August 29, 2011

Elizabeth M. Murphy

Secretary

Securities and Exchange Commission

100 F Street, N.E.

Washington, D.C. 20549-1090

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

Security-Based Swap Participants (File No. S7-25-11)

Dear Secretary Murphy:

We are writing on behalf of the Consumer Federation of America (CFA)1and Americans 

for Financial Reform2in response to the Commission‟s request for comment regarding proposed 

business conduct rules for security-based swap dealers and security-based swap participants. 

These proposed rules are neither consistent with congressional intent nor commensurate with the 

severity of the problems they are intended to address. Indeed, unless they are dramatically 

strengthened, they will do little to change the abusive practices that Congress targeted when it 

gave the Commission broad authority to regulate business conduct among security-based swap 

dealers (SBS Dealers) and major security-based swap participants (Major SBS Participants).

It is particularly disappointing that the Commission has proposed such a weak set of 

business conduct rules when it had the benefit of the Commodity Futures Trading Commission‟s 

previous excellent work in this area to draw on in developing its proposal. The CFTC proposal 

won strong support from investor advocates along with numerous concrete suggestions for 

needed improvements. We are dismayed that, despite a growing body of evidence of pervasive 

abuses and the enormous costs of not regulating this market, the Commission has proposed to 

substantially weaken rather than strengthen the CFTC proposal. Inevitably, the Commission‟s 

weaker proposal will be used as leverage by those attempting to undermine the CFTC effort. 

 

1 CFA is a non-profit association of approximately 300 national, state and local pro-consumer organizations founded 

in 1968 to represent the consumer interest through research, education and advocacy.

2Americans for Financial Reform is an unprecedented coalition of over 250 national, state and local groups who 

have come together to reform the financial industry. Members of our coalition include consumer, civil rights, 

investor, retiree, community, labor, religious and business groups as well as Nobel Prize-winning economists. 

(Members of AFR are listed at the end of this letter in Appendix A.)
2

Thus, the Commission proposal not only threatens to provide inadequate protections in the 

security-based swap market, it also makes it more difficult for the CFTC to defend its effort to 

adopt appropriate reforms. 

We cannot state strongly enough how imperative it is that the Commission adopt 

extensive revisions before finalizing these rules. To accomplish that goal, serious flaws in 

virtually every provision of the SEC proposal will need to be fixed. The following are among 

the highest priorities. Each is discussed in more detail below.

 In order to ensure that the rules deliver the enhanced protections for special entities that 

Congress intended, the Commission must eliminate the gaping loophole in the definition 

of “act as an advisor” that would otherwise enable SBS dealers to force special entities to 

sign away their right to best interest recommendations. In addition, it must revise the 

definition of “independent representative” to ensure that any such representative is free of 

undue influence from SBS Entities.

 Provide guidance with regard to the best interest standard. Any such guidance should

make clear that the best interest standard is intended to provide protections that go 

beyond those of a suitability standard (including by requiring recommendation, from 

among the various suitable options, of the approach the SBS Entity believes to be best for 

the special entity). In addition, guidance should clarify that the best interest standard is 

consistent with various different methods of compensation and with proprietary trades, 

but that it requires the full disclosure of any conflicts of interest. 

 Eliminate the alternative method of “compliance” with the proposed suitability standard –

which makes it unlikely the standard would ever apply – and instead tweak the definition 

of recommendation and provide additional guidance on when the standard would apply to 

provide industry with greater clarity about when they would be subject to the standard.

 Strengthen “know your counterparty” requirements to bring them into line with the CFTC 

proposal and apply at least certain aspects of the requirements to Major SBS Participants.

 Improve financial incentive and conflict disclosures by including differential 

compensation for recommending different types of swaps (customized vs. standardized, 

for example) or for recommending swaps over other non-swap alternatives (e.g., 

conventional bonds) among the financial incentives that have to be disclosed. Clarify 

that other types of conflicts associated with the counterparty role, such as the fact that the 

SBS Entity may be trying to move a position off its books and is recommending the swap 

as part of that strategy, would also have to be disclosed. 

 Improve risk disclosures by requiring a scenario analysis as part of the risk disclosures, 

by specifying other characteristics such as liquidity or the risks of uncleared swaps 

among those that have to be disclosed, and by explicitly requiring SBS Dealers and 

Major SBS Participants that recommend customized swaps to show the standardized 

alternative and provide an assessment of the relative risks and costs of the two 

approaches.
3

 Provide additional guidance on material characteristics beyond risks that would have to 

be disclosed. These should include a requirement to detail, and separately price, the 

standardized component parts of any customized swap, including any imbedded credit for 

forgone collateral. 

 Set standards for the manner of disclosure that require risk, material characteristics, 

financial incentive and conflict disclosures to be provided in writing at the earliest 

possible point in advance of the transaction. Do not allow the use of master agreements 

to substitute for disclosure of conflicts, risks, or other material characteristics.

 Adopt standards regarding reliance on written representations to demonstrate compliance 

with Commission rules that require that the representations themselves be sufficiently 

detailed and informative to permit reliance and that require SBS Entities who wish to rely 

on those representations without further inquiry to have a reasonable basis for believing 

those representations to be true.

 Adopt execution standards comparable to those proposed by the CFTC.

 Generally bring the Commission proposal into line with stronger CFTC proposals in each 

of the areas covered by the rules.

Before discussing these and other aspects of the rule proposals in greater detail, it is 

appropriate to take a moment to reflect on the conditions that led Congress to provide the SEC 

and CFTC with broad new authority in this area. This is particularly important since an 

awareness of that context and the purpose behind the business conduct rules seems to be missing 

from the Commission proposal.

I. Background

The business conduct rules directly address a problem that was a root cause of the 2008 

financial crisis: the change in culture on Wall Street. For a variety of reasons – the decision of 

investment banks to go public and an emphasis on proprietary trading rather than customer 

services as a major revenue source, for example – Wall Street firms no longer exist primarily to 

serve the needs of their customers. Indeed, industry insiders called to testify before the Senate 

Permanent Subcommittee on Investigations last year often seemed bewildered by suggestions 

that they should do so. In their world, everyone appears to take it for granted that products are 

designed to serve no economic purpose except to make the firm money, customers who can‟t 

look out for their own interests are simply sheep waiting to be shorn, and the only obligation is to 

maximize firm profits. 

The indifference to consequences for customers exhibited in the Permanent 

Subcommittee‟s hearing is not a new or rare phenomenon. Similar conduct was on display as far 

back as the early 1990s, when Bankers Trust took supposedly “sophisticated” institutional 

investors, such as Gibson Greeting, Inc. and Procter & Gamble, to the cleaners selling them risky 

interest rate swaps based on complex mathematical formulas the customers clearly did not 
4

understand. And the history of the over-the-counter derivatives market is littered with all too 

many similar examples, from Orange County, California in the 1990s to school districts and 

municipalities all across the country in the past decade. What comes through in accounts of 

these events over the years is not just that customers clearly lacked the financial knowledge and 

sophistication needed to assess the deals, but that the dealers fully recognized and intentionally 

exploited their lack of understanding. In his 2003 book Infectious Greed, for example, Frank 

Partnoy offers the following illustration of the culture at Bankers Trust:

As one former managing director put it, “Guys started making jokes on the 

trading floor about how they were hammering the customers. They were giving 

each other high fives. A junior person would turn to his senior guy and say, „I can 

get [this customer] for all these points.‟ The senior guys would say, „Yeah, ream 

him.‟”3

When the Senate Permanent Subcommittee on Investigations held its hearings last year

on the role of investment banks in the financial crisis, little appeared to have changed. Among 

other things, the hearing highlighted the practices at Goldman and other investment banks that 

created “a conflict between the firm‟s proprietary interests and the interests of its clients” by 

trading “billions of dollars in mortgage related assets for the benefit of the firm without 

disclosing its proprietary positions to clients.”4 Particularly revealing was the description of 

Goldman Sachs‟ actions as it sought to reduce its own exposure to and then bet against a 

mortgage market it viewed as headed for serious trouble. 

According to Subcommittee documents, Goldman began in late 2006 to instruct its sales 

force to sell mortgage-backed securities and CDOs “containing or referencing high risk assets 

that Goldman Sachs wanted to get off its books.”5 Various emails among Goldman employees 

refer to the investments “as a way to distribute junk that nobody was dumb enough to take first 

time around,” and they refer to certain clients as “too smart to buy this junk.”6The implication, 

of course, is that there were other clients who weren‟t as smart. One Goldman employee 

describes the “real bad feeling across European sales about some of the trades we did with 

clients,” trades that had cost clients more than $1 billion in losses on just five deals. Adding to 

the resentment in the latter case, the team did not feel it had been adequately rewarded “for 

getting this business done” considering all the money it “ended making/saving the firm.”7In 

other words, Goldman and other investment banks weren‟t simply passively agreeing to act as 

counterparties in these trades, they were aggressively pushing deals that they had reason to 

believe would be harmful to their customers‟ interests.

