) undertakes a duty to act in the best interests of the counterparty it 

represents”. See ERISA section 404(a)(1) which provides in relevant part that 

a fiduciary must “discharge his duties with respect to a plan solely in the 

interest of the participants and beneficiaries [of the plan]”. 

“(V) makes appropriate disclosures”. It is clear under ERISA that fiduciary 

duties include the duty to make all appropriate disclosures to the plan. See, 

e.g., Eddy v. Colonial Life Ins. Co. of Am., 919 F.2d 747 (D.C. Cir. 1990) (stating 

that “[t]he duty to disclose material information is the core of a fiduciary’s 

responsibility”). 

“(VI) will provide written representations to the Special Entity regarding 

fair pricing and the appropriateness of the transaction”. Again, it is clear 

under ERISA that a fiduciary advising regarding a transaction must evaluate 

both the price and appropriateness of the transaction. See, e.g., California 

Ironworkers Field Pension Trust v. Loomis Sayles & Co., 259 F.3d 1036 (9th Cir. 

2001) (“When applying the prudence rule, the primary question is whether 

the fiduciaries, ‘at the time they engaged in the challenged transactions, 

employed the appropriate methods to investigate the merits of the 

investment and to structure the investment.’”) (quoting Donovan v. Mazzola, 

716 F.2d 1226, 1232 (9th Cir. 1983)).

This analysis leads to a very logical result. Where a governmental entity is the 

counterparty, the swap dealer or MSP must have a reasonable basis to believe that the 

representative meets subclauses (I)-(VI). Since those subclauses relate to issues already 

addressed by ERISA with respect to ERISA fiduciaries, only subclause (VII) applies where 

an ERISA plan is the counterparty. 

 Thus, in the case of ERISA plans, compliance with clause (i) of section 4s(h)(5)(A) is 

very straightforward and logical. The swap dealer or MSP need only have a reasonable 

basis to believe that the plan’s representative is “independent” (a requirement included in 

the language prior to subclause (I)) and is an ERISA fiduciary. 
6 

II. What is meant by the reference to a special entity having an “independent” 

representative?

 The “independence” issue is clear. The representative advising the plan with respect 

to the swap must be independent of the swap dealer or MSP; there is no requirement that 

the representative be independent of the plan. This was squarely confirmed by a colloquy 

between Senators Blanche Lincoln (D-AR) and Tom Harkin (D-IA) on July 15, 2010 (Fed. 

Reg. S5903): 

Mrs. LINCOLN....Our intention in imposing the independent representative 

requirement was to ensure that there was always someone independent of 

the swap dealer or the security-based swap dealer reviewing and approving 

swap or security-based swap transactions. However, we did not intend to 

require that the special entity hire an investment manager independent of the 

special entity. Is that your understanding, Senator HARKIN? 

Mr. HARKIN. Yes, that is correct. We certainly understand that many 

special entities have internal managers that may meet the independent 

representative requirement.... 

 Any other conclusion here would be inconsistent with Congressional intent—

Congress certainly did not intend to cause plans across the country to dismantle efficient 

internal investment teams. Moreover, there is no policy reason to require representatives to 

be independent of the special entity. On the contrary, the objective is to ensure that the 

special entity is not relying on the swap dealer or MSP with respect to the swap. 

 In order for the swap dealer or MSP to have a reasonable belief that a plan’s 

representative is independent of the swap dealer or MSP, the swap dealer or MSP must 

have a reasonable basis to believe that the representative is not controlled by, or under 

common control with, the dealer or MSP that is the plan’s counterparty. 

III. What does a swap dealer or MSP need to do in order to have a “reasonable basis” to 

believe that the specified requirements are satisfied?

 It is critical that swap dealers and MSPs have a clear, simple, and administrable 

means of demonstrating the requisite “reasonable basis” required under clause (i) of section 

4s(h)(5)(A). In many cases, a plan will enter into multiple swaps during a year with the 

same swap dealer or MSP. Swap dealers and MSPs need to have an efficient means of 

satisfying the reasonable belief requirement that does not entail costly and subjective due 

diligence with respect to every swap. Otherwise, plans’ ability to use swaps would be 

materially affected, plans’ costs would rise, and funding volatility could reach dangerous 

levels. 

 We would suggest the following safe harbor. If a swap dealer or MSP receives a 

written representation from the plan or its representative that (1) states that the plan’s 

representative is independent of the swap dealer or MSP and is an ERISA fiduciary, and (2) 
7 

states that the plan or its representative shall notify the swap dealer or MSP if at any time 

the representation becomes inaccurate, then the swap dealer or MSP can rely on such 

written representation for purposes of satisfying the reasonable belief standard until the 

swap dealer or MSP receives a contrary representation from either party. If the swap dealer 

or MSP receives the written representation from the representative, reliance would only be 

permitted with respect to swaps involving that representative. 

One other point is very important. It should be made clear that the safe harbor 

representations do not give rise to any additional contractual rights. For example, assume 

that due to changing economic conditions, a swap between a swap dealer and a plan has 

become very disadvantageous for the swap dealer. The swap dealer should not be able, for 

example, to void the swap—or make any other type of claim against any party —by 

asserting that one or more of the representations made by the plan or its representative 

under clause (i) were incorrect. In other words, these business conduct standards—which 

were meant to protect plans—should not be permitted to be a weapon that can be used 

against plans or their representatives. Correspondingly, the swap dealer or MSP should be 

permitted to rely on such representations and should not have any liability or be exposed to 

the possibility of having the swap voided by reason of the representation turning out to 

have been incorrect. 