 

3

Frank Partnoy, Infectious Greed, How Deceit and Risk Corrupted the Financial Markets, Henry Holt and 

Company (New York), 2003, p. 55, citing Brett D. Fromson, “Guess What? The Loss is Now ... $20 Million: How 

Bankers Trust Sold Gibson Greetings a Disaster,” Washington Post, June 11, 1995, p. A1.

4 U.S. Senate Permanent Subcommittee on Investigations Press Release, “Senate Subcommittee Holds Fourth 

Hearing on Wall Street and the Financial Crisis: The Role of Investment Banks,” April 26, 2010.

5 Chris V. Nicholson, “Deal Book: The Goldman Emails, or How to Sell Junk,” The New York Times, April 28, 

2010.

6

Ibid.

7

Ibid.
5

While the Permanent Subcommittee hearings and related media coverage were very 

much on members‟ minds as they drafted the business conduct provisions of the act, they were 

also influenced by accounts of a different form of abusive conduct in the swaps market. In this 

case, the victims were municipalities, sewer districts, and school districts throughout the country 

that were sold complex financial transactions, purportedly to lower their interest rates, but which 

exposed them to risks far greater than those they sought to hedge. As described in several New 

York Times accounts, these small time players were “ensnared in the derivatives mess” because 

of municipal swaps that blew up when the credit markets collapsed.8 Even before that collapse, 

however, the U.S. Justice Department had reportedly launched a criminal investigation looking 

at whether J.P. Morgan and others conspired to overcharge governments on “swaptions.”9 And a 

number of government bodies had filed lawsuits challenging excessive fees and other features of 

the transactions.10 In November 2009, Pennsylvania‟s Auditor General issued a report that 

called for a ban on the use of interest rate swaps and other derivatives by local government units 

and municipal authorities.11

The most notorious such case involved the Commission‟s own probe into J.P. Morgan 

Chase & Co.‟s sale of derivatives to Jefferson County, Alabama to finance a new sewer system. 

In November of 2009, the bank agreed to a $722 million settlement that required it to pay a fine 

of $25 million, to pay $50 million to the county to assist displaced county employees, residents, 

and sewer ratepayers, and to cancel $647 million in fees it had charged the county to unwind the 

derivatives transactions in question.12 As the Commission well knows, the charges that were 

settled involved pay-to-play allegations and millions in bribes that landed one county official in 

jail. Bad as the bribery and corruption were, however, the real scandal is the underlying conduct, 

in which J.P. Morgan sold the county billions of dollars of derivatives that profited J.P. Morgan 

handsomely but has brought the county to the brink of bankruptcy. 

Over the course of the sewer financing project, Jefferson County reportedly did 23 swap 

deals, leaving it at one point with more outstanding swaps than New York City.13 In 2008, 

however, a series of penalties built into the swaps deals began to kick in, including one related to 

failed insurance on the deal that forced the county to pay off $800 million of its debt in four 

years instead of 40. As a result, the annual payment on Jefferson County‟s debt jumped from 

$53 million in 2008 to $636 million in 2009. There were other problems with the swaps, 

including a mismatch in interest rates paid that left the county getting lower payments from J.P. 

Morgan than it was forced to pay out to bondholders. When the county was unable to make its 

swap payment to J.P. Morgan, the bank cancelled the deal, charging the $647 million termination 

 

8 Gretchen Morgenson, “The Swaps That Swallowed Your Town,” The New York Times, March 2010. See also Don 

Van Natta Jr., “Firm Acted as Tutor in Selling Towns Risky Deals,” The New York Times, April 8, 2009.

9 Naked Capitalism, “JP Morgan Under Criminal Investigation for Jefferson County, Other Swaps,” Oct. 29, 2008, 

quoting a Bloomberg article.

10 Ibid.

11 Jack Wagner, Auditor General, “A Special Investigation of the Bethlehem Area School District, 

Lehigh/Northampton Counties: A Case Study of the Use of Qualified Interest Rate Management Agreements 

(“Swaps”) by Local Government Units in Pennsylvania, With Recommendations,” November 2009.

12 Securities and Exchange Commission, “J.P. Morgan Settles SEC Charges in Jefferson County, Ala. Illegal 

Payments Scheme,” November 4, 2009.

13 The description in this paragraph comes from an article by Matt Taibbi, “Looting Main Street: How the nation‟s 

biggest banks are ripping of American cities with the same predatory deals that brought down Greece,” Rolling 

Stone, March 31, 2010. 
6

fee that it was ultimately required by the SEC settlement to relinquish. But prior to passage of 

Dodd-Frank, that underlying conduct was not illegal and, absent strong business conduct rules, it 

is unlikely to be eradicated.

Cases such as these have a very direct and painful impact on taxpayers and pension 

recipients and endowments that fall victim. Jefferson County, for example, has seen its credit 

rating slashed. It has laid off workers, increased sewer bills by more than 400 percent, and it is 

still weighted down with billions in debt that will either force the county into bankruptcy or 

require county taxpayers to continue paying off the debt for decades to come. As journalist Matt 

Taibbi concludes in his account of the fiasco:

The destruction of Jefferson County reveals the basic battle plan of these modern 

barbarians, the way that banks like JP Morgan and Goldman Sachs have 

systematically set out to pillage towns and cities from Pittsburgh to Athens. 

These guys aren‟t number-crunching whizzes making smart investments; what 

they do is find suckers in some municipal-finance department, corner them in 

complex lose-lose deals and flay them alive. In a complete subversion of freemarket principles, they take no risk, score deals based on political influence rather 

than competition, keep consumers in the dark – and walk away with big money. 14

Econned author Yves Smith, writing in a blog about another deal involving J.P. Morgan, 

makes a similar point. Working from an account in a Bloomberg article, she notes that, if 

correctly described, “this looks like a deal almost certain to have turned out badly for the 

county.” “This is not at all uncommon for OTC derivatives,” she added, “where even if the 

transaction in theory has merit, the fees charged are so high as to make the deal uneconomical to 

the client. But clients almost universally lack the skills to properly model the deal to figure this 

out. Most deals don‟t blow up as spectacularly as this one did, so most clients never figure out 

they were had.”15

It is against this back-drop of widespread swap dealer abuses targeting everyone from 

tiny school districts to giant international banks that Congress drafted and adopted provisions as 

part of the Dodd-Frank Act granting the SEC and CFTC broad authority to adopt business 

conduct rules for swaps dealers and major swaps participants. Since the legislation was adopted, 

additional details have come to light that add urgency to the call for strong implementing 

regulations. A recent New York Times article by Pulitzer Prize winning financial writer Gretchen 

Morgenson, for example, describes the role that Wall Street has played in the worsening 

financial problems of municipalities around the nation.16 Drawing in part on testimony from a 

recent Commission hearing on municipal securities, the articles describes Wall Street‟s 

“multibillion-dollar hidden tax on Main Street” in the form of hidden and excessive fees in the 

interest rate swaps peddled to municipalities and other borrowers seeking to exchange variable-

 

14 Ibid.

15 Yves Smith, “JP Morgan Under Criminal Investigation for Jefferson Country, Other Swaps,” Naked Capitalism

blog, Oct. 29, 2008, available at: http://www.nakedcapitalism.com/2008/10/jp-morgan-under-criminalinvestigation.html. 

16 Gretchen Morgenson, “Wall Street‟s Tax on Main Street,” The New York Times, August 6, 2011 available at: 

http://www.nytimes.com/2011/08/07/business/wall-streets-tax-on-main-street.html?_r=1&emc=eta1. 
7

rate debt for fixed-rate obligations. One expert testified that the deals, which are lucrative for the 

banks but poorly understood by many issuers, have cost taxpayers $20 billion over the last five 

years alone.

The article describes a variety of features that make the interest rate swaps attractive for 

banks but costly for users: 

 The lack of a central market which leaves costs “shrouded in secrecy” and allows for 

significant hidden mark-ups;

 Agreements that force borrowers who want to unwind the deals to go back to the bank 

that created them, putting those borrowers at a disadvantage;

 Onerous costs of unwinding the deals that are unjustified based on the risks; 

 Generous bonuses for salespeople that create incentives to push the swaps;

 A tendency by cities and counties to view the dealer selling the swaps as a financial 

adviser;

 The fact that the deals are considered to be exempt from FINRA fair practice rules, such 

as rules prohibiting excessive mark-ups; and

 A widespread willingness to take advantage of customers‟ lack of sophistication to profit 

at their expense.

It is with these sorts of abuses in mind that the Commission should fashion the rules to 

implement those standards. To effectively eliminate potential abuses, the rules must:

 Apply broadly, scaling the rules and conduct standard to match the degree of reliance by 

the counterparty on the SBS Entity;

 Impose an obligation to make suitable recommendation any time the swap dealer 

recommends a swap, particularly a customized swap;

 Require adequate transparency to ensure that the other party to the transaction can fully 

understand the characteristics, including in particular the costs and risks, associated with 

any transaction;

 Require that the full range of conflicts of interest between the swap dealer and 

counterparty are fully disclosed and clearly explained;

 Provide additional protections, including by imposing a best interest standard, where the 

swap dealer offers or enters into a swap with a “special entity” or other particularly 

unsophisticated counterparty; and
8

 Require sufficient documentation to enable the Commission to easily determine 

compliance with the business conduct rules.

As measured against this set of principles, virtually every aspect of the Commission proposal is 

seriously flawed. Unless the rules are extensively revised, they will do little or nothing to end 

these pervasive abuses. Our detailed responses to the Commission‟s request for comment 

follow.

II. Approach to Drafting the Proposed Rules

Before launching into its rule proposal, the Commission provides some introductory 

comments on its general approach to drafting the proposed rules. This section responds to this 

discussion.

A. SRO Rules as a Potential Point of Reference

The Commission appropriately suggests that business conduct rules adopted by selfregulatory organizations can provide a useful point of reference for the Commission as it adopts 

business conduct rules for SBS Entities. We agree. To the extent that other regulatory entities 

have already thought through and dealt effectively with the issues raised with regard to business 

conduct rules for swap dealers and major swap participants, there is every reason to take 

advantage of that experience. We are concerned, however, that in its discussion of this approach, 

the Commission does not appear even to contemplate that it might be necessary to go beyond 

existing standards in certain areas. It would have been appropriate, for example, for the 

Commission to note the need to reexamine the adequacy of business conduct rules that proved 

ineffective in preventing many of the abuses that led to the financial crisis. In particular, the 

Commission could and should have drawn attention to the fact that the scale of potential profits 

in the derivatives market creates conflicts of interest that dwarf those in the retail securities 

markets. Similarly, the Commission could and should have made the point that the potential 

harm to the overall economy from abusive practices in the swaps market is far greater than it is 

for most traditional securities transactions. That fact was made all too clear in the recent 

financial crisis which, according to the Financial Crisis Inquiry Commission, erased $11 billion 

in household wealth and caused extensive additional harm to businesses “large and small.”17

Thus, a strong case can be made for adopting a more stringent set of business conduct 

rules in certain areas, but the Commission fails to make it. Instead, the only reason the 

Commission cites for possibly diverging from existing SRO standards is the institutional nature 

of the swap market. By ignoring the factors that would justify issuing stronger standards, and 

citing extensive reasons for not diverging from existing standards, the Commission risks 

undermining its ability to take the effective action needed to address serious and pervasive 

abuses. At a time when the industry has made no secret of its intention to challenge agency 

actions in court, the Commission must do a better job of explaining the public interest rationale 

for adopting the strongest possible set of reforms. Unfortunately, the timidity the Commission 

 

17 Financial Crisis Inquiry Commission, The Financial Crisis Inquiry Report: Final Report of the National 

Commission on the Causes of the Financial and Economic Crisis in the United States, January 2011.
9

shows in arguing for strengthened standards is also reflected throughout the rule proposals 

themselves, as discussed in greater detail below. 

B. Business Conduct Rules Not Expressly Addressed by the Dodd-Frank Act

Dodd-Frank grants the Commission broad authority to adopt business conduct rules “as 

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

purposes of the Exchange Act.” Indeed, the statute states not only that the Commission “may” 

adopt such additional requirements, but that it “shall” do so. This suggests that Congress 

intended to identify certain key components that would be included in the business conduct rules 

but fully expected the Commission to expand on those requirements with a goal of creating a 

comprehensive business conduct regulatory regime. The Commission is therefore clearly within 

its authority to adopt business conduct rules not specified in the statute, and the three areas it has 

identified – know your counterparty, suitability, and pay-to-play – are all appropriate areas for 

the Commission to exercise this authority. All are consistent with the principles of Dodd-Frank. 

All meet the test of promoting the public interest, the protection of investors, and the purposes of 

the Exchange Act. Most importantly, all are directly responsive to abusive practices identified in 

this market.

C. Differences between SBS Dealers and Major SBS Participants

We agree that it may be appropriate, in light of their somewhat different roles, to adopt 

different approaches to rules governing SBS Dealers and Major SBS Participants in certain areas. 

We are concerned, however, that the Commission approach to determining when this should be 

the case is not appropriate. The approach should not depend on whether the statute expressly 

directs that the rule apply to major swap participants. The determining factor should be whether 

major swap participants are likely to be engaged in conduct that would appropriately be 

regulated under the relevant standard. Absent an affirmative reason to adopt a different approach 

for SBS Dealers and Major SBS Participants, the Commission should seek to promote 

consistency and adopt uniformly strong rules. 

D. Treatment of Special Entities

In discussing the rule provisions related to “special entities,” the Commission indicates 

that its goal was to strike a balance between enhancing protections and preserving access to the 

derivatives markets for these entities. That is appropriate, as far as it goes, but it ignores or 

misinterprets the legislative history behind these proposals. The provisions regarding special 

entities reflected Congress‟s outraged response to evidence of derivatives dealers‟ callous 

disregard for the well-being of their customers and cynical willingness to profit at the expense of 

the least sophisticated among these customers. This willingness to take advantage of less 

sophisticated market participants had resulted in devastating harm to communities throughout the 

nation. Congress‟s initial response was to propose that a full-fledged ERISA-style fiduciary duty 

be applied to all transactions between swaps dealers and special entities. It was in this context 

that concern about preserving access to the derivatives market was raised, since this approach 

arguably would have prevented swaps dealers from both making recommendations and acting as 

counterparties. Ultimately, a compromise was drafted that sought to impose a less restrictive 
10

“best interest” standard on swaps dealers when they recommended swaps to special entities

while preserving their ability to act as counterparties in such transactions. 

In adopting rules to implement this section of the legislation, the Commission should 

respect congressional intent to provide the strongest protections possible for these special entities 

consistent with preserving their access to derivatives markets. In keeping with this goal, the 

rules should be designed to put a stop to abusive practices that prey on special entities‟ lack of 

sophistication. Current practices, in which derivatives dealers have lured these unsophisticated 

players into the derivatives markets when they would have been better served by more traditional 

debt instruments, should be eradicated. As should the practice of recommending products to 

hedge risks that actually expose the special entities to risks that are greater than those they are 

hedging. Recommending customized swaps when the special entity would be better off in a 

standardized swap should also be eliminated. In other words, the goal is not to preserve access 

to these markets on the same terms that access exists today, but to preserve access to these 

markets when it is in the best interests of the special entity to do so and on terms that promote 

their interests.

Unfortunately, the Commission has taken the opposite approach, giving far greater 

priority to preserving unrestricted market access than it has to enhancing protections for special 

entities. Under the approach proposed by the Commission, SBS Dealers would be free to require 

special entities to sign away their right to best interest recommendations as a condition of 

participating in the markets. We have no doubt that they would do so. When this occurs, special 

entities would have as their only defense advice from an “independent” representative who, 

under the Commission definition of independence, could be completely financially beholden to

the SBS industry. It is not even entirely clear from the discussion in the proposing Release that 

the Commission interprets the best interest standard as imposing obligations beyond making 

suitable recommendations. Under the circumstances, it is hard to see how the proposed rules 

will deliver any significant new protections for special entities. 

III. Comment on Proposed Rules

This section of our letter deals with specific aspects of the proposed rules in the order 

they are raised in the Commission‟s proposing release. We address most but not all of the issues 

on which the Commission requests comment. Our comments are informed by our direct and 

detailed involvement in the congressional negotiations over this section of the legislation. In 

addition, because we believe market participants are best served by uniform rules (so long as 

they are uniformly strong and not uniformly weak), we make frequent reference to the CFTC‟s 

proposals to address the same issues. 

A. Scope: Proposed Rule 15Fh-1 

Getting the scope of the rules right is an essential first step in designing an effective 

business conduct rule regime. Unfortunately, the SEC falls somewhat short in this regard then 

threatens to exacerbate this problem by requesting comment on several approaches that would 

completely undermine the rules‟ effectiveness. We therefore urge the SEC to expand its 

interpretation of the rules‟ scope as described below and to reject approaches that would allow 
11

counterparties to opt out of enhanced protections, that would elevate procedures over results in 

determining compliance with the rules, or that would permit SBS Entities to rely on counterparty 

representations they have no reason to believe are true. 