In analogous situations, regulators have permitted reliance on certifications. For 

example, under Rule 144A, under the Securities Act, a seller of securities is entitled to rely 

on a certification by an executive officer of the purchaser that the purchaser meets the 

conditions necessary to establish that the purchaser is a qualified institutional buyer 

(“QIB”). Rule 144A (d)(1)(iv). The Adopting Release for Rule 144A states that: "[u]nless 

circumstances exist giving a seller reason to question the veracity of the certification, the 

seller would not have a duty of inquiry to verify the certification." Another example is 

Regulation EE issued by the Federal Reserve, which provides that a person will qualify as a 

“financial institution” (for netting purposes) if it represents orally or in writing that it meets 

the appropriate test. 12 CFR 231.3. 

Under the language of these regulations, if the certification is reasonably obtained, 

the recipient of the certification may treat its counterparty as a QIB/financial institution. A 

subsequent determination that the certification was wrong will not retroactively void the 

QIB/financial institution status of the counterparty. 

IV. What is needed for the swap dealer or MSP to satisfy the requirement in clause (ii) of 

section 4s(h)(5)(A) that it disclose to the plan the capacity in which it is acting? 

 The swap dealer or MSP should be permitted to make a one-time disclosure to the 

plan or its representative regarding the capacity in which it is acting with respect to swaps 

with the plan. Of course, if in a future swap a swap dealer or MSP functions in a different 

capacity—i.e., not as a counterparty—the swap dealer or MSP would be obligated to make a 

separate representation regarding the capacity in which it is acting with respect to that 

future swap. 
8 

NON-ERISA PLANS

 There are questions as to whether clause (i) of section 4s(h)(5)(A) applies to nonERISA plans, such as governmental plans, and if so, which provisions of such clause apply 

and which may be satisfied by ERISA-like requirements in relevant state 

statutes/ordinances. We defer on that issue to the governmental plan community. 

However, as advisors and representatives of governmental plans, we are keenly interested 

in ensuring that, to the extent clause (i) applies to governmental plans, it applies in an 

administrable and appropriate fashion. 

 Some of the analysis provided above with respect to ERISA plans applies equally to 

non-ERISA plans, i.e.: 

• The definition of “independent”; 

• The means of satisfying the reasonable basis requirement; and 

• The means of satisfying the requirement that the swap dealer or MSP disclose the 

capacity in which it is acting. 

However, additional issues may apply to non-ERISA plans by reason of the 

application of subclauses (I)-(VI). Those issues are addressed below. 

I. What is needed for a swap dealer or MSP to have a reasonable basis to believe that a 

special entity’s independent representative (a) has “sufficient knowledge to evaluate the 

transaction and risks”, (b) “undertakes a duty to act in the best interests of the 

counterparty it represents”, and (c) “makes appropriate disclosures”?

 As discussed above, it is critical that swap dealers and MSPs not be required to do 

burdensome and unnecessary due diligence, such as, in this case, detailed investigations 

regarding whether a representative makes “appropriate” disclosures. A written 

representation described above from the plan or its representative should be sufficient if it 

states that the requirements in section 4s(h)(5)(A)(i) regarding the representative’s 

knowledge, duties, and disclosure practices are satisfied3

. A different rule would not only 

be extremely burdensome, but would also give swaps dealers and MSPs a potential tool to 

exercise inappropriate control over the opposing party in a swap. Swap dealers and MSPs 

could decide which representatives were knowledgeable, act in the best interests of their 

counterparty, and make appropriate disclosures. This would give swap dealers or MSPs 

inappropriate power over their counterparty’s selection of a representative. It is critical that 

plans retain the ability to protect themselves. 

II. What is needed for a swap dealer or MSP to have a reasonable basis to believe that the 

independent representative “will provide written representations to the special entity 

regarding fair pricing and the appropriateness of the transaction”? 

 

3

 Where the representative makes a representation, it should be permitted for the representative to do so 

in a way applicable to all of its plan clients—such as on its website—as opposed to on a plan by plan 

basis. 
9 

 A written representation described above from the plan or its representative should 

be sufficient if the representation states that the representative is obligated, by law and/or 

contract, to review pricing and appropriateness with respect to any swap transaction in 

which the representative serves as such with respect to the plan. In this regard, it is critical 

to clarify one point. While it is very important that every swap be reviewed with respect to 

pricing and appropriateness (and that existing swaps be monitored appropriately), the 

CFTC and the SEC should not impose any requirement that the representative provide a 

separate opinion on pricing and appropriateness for each and every swap entered into by 

plans. That would be very costly and very disruptive. Where swaps are used to hedge risk, 

swap transactions can be entered into with some regularity. To require separate formal 

opinions regarding pricing and appropriateness would make it extremely difficult to 

execute swaps as needed to fit plans’ investment objectives. In fact, such a requirement 

would drive up plan costs materially and cause plans to have to reduce their use of swaps, 

thereby hurting participants and exposing the company sponsoring the plan to far greater 

risks and funding volatility. Moreover, there is no reason for separate opinions for each 

swap. If the representative is contractually or legally obligated to review pricing and 

appropriateness, the law would only be adding time and expense by requiring a separate 

opinion letter regarding every swap. 

 We very much appreciate your consideration of our views. 

 Sincerely, 

 Lynn D. Dudley 

 Senior Vice President, Policy 

cc: Dan M. Berkovitz David M. Becker 

 Phyllis J. Cela James Brigagliano 

 Stephen J. Obie Meredith B. Cross 

 Ananda K. Radhakrishnan Andrew J. Donohue 

 Steven Schoenfeld Henry T.C. Hu