Scope: The CFTC makes clear in its proposal that the business conduct standards would 

apply to swaps that are offered as well as those that are entered into. The SEC proposal indicates 

these rules would apply “in connection with entering into security-based swaps.” As we stated in 

our letter to the CFTC: “For the business conduct rules to provide meaningful protections, they 

must apply from the outset of any discussions between the swap dealer or major swap participant 

and the potential counterparty about a particular transaction or trading strategy. That can only 

occur if, as the Commission has proposed, the rules apply to offers to enter into swaps and 

discussions with prospective counterparties as well as to transactions that are actually 

consummated.” There is no good policy reason to exempt offers to enter into swaps from the 

rules, and there is a strong policy reason to ensure that the two agencies‟ rules don‟t diverge on 

this basic issue of scope. We therefore urge the Commission to amend its rule to conform to the 

approach adopted by the CFTC. On the other hand, the SEC proposal makes clear, in a way that 

the CFTC proposal does not, that the requirements would “continue to apply, as appropriate, 

over the term of executed security-based swaps.” While we believe the on-going obligation is 

implied under the CFTC approach, it would nonetheless be beneficial for the CFTC to clarify 

that this is its intent.

Opt Out: The Commission requests comment on whether certain counterparties subject to 

enhanced protections should be allowed to “opt out” of those additional protections. We 

strongly oppose this approach. As derivatives expert Richard Bookstaber noted in testimony 

before the Senate Agriculture Committee, counterparties‟ motives for turning to the derivatives 

market are not always entirely pure. “Derivatives have been used to solve various non-economic 

problems, basically helping institutions game the system” by hiding risk-taking activities, for 

example, or taking exposures not permitted by a particular investment charter. “These noneconomic objectives are best accomplished by designing derivatives that are complex and 

opaque, so that the gaming of the system is not readily apparent,” he explained. 18 A high-profile 

recent example can be found in the derivative contracts that allowed Greece to hide its level of 

indebtedness until the problem was so severe it could no longer be obscured. Allowing 

counterparties to opt out of special protections under business conduct rules could encourage 

collusion between them and swaps dealers to promote these questionable practices. On the other 

hand, a theoretically optional opt out would likely become mandatory in reality as swap dealers 

would almost certainly make it a condition of doing business with counterparties subject to 

enhanced protections. In short, this opt out approach could be used to perpetuate the very abuses 

the legislation was enacted to prevent. 

That does not mean that the rules should apply, or apply equally, in every situation. 

Rather, they should be designed to be scalable, based on the degree of reliance in the 

counterparty relationship. This would provide necessary flexibility in applying the rules without 

creating a means for circumventing them entirely. The discussion in the CFTC rule proposal

offers a good model for this approach. The CFTC specifies, for example, that the rules would 

 

18 Testimony of Richard Bookstaber before the Senate Committee on Agriculture, Nutrition and Forestry, 

“Regulatory Reform and the Derivatives Markets,” June 4, 2009.
12

have the most applicability “when swap dealers and major swap participants have a pre-trade 

relationship with their counterparty, where that relationship includes discussion and negotiations 

that would allow a swap dealer or major swap participant to make appropriate disclosures and 

conduct due diligence.” On the other hand, transactions initiated on a designated contract market 

(DCM) or swap execution facility (SEF) where the swap dealer or major swap participant does 

not know the counterparty‟s identity prior to execution and transactions where both parties to the 

deal are swap dealers or major swap participants would largely be exempt. In the first instance, 

the exemption is justified because there can, by definition, be no reliance by one party on the 

recommendations of the other in an anonymous transaction. In the second instance, where both 

parties are market professionals, both should have the sophistication and expertise to look out for 

their own interests that other market participants often lack. 

Policies and Procedures: The Commission also requests comment on whether an SBS 

Entity should be deemed to have complied with the requirements of the rules if it: 1) has 

established and maintained written policies and procedures, and a documented system for 

applying those policies and procedures, that are reasonably designed to achieve compliance with 

the requirement; and 2) has reasonably discharged the duties and obligations required by the 

written policies and procedures and documented system and did not have a reasonable basis to 

believe that the written policies and procedures and documented system were not being followed. 

We strongly oppose this approach, which puts process over results in measuring compliance with 

business conduct rules. That said, it is certainly appropriate for the Commission to require SBS 

Entities to establish, maintain, document and enforce policies and procedures reasonably 

designed to achieve compliance with business conduct rules. In addition, it would be appropriate 

for the Commission to take that into account in determining the appropriate sanction for 

violations. But the requirement regarding policies and procedures should supplement the 

requirements or prohibitions in the rules, not supplant them. Under no circumstances should the 

Commission provide what amounts to a safe harbor from sanctions based on the existence of 

compliance policies and procedures. 

Counterparty Representations: Having proposed an approach that allows SBS Entities to 

rely on counterparty representations absent special circumstances, the Commission requests 

comment on when it would no longer be appropriate for an SBS Entity to rely on counterparty 

representations without further inquiry. It offers two alternative approaches. The first would 

allow the SBS Entity to rely on a counterparty representation unless it knows the representation 

is not accurate. We are frankly appalled that the Commission would even propose for comment 

an approach that would allow SBS Entities to rely without further inquiry on representations they 

have reason to believe, but do not affirmatively know, are not accurate. Such an approach would 

encourage a cynical disregard for the rules and, where counterparties are seeking to use 

derivatives to evade legal or other restrictions, promote the kind of collusion between swap 

dealers and counterparties described above. The second approach, which would allow SBS 

Entities to rely without further inquiry on counterparty representations unless it has information 

that would cause a reasonable person to question the accuracy of the representation, is only 

slightly better. It encourages a see-no-evil approach that is likely to be ineffective in preventing 

abuses. 
13

While we believe it is appropriate for the Commission to adopt a standard addressing the 

circumstances in which it is appropriate for SBS Entities to rely on counterparty representations 

to establish compliance with the proposed rules, neither of the two proposed approaches is 

satisfactory. Instead, the Commission should adopt the approach proposed by the CFTC, which 

would require that the swap entity have a reasonable basis for believing the representations are 

reliable in light of the particular facts and circumstances of the relationship and the context of the 

particular transaction. Importantly, the CFTC proposal would also require that the 

representations be sufficiently detailed to allow such an assessment. As such, and if subject to 

appropriate documentation and record retention requirements, the CFTC proposed approach 

should provide an adequate basis for regulators to enforce compliance without being unduly 

prescriptive in laying out the means of compliance. It should serve as a model for the SEC, both 

because of the benefits of uniformity of approach and because it would promote market integrity 

in a way that the two options under consideration by the SEC would not.

B. Definitions: Proposed Rule 15Fh-2 

This section of the proposed rules includes definitions of key terms that are crucial to 

determining the rules‟ effectiveness, particularly with regard to the protections provided special 

entities. Unfortunately, the definitions of “act as an advisor” and “independent representative of 

a special entity” are so weak that the rules, as proposed, would afford no meaningful new 

protections to these most vulnerable of swap market participants. (Our discussion of those 

definitions is included below as part of our overall discussion of the rules related to special 

entities.) In addition, because the definitions of SBS Dealer and Major SBS Participant fail to 

include all those who act on behalf of these entities, they risk providing a means to evade the 

rules‟ restrictions. 

Associated Persons: The Commission proposes to include, where relevant, associated 

persons within the definition of SBS Dealer and Major SBS Participant. In contrast, the CFTC 

proposes to include not just associated persons but also all those acting on behalf of the swap 

dealer or major swap participant, including but not limited to associated persons. This broader 

approach proposed by the CFTC should help to ensure that swap entities will not be able to 

evade the business conduct rules by doing through third parties what they would not be permitted 

to do directly. We strongly urge the Commission to adopt this approach, both for the sake of 

promoting uniformity between SEC and CFTC rules and because the CFTC approach is likely to 

be more effective than the narrower SEC proposal in promoting market integrity. On the other 

hand, we do not believe the Commission should seek to identify all of the requirements that 

would apply to an associated person of an SBS Entity. Such an approach risks creating 

loopholes that would subvert compliance. Instead, the rules should apply in any circumstance 

where the SBS Dealer or Major SBS Participant acts through or by means of that associated 

person or other party. If, on the other hand, the Commission decides it would be appropriate to 

identify specific rules that apply to associated persons, it should make clear that any such list is 

not intended to be exclusive and that rules might apply in other instances, depending on the 

circumstances.
14

C. Business Conduct Requirements: Proposed Rule 15Fh-3 

1. Counterparty Status

The CFTC proposed a sound and reasonable approach to verification of counterparty 

eligibility. In the interest of uniformity and because the CFTC proposal is superior in several 

areas, we urge the Commission to revise its proposal to more closely resemble the approach 

proposed by the CFTC. In addition to being more clearly written than the comparable 

Commission proposal, the CFTC proposal imposes the counterparty verification obligation in 

any transaction other than those which are both initiated on a swap execution facility and in 

which the swap entity does not know the identity of the counterparty prior to the transaction. 

Thus, even transactions executed on a SEF would be covered if the identity of the counterparty is 

known in advance, as would any transaction not conducted on a SEF. Moreover, the CFTC 

proposal requires the verification to occur before offering to enter into or entering into a swap 

with that counterparty. As part of its verification obligation, the swap dealer or major swap 

participant would have an affirmative obligation to determine whether the counterparty is a 

Special Entity, with that verification also occurring before the offer to enter into a transaction. 

In contrast, the Commission proposal is written to exempt any transaction that occurs on 

a registered national securities exchange or registered security-based swap execution facility, 

regardless of whether the identity of the counterparty is known in advance of the transaction, and 

to exempt any transaction in which the identity of the counterparty is unknown, regardless of 

where the transaction occurs. The obligation to verify whether the counterparty is a Special 

Entity is similarly limited to circumstances in which the identity of the counterparty is known. 

Finally, the Commission proposal requires verification to occur before execution but not before 

the offer to enter into the transaction. 

The Commission justifies exempting transactions on exchanges and SEFs from the 

counterparty verification requirement because related rules hold these execution facilities 

responsible for limiting access to eligible counterparties. That is reasonable, with one caveat. 

Execution facilities may not have perfect compliance in this regard. We would therefore urge 

the Commission to alter its proposal to make clear that, where the SBS Entity knows the identity 

of the counterparty prior to the transaction and has reason to believe it may not be an eligible 

counterparty, it would have an obligation to undertake an additional inquiry to verify 

counterparty eligibility. 

More importantly, we oppose exempting any transactions that are not conducted on a

registered exchange or swap execution facility from the verification requirement. We cannot 

imagine a circumstance in which the identity of the counterparty would not be known in such 

transactions; certainly it would not be possible to satisfy know-your-counterparty and suitability 

obligations without knowing the identity of the counterparty. Providing an exemption seems to 

invite the creation of a mechanism to permit anonymous off-exchange transactions, particularly 

if the pay-off is avoidance of the obligations owed to Special Entities. It can serve no beneficial 

purpose. 
15

We also prefer the wording of the CFTC proposal with regard to timing before the offer 

to enter into the transaction over the Commission‟s pre-execution approach. Certainly, the 

verification can come no later than that allowed for in the Commission proposal. The 

Commission suggests that pre-execution verification is “important.” We believe it is not just

important, but absolutely essential. In particular, requiring verification of the counterparty‟s 

Special Entity status as soon as possible is necessary to ensure timely compliance with the other 

obligations that accompany transactions with these entities.

Finally, while we believe it is appropriate to allow reliance on written representations to 

satisfy compliance with this requirement, neither of the two alternatives proposed by the 

Commission is adequate. Indeed, the first alternative is shockingly weak and should not even 

have been proposed. It would invite the creation of a SBS market equivalent of the mortgage 

market‟s “liar loans.” Instead, the Commission should adopt the approach proposed by the CFTC 

but with one addition; the Commission should clarify that the SBS Entity is required to 

document the basis on which it reached its conclusion, to do so in sufficient detail to allow a 

third-party to evaluate the validity of the conclusion, and to make those records available for 

Commission inspection. This approach would enable the Commission to provide effective 

enforcement of the requirement in a way that neither of the Commission‟s two proposed 

alternatives would do. Moreover, this requirement should impose minimal if any additional 

compliance costs, since it is difficult to imagine that SBS Entities could satisfy their know your 

counterparty obligations without obtaining information that would enable them to verify 

eligibility and Special Entity status at the same time.

2. Disclosure

Getting the disclosures right is central to preventing the types of abuses that prompted 

Congress to provide the Commission with such broad authority to set business conduct 

standards. Although the swaps market is theoretically closed to all but sophisticated parties, the 

reality is that the complexity and opacity of these transactions has made old notions of financial 

sophistication obsolete. All too often, corporations and government entities alike have failed to 

understand the magnitude of the risks they were taking on – a particularly egregious failing in a 

market the most important and valuable function of which is to help counterparties hedge risks. 

For disclosures to be effective, they must meet three essential requirements: they must provide 

the information the counterparty needs, in an accessible form, at a time when it can influence the 

decision-making process. 

When we commented on the CFTC‟s proposal, we expressed strong overall support for 

that agency‟s approach to disclosure. In particular, we praised the CFTC‟s proposal to include 

scenario analysis as part of the required risk disclosures while urging the agency to strengthen 

that proposal and offering specific suggestions for doing so. Instead of building on the CFTC 

proposal, however, the Commission‟s proposed risk disclosures fall well short, particularly with 

regard to the content of risk disclosures. Moreover, the Commission fails to set any standards 

regarding the manner of that disclosure. As a result, even the modest disclosures required by the 

Commission are likely to be delivered in a form that severely undermines their effectiveness. In 

order to ensure that the disclosures have their intended effect of promoting informed investment 
16

decision-making, the Commission should strengthen this proposal both by setting standards 

governing the manner of disclosure and by expanding the required risk disclosures.

a. Disclosure Not Required When the Counterparty Is an SBS Entity or a Swap Dealer 

or a Major Swap Participant

We agree with the Commission interpretation that Congress intended the swap 

dealer/major swap participant exemption in this section to mirror that provided with regard to 

non-security-based swaps. In discussing the exemption, the Commission also requests comment 

on whether other entities should be exempted or subject to different disclosure requirements. We 

would strongly discourage the Commission from adopting either approach. Any attempt to go 

beyond the statutory exemption to specify different types or amounts of disclosure for different 

types of counterparties risks leaving certain counterparties without adequate warning of risks and 

conflicts. For example, the Commission cites registered broker-dealers or banks as entities that 

might not need the same degree of disclosures. While this may be true of certain more 

sophisticated banks or brokers, it would not necessarily be true of all such entities. Setting 

reduced disclosure requirements that might be acceptable for the most sophisticated entities in 

these categories would thus leave the less sophisticated entities in these categories without 

adequate protections. Under the circumstances, the Commission should err on the side of 

promoting transparency by avoiding additional exemptions or disclosure disparities. 

b. Timing and Manner of Certain Disclosures

Timing: The Commission appropriately proposes to require that disclosures of material 

risks and characteristics, material incentives and conflicts of interests, and clearing rights be 

presented before entry into a security-based swap. However, unlike the CFTC proposal, the 

Commission does not specify that the disclosures should come at “a reasonably sufficient” time 

prior to the transaction to enable the counterparty to consider these factors in evaluating the 

transaction. As a result, nothing in the current formulation of the rule would prevent the 

disclosures from being provided immediately prior to execution without adequate time for the 

counterparty to carefully evaluate the information provided. We urge the Commission to make 

clear that these disclosures must be provided at the earliest possible point in the transaction and 

not delayed until the point of execution.

Manner: The Commission proposes that disclosures regarding material risks and 

characteristics and material incentives or conflicts of interest be made “in a manner reasonably 

designed to allow the counterparty to assess” the information being provided. However, it sets 

no standards to ensure that this is the case. Worse, it blesses disclosure methods, including oral 

disclosures, that clearly do not satisfy the goal of promoting pre-transaction transparency and 

that will make the disclosure rules far more difficult, if not impossible, to enforce. This 

approach is an open invitation to SBS Entities to manipulate and abuse the system. Moreover, 

this approach doesn‟t even have the benefit of saving labor, since the Commission proposes to 

require after-the-fact written disclosures of any information not made in writing prior to the 

transaction. Indeed, the only recommendation of this approach appears to be to change as little as 

possible about the way the industry conducts its business, precisely the opposite of what 

Congress intended when granting the Commission broad authority to reform business conduct.
17

It is perfectly reasonable to allow flexibility with regard to the manner of disclosure so 

long as the manner in question is “reasonably designed to allow the counterparty to assess” the 

information. Oral disclosures with regard to potentially complex issues of risk do not meet that 

test. Nor is it appropriate to allow oral disclosures of conflicts, which may permit the SBS Entity 

to present the information in a way that glosses over the magnitude or extent of those conflicts, at 

least until after the transaction is completed and fuller written disclosures are provided. On the 

other hand, various forms of written disclosure – whether in email or by way of electronic 

platforms, for example – should provide both for adequate and timely review on the part of the 

counterparty and a verifiable record of disclosure for the purposes of enforcement if they are 

provided well in advance of the transaction. 

To sum up, the Commission should revise its proposal to ensure that disclosures are 

provided in writing at the earliest possible point in advance of the transaction. If, ignoring our 

strong recommendation, the Commission does not adopt these changes for all counterparties, it 

must at the very least adopt them for transactions with special entities. After all, a key 

component of any best interest standard should be full and fair disclosure of all material 

information, including information about conflicts of interest. As drafted, the Commission 

disclosure rules do not meet that standard.

c. Material Risks and Characteristics of the Security-Based Swap

Material Risks: The Commission‟s proposal with regard to disclosure of material risks of 

security-based swaps is good as far as it goes, but it does not go far enough. Specifically, if these 

requirements are effectively implemented, counterparties should benefit from disclosures 

regarding the material factors that influence the day-to-day changes in valuation, the factors or 

events that might lead to significant losses, the sensitivities of the security-based swap to those 

factors and conditions, and the approximate magnitude of the gains or losses the security-based 

swap will experience under specified circumstances. Indeed, we specifically suggested that the 

CFTC incorporate several of these factors into its required scenario analysis in order to provide a 

better description of risks. We appreciate that the Commission has heeded that request and 

incorporated them here and has specified that the disclosures must be “particular” to the 

transaction at hand. However, because the Commission fails to require the full-fledged scenario 

analysis required under the CFTC proposal, SBS Entities may seek to take advantage of this gap 

by providing boilerplate disclosures that offer minimal benefit to counterparties. 

Moreover, the Commission proposal fails to clearly require disclosure of other issues, 

with regard to liquidity, for example, that clearly constitute material risks of swaps. While the 

Commission discusses liquidity risk in the test of the proposing Release, it does not include it on 

the list of factors SBS Entities would be required to disclose. Similarly, the Release directs SBS 

Entities to “consider the unique risks and characteristics associated with a particular securitybased swap, class of security-based swap or trading venue, and tailor their disclosures 

accordingly.” It also directs the SBS Entity to consider “risks that may be associated specifically 

with uncleared security-based swaps,” such as the absence of a credit support agreement. 

However, none of these issues are addressed in the proposed rule itself, even by category. In 

order to ensure that the rule is implemented in a way that is consistent with apparent Commission 
18

intent, the Commission should clarify and expand the rule proposal to address these gaps. It may 

also be appropriate for the Commission to provide additional guidance at the time the rule is 

finalized. Absent that greater clarity, the Commission may find it difficult to enforce the 

disclosure requirements in a manner that promotes robust disclosure. 

Furthermore, for risk disclosures to be effective, they must be designed to enable the 

counterparty to assess relative risks and costs. This is particularly important for 

recommendations of customized swaps. For example, because of the higher fees they are able to 

charge, dealers have an incentive to recommend hedges that are customized to be very precise. 

That degree of customization, however, is also likely to make the swap highly illiquid. For many 

counterparties, the risk adjusted cost of a conventional, listed hedge equivalent may be much 

lower. In such instances, taking on some basis risk may make more sense than taking on the 

illiquidity risk of a less traded swap, particularly considering the relative costs. In order to 

highlight such risks, the rules should explicitly require swap dealers and major swap participants 

that recommend customized swaps to show the alternative and provide an assessment of the 

relative risks and costs of the two approaches. Requiring such disclosures would have the added 

benefit of helping to ensure compliance with proposed suitability and best interest standards 

where the incentive for non-compliance is greatest.

Material Characteristics: The Commission proposal also fails to provide any guidance 

with regard to material characteristics beyond material risks that would have to be disclosed. 

This is a significant oversight. One area in need of improved disclosure involves customized 

swaps that are simply amalgamations of standardized swaps or combinations of standardized 

swaps and other non-swap components, such as a loan. Such amalgamations make it possible for 

dealers to avoid the price transparency that comes with trading standardized swaps on swap 

execution facilities. To combat this practice, which both increases prices to customers and 

subverts the goal of the reform legislation, the required disclosure of material characteristics 

should detail, and separately price, the standardized component parts of any customized swap. 

This should include any imbedded credit for forgone collateral. 

Such disclosures would better enable the counterparty and the swap dealer or major swap 

participant alike to determine whether the counterparty would be better served by a strategy 

using standardized components, a necessary aspect of determining suitability or best interest. 

Requiring such disclosures would also help to deter industry efforts to evade exchange trading 

and clearing requirements through the development of complex customized swaps that provide 

no added utility to the end user and may indeed cost that end user considerably more than they 

would pay to achieve the same result with standardized components.

In addition, the Commission should further clarify that disclosures should clearly identify 

any features of the swap that could disadvantage the counterparty. We are thinking specifically 

of such features as the interest rate mismatch embedded in the Jefferson County swaps, which 

left them making higher interest payments to J.P. Morgan than they were receiving from bond 

holders, as well as penalties that left them exposed to risks much greater than the county could 

reasonably afford to take. Ideally, such practices would be eliminated outright, at least with 

regard to special entities, through strong business conduct standards. But all counterparties, and 

the overall integrity of the market, would benefit from clearer disclosure that elucidate any swap 
19

features that are designed to benefit the swap dealer or major swap participant at the expense of 

the end user. This could be accomplished through disclosures of material characteristics in some 

instances and through disclosure of conflicts of interest in others. 

Master Agreements: The Commission requests comment on whether entry into a master 

agreement and provision of a trade acknowledgement would satisfy the disclosure obligation. 

We strongly oppose this approach, which is highly unlikely to produce the explanatory 

disclosures necessary to truly elucidate key issues related to risks and characteristics of the swap. 

Instead, under such an approach, key information could be lost in the fine print of legal 

documents. As we noted above, the complexity and opacity of these transactions demands that 

disclosures be made in an accessible form. This approach would not meet that standard. Indeed, 

if the current master agreement disclosures were sufficient, Congress would presumably not have 

felt it necessary to call for enhanced disclosures. If the Commission were to pursue this 

approach, over our strong opposition, it would at the very least need to take steps to ensure that 

the disclosures with regard to material risks and characteristics (as well as conflicts of interest 

and incentives) were discussed in a clearly labeled separate narrative incorporated into the 

overall document and that all key issues were disclosed pre-transaction and not in a post-trade 

acknowledgement.

Proprietary Information: The Commission requests comment on whether its proposed 

disclosure requirements might require disclosure of proprietary information. Such complaints 

from industry often serve as a smokescreen to cover more general opposition to increased 

transparency. The Commission should therefore take any such claims with a grain of salt, 

carefully distinguishing between those that raise genuine concerns and those that do not. 

Moreover, if the choice is between requiring disclosure of proprietary information and providing 

adequate warning of risks or other information necessary to enable a counterparty to assess the 

swap, we would hope that the Commission would not dismiss out of hand the notion that 

disclosure might take precedence. After all, disclosures in the context of a bilateral transaction 

would not need to broadcast any proprietary information beyond the parties to the transaction, 

for whom it is directly relevant.

d. Material Incentives or Conflicts of Interest

On the crucial issue of conflict of interest disclosure, the Commission proposes to adopt 

the narrowest possible interpretation of the material incentives and conflicts of interest that SBS 

Entities would be required to disclose. In particular, the Commission proposes to exclude what 

in many instances is likely to be the largest conflict – the differential compensation that SBS 

Entities receive when they recommend swaps. This would include the increased compensation 

they might receive for recommending a customized swap over a comparable exchange-traded 

alternative or recommending a swap rather than a non-swap alternative. As Bookstaber noted in 

his Senate testimony: 

“For the bank, the more complex and custom-made the instrument, the greater the chance 

the bank can price in a profit, for the simple reason that investors will not be able to 
20

readily determine its fair value. And if the bank creates a customized product, then it can 

also charge a higher spread when an investor comes back to trade out of the product.”19

To be effective, then, the conflict disclosures must be designed to elucidate and counteract 

pervasive incentives such as these to use complexity and customization to increase profits at the 

expense of end users. Disclosures that compare the risks and costs of customized swaps with 

those of standardized, listed swaps would be particularly helpful in this regard. It is frankly 

inexcusable that the Commission proposal fails to address this most fundamental of conflicts.

While not perfect, the CFTC proposal at least makes clear that swaps dealers and major 

swaps participants that recommend a swap “would be expected to disclose whether their 

compensation related to the recommended swap would be greater than for another instrument 

with similar economic terms offered by the swap dealer or major swap participant.” In 

commenting on the CFTC proposal, we urged the agency to take this required disclosure a step 

further. Specifically, we urged the agency to clarify that the disclosure would have to relate not 

just to a specific alternative instrument but to an alternative strategy, particularly where the 

recommendation involves a customized swap that is an amalgamation of standardized 

components. That should be the model for the SEC as well.

One area where both proposals need to be strengthened is in requiring more detailed 

disclosure of components that make up the price of a transaction. We urge the Commission to 

require more detailed pricing disclosure, which is both a material characteristic of the swap and, 

depending on how it is structured, may also constitute a material incentive to recommend a 

customized rather than a standardized swap. Among other things, these disclosures should 

require clear, separate pricing of any imbedded credit for forgone collateral.

In addition, both proposals entirely ignore the types of conflicts of interest that came to 

light in both the Senate Permanent Subcommittee hearings and in the SEC‟s case against 

Goldman Sachs. As just one example, the SEC and CFTC should require clear disclosures 

related to the particular conflicts that exist when the swap dealer or major swap participant is 

trying to move a position off its books and the swap it is recommending is part of its strategy to 

do so. Rather than try to enumerate all the types of such conflicts that could exist and require 

disclosure, the Commission should make clear that swap dealers and major swap participants 

must disclose (and not just in boilerplate language) the full range of conflicts and incentives they 

have relevant and particular to a specific recommended transaction, including conflicts and 

incentives that relate not to specific payments but to their overall trading strategy, for example.

e. Clearing Rights

We strongly support the proposal to require disclosure of clearing rights and believe the 

framework the Commission has proposed for providing those disclosures is an appropriate one. 

A major goal of the derivatives title of Dodd-Frank is to encourage central clearing of swaps 

wherever possible. The required disclosures will support that goal. Where the swap in question 

is required to be cleared, the required disclosures would help to ensure that counterparties are 

aware of and have an opportunity to exercise their right to select the clearing agency. More 

 

19 Ibid.
21

importantly, where the swaps are accepted for clearing but not required to be cleared, the 

proposed disclosures would help ensure that counterparties are aware of the availability of 

clearing. Moreover, whether the transaction is subject to central clearing would arguably be a 

material characteristic of the swap that ought to be disclosed. The required disclosures would 

therefore impose little if any additional regulatory burden, since SBS Entities would have to 

know for their own compliance purposes whether the clearing requirement would apply. 

Including information about clearing availability in separately required pre-transaction 

disclosures ought therefore to be a simple matter. To the degree that there is any added burden, 

permitting the counterparty to elect where to clear its swaps on an asset-class-by-asset-class basis 

or for all potential transactions would allow for streamlined compliance in these circumstances. 

If this approach is adopted, we believe it would be appropriate to require that these instructions 

be reaffirmed on at least an annual basis.

3. Know Your Counterparty

“Know your counterparty” requirements are an essential component of an effective 

business conduct rule regime. We therefore support the Commission‟s proposal to adopt such a 

standard. Typically, we think of “know your customer” rules as the first component of a 

suitability or fiduciary standard. In its proposal, however, the Commission has decoupled the 

“know your counterparty” rule from the standards governing recommendations by SBS Dealers 

and acting as an advisor to special entities. Each of those separate provisions of the rule proposal 

includes additional components of a “know your counterparty” rule. (Following the 

Commission‟s organizational lead, we will deal with those provisions within the context of the 

relevant sections rather than doing so here.) As a result, what remains in this category of the rule 

proposal is a much scaled down version of “know your counterparty.” Even acknowledging that 

this section does not represent the proposal‟s last work on the topic, the rule proposal is weaker 

than that put forward by the CFTC. It does not apply to Major SBS Participants, and it does not 

include language requiring the SBS Entity to “use reasonable due diligence” to obtain the 

relevant information.20 

Given how the Commission has decoupled its “know your counterparty” requirement 

from any association with making recommendations or offering advice, it is frankly bewildering 

that the Commission has chosen not to apply at least certain of these requirements to Major SBS 

Participants. Specifically, we believe all SBS Entities should, at a minimum, be required to use 

reasonable due diligence to obtain and retain a record of: (i) facts necessary to comply with 

applicable laws, regulations and rules as well as (ii) facts necessary to effectuate the SBS 

Entity‟s credit and operational risk management policies in connection with transactions entered 

into with such counterparty. 

4. Recommendations by SBS Dealers

We strongly support imposing a suitability obligation on SBS Dealers when they make 

recommendations in connection with a security-based swap or a trading strategy involving 

 

20 On the other hand, requirements contained in the CFTC proposal to “evaluate the previous swaps experience, 

financial wherewithal and flexibility, trading objectives and purposes of the counterparty,” can be dealt with in the 

sections related to making recommendations and acting as an advisor. 
22

security-based swaps. Unfortunately, the approach proposed by the Commission offers the 

promise, but not the reality, of a broad suitability standard. Instead of offering an alternative 

method of compliance that renders the standard meaningless, the Commission should address 

industry concerns about the scope of the obligation by tweaking the definition of 

recommendation to which it applies and providing further guidance on when the obligation 

would be triggered. (We discuss this approach in detail in the section on special entities.) 

As the Commission notes in its proposing Release, “the obligation to make only suitable 

recommendations is a core business conduct requirement” for broker-dealers and other market 

professionals. Imposing a suitability obligation on swap recommendations is also directly 

responsive to the concerns raised by members of Congress, many of whom expressed shock at 

the degree to which investment banks had been willing to subvert the interests of their customers 

in order to maximize their own profits. Supplementing disclosure requirements with an 

obligation to make only suitable recommendations has the potential to greatly ameliorate this 

problem. Properly implemented, it should also help to prevent dealers from recommending 

swaps to counterparties who are using swaps to hedge risks that expose them to risks greater than 

those they are attempting to hedge.

The industry has traditionally argued against imposing suitability obligations in markets 

such as these on the grounds that institutional investors are capable of looking out for their own 

interests and have the resources to absorb any potential losses. As described in greater detail in 

the Background section of this letter, the history of the derivatives market is replete with 

examples that show this to be a myth. The complexity and opacity of many structured finance 

products has made them impenetrable to all but the most sophisticated industry experts. Indeed, 

even the non-experts within the financial firms themselves have not always understood the risks 

they entail. Unfortunately, that misconception about institutional investors‟ ability to fend for 

themselves is reflected in the Commission‟s proposal, which includes an alternative method of 

satisfying the suitability standard that relies on the same formulation. Unless this aspect of the 

proposal is fixed, the benefits of the suitability standard are likely to be theoretical rather than 

real. 

Making a Recommendation: The Commission appropriately limits the proposal to 

situations in which the SBS dealer makes a recommendation. As a result, transactions in which 

the dealer acts purely as a counterparty would be exempt. We also support the Commission‟s 

position that determination of whether a recommendation has been made “should turn on the 

facts and circumstances of the particular situation,” and we strongly agree that, “The more 

individually tailored the communication to a specific customer or a targeted group of customers 

... the greater the likelihood that the communication may be viewed as a „recommendation.‟” 

This last point has a special relevance in the context of swaps, where many of the products are 

customized. Customization by its very nature implies that the swap has been designed with the 

particular needs of the counterparty in mind. As a result, a suitability analysis should be required 

for any customized swap where the dealer plays a role in designing the customization. In such 

circumstances, it is not enough that the dealer determine whether the customized swap might 

theoretically be suitable for some counterparty; it should be required to determine whether the 

swap is suitable for that particular counterparty. 
23

Reasonable Diligence: We agree that “what constitutes reasonable diligence” will vary, 

and that “the complexity of and risks associated with” the security-based swap or trading strategy 

are important facts that would influence that determination. Unfortunately, the Commission 

proposal appears to stop well short of requiring a full suitability analysis with regard to the 

counterparty. It requires the SBS Dealer to obtain relevant information regarding the 

counterparty‟s “investment profile, trading objectives, and its ability to absorb potential losses 

associated with the recommended security-based swap or trading strategy.” Unlike the CFTC 

proposal, however, it does not propose to require the dealer “to obtain information through 

reasonable due diligence concerning the counterparty‟s financial situation and needs, objectives, 

tax status, ability to evaluate the recommendation, liquidity needs, risk tolerance” or other 

relevant information. Nor does it require, as the CFTC proposes in the context of its “know your 

counterparty” rule, to require the swap dealer to “evaluate the previous swaps experience, 

financial wherewithal and flexibility, trading objectives and purposes of the counterparty.” 

Finally, neither the SEC nor the CFTC proposal explicitly requires that the information gathered 

be sufficient to enable the swap dealer to make the suitability assessment, and neither imposes 

documentation requirements sufficient to ensure that regulators can effectively enforce 

compliance. 

Alternative Compliance Method: Unfortunately, the Commission and CFTC have both 

proposed to include an alternative compliance method that threatens to take away with one hand 

what it has given with the other. Specifically, the Commission proposal would exempt SBS 

dealers from the suitability standard in circumstances where the dealer determines “that the 

counterparty, or an agent to which the counterparty has delegated decision-making authority, is 

capable of independently evaluating investment risks with regard to the relevant security-based 

swap or trading strategy involving a security-based swap,” the counterparty indicates it is 

exercising independent judgment, and the SBS dealer discloses that it is not undertaking to 

assess the suitability of the transaction or trading strategy. Under these circumstances, the SBS 

dealer wouldn‟t even have to have a reasonable basis to believe the swap was suitable for 

anyone, let alone for the particular counterparty to the transaction. In its proposal, the CFTC 

would at least require that the dealer or major swap participant have a reasonable basis to believe 

the counterparty has the capacity to absorb potential losses related to the swap or swap trading 

strategy, which might help to curb the worst abuses. If, over our strong opposition, the 

Commission retains this alternative compliance method it ought at the very least to include this 

added condition for reliance on that method.

In assessing this proposed approach, which we strongly oppose, it is important to keep in 

mind that what is at stake is not the SBS Dealer‟s ability to enter into such transactions as a 

counterparty, but rather its ability to recommend such transactions. What is the benefit of 

permitting unsuitable recommendations – indeed recommendations that may not be appropriate 

for any counterparty – that justifies this approach? This approach, moreover, is likely to become 

the primary means of “complying” with the suitability obligation. Given the profits at stake, 

SBS Dealers will have strong incentives to conclude that the counterparty is capable of 

evaluating the transaction. Counterparties who turn to the derivatives markets out of 

questionable motives will have equally strong incentives to assert their capacity to independently 

evaluate investment risk. And even those with purer motives may be reluctant to confess to a 

lack of expertise. We have no doubt, for example, that the Orange County, California Treasurer 
24

who bankrupted the county with his interest rate swap strategy in the early 1990s would have 

declared his competence to assess the risks. Indeed, we expect that would be true of many of 

those that Goldman duped into buying toxic mortgage-related swaps in the years leading up to 

the financial crisis – at least it would have been before the transactions blew up in their faces. 

Ultimately, if this approach is adopted, SBS dealers are likely to make such agreements a 

condition of doing business, rendering the suitability standard meaningless. 

Reliance on Written Representations: This bad policy is made worse by the 

Commission‟s proposal to allow SBS dealers to comply by relying on written representations 

from the counterparty. As we noted in our comments to the CFTC, “It is one thing to suggest 

that the swap dealer or major swap participant could rely on counterparty representations with 

regard to the facts on which the suitability analysis is based. It is quite another to suggest that 

they can rely on counterparty representations that the transaction itself is suitable.” The CFTC 

has at least proposed a decent standard for relying on written representations. The Commission 

has actually proposed as one alternative a standard that would allow reliance on representations 

without further inquiry except where the SBS Dealer affirmatively knows the representation to 

be false. Even its second alternative proposal wouldn‟t require the SBS Dealer to have a 

reasonable basis for believing the representation to be true. Under the Commission‟s proposed 

alternative method for complying with suitability, the only factor that might remotely serve as a 

check on dealers‟ ability to take advantage of unsophisticated counterparties is a requirement that

they be accountable for determining the counterparty‟s capacity to assess the swap and its risks. 

While this is a slender reed on which to rest the standard, the Commission‟s approach removes 

even this minimal protection. And all of this is being proposed in order to make it easier for 

dealers to recommend swaps that are not suitable for the counterparty, subverting the very reason 

that Congress chose to include broad business conduct rule authority in the Act.

Exceptions: The Commission does not propose to apply the suitability standard to Major 

SBS Participants on the assumption that they will not be engaged in the kind of dealer role that 

would make it appropriate. While this may be a reasonable assumption, it is just an assumption. 

A cleaner approach would be to apply the suitability standard to all SBS Entities. If they don‟t 

engage in the conduct that triggers the standard, it will not apply. This approach avoids creating 

differential treatment based on regulatory status that may not be justified or, if it is currently 

valid, could cease to be justified as the industry evolves. As the Commission has reason to know

all too well, such disparities can be difficult to repair once they are adopted as regulatory policy.

On the other hand, we agree that suitability obligations need not apply to 

recommendations made to other SBS Entities. Unlike other counterparties, these entities are 

actually likely to have the sophistication necessary to make their own independent evaluations of 

the swaps and their risks. We would strongly oppose any additional exemptions, however, for 

recommendations to broker-dealers or other market intermediaries who are not SBS Entities. 

There is no guarantee that such entities would have the specialized knowledge and sophistication 

to evaluate securities-based swaps, and there is no greater utility in permitting unsuitable 

recommendations that would justify the risks of such an approach. By the same token, we 

strongly oppose the approach the Commission requests comment on to further weaken these 

already fatally flawed rules by limiting them to retail investors, for the reasons described above. 
25

We agree, at least in theory, with the Commission‟s view that compliance with the 

provisions governing acting as an advisor to a special entity ought to satisfy compliance with the 

suitability standard. Unfortunately, those provisions are so flawed that they do not achieve even 

a basic suitability standard, let alone the best interest standard intended by Congress when it 

drafted this section of the legislation.

5. Fair and Balanced Communication

We strongly support the Commission‟s proposed approach with regard to SBS Entities‟ 

communications with counterparties. In particular, we believe the three more specific standards 

the Commission has added to the broad principles-based requirement provide useful additional 

clarity to the standard without limiting its scope. We do not believe any further specific 

elucidation of those standards is necessary at this time. As the law is implemented, the 

Commission may identify specific practices that require either additional guidance or 

clarification through rules. As a general matter, however, we believe this is an area where 

adoption of enforceable, principles-based standards, as outlined in the proposing release, is likely 

to serve better than prescriptive rules. 

We do not support providing exceptions to the requirement to communicate in a fair and 

balanced manner. Such exceptions could serve no beneficial purpose and would simply serve to 

make the standard less enforceable. While industry may be expected to argue that the 

requirement could discourage communication, discouraging unfair and unbalanced 

communication should be viewed as a benefit of the proposal not a shortcoming. As the hearings 

of the Senate Permanent Subcommittee on Investigations made clear, derivatives dealers have 

been all too willing to aggressively promote transactions they knew to be harmful to their 

customers‟ interests. It was precisely to stop such practices that this section of the legislation

was drafted, and it should not be weakened.

6. Obligation Regarding Diligent Supervision

Drawing effectively from existing Exchange Act and SRO standards, the Commission 

has proposed a sound set of rules with regard to supervision. Importantly, the Commission 

recognizes that these rules set minimum standards, and that the list of requirements they impose 

would not be exhaustive. In addition, the documentation requirements should help to enable 

effective enforcement. We are concerned, however, that the proposed approach does not do 

enough to ensure that compliance with the supervisory procedures results in effective 

supervision. We believe two changes are needed to rectify this shortcoming in the existing 

standard. First, supervisory personnel should be required to report to upper management or the 

board, as appropriate, if they have reason to believe the supervisory procedures are not proving 

effective in preventing violations. In certain such circumstances, they may need to go beyond 

those procedures in order to provide effective oversight. Second, where supervisory procedures 

fail to detect or deter significant violations, the SBS Entity should be required reevaluate those 

procedures to determine whether revisions are needed. Finally, we believe the Commission 

should apply the requirements to Major SBS Participants as well as to SBS Dealers. The goal of 

the provisions – to ensure compliance with the laws and regulations – is relevant in both business 

models.
26

D. Proposed Rules Applicable to Dealings with Special Entities

Prompted in part by revelations of the Senate Permanent Subcommittee hearings and in 

part by the plight of local governments struggling with skyrocketing payments on interest rate 

swaps sold them by major swaps dealers, Congress sought to provide added protections for a 

subset of counterparties dubbed “special entities.” Although the financial sophistication of these 

special entities varies greatly, they were generally considered to be less sophisticated than other 

participants in the swap market, such as hedge funds or major corporate users of swaps. In 

addition, these organizations – whether government entities, pension funds, or endowments –

have individuals behind them who stand to suffer significant harm if the entity enters 

transactions that entail unacceptable and inappropriate risks. Using the Investment Advisers Act 

as a general model, Congress sought to ensure that swap dealers would act in the best interest of 

these more vulnerable counterparties when providing advice and making recommendations. 

As we noted above, the first proposal Congress put on the table in this area would have 

imposed a strict fiduciary duty on all transactions between special entities and swaps dealers or 

major swap participants. While members ultimately realized that this approach would be 

unworkable, it provides an important context for evaluating proposals to implement the 

legislation. In particular, it demonstrates that congressional intent was to provide the strongest 

possible protection for special entities without adopting an approach that would preclude their 

participation in the swaps market. Clearly, Congress‟s goal was to fundamentally transform the 

way in which market participants interact with these special entities. 

Unfortunately, the Commission has proposed rules in this area that, far from fulfilling 

that congressional intent, would provide no meaningful new protections to these most vulnerable 

of market participants. First, the Commission includes an escape hatch in the definition of 

“acting as an advisor” that all but ensures the enhanced protections will never come into play. 

Moreover, one of the conditions of that provision – that the special entity rely on advice from an 

independent representative – uses a definition of independence that is so weak it would permit 

representatives to qualify as independent who are entirely financially beholden to SBS Entities. 

Unless the Commission radically alters this approach, special entities are likely to be required by 

SBS Entities to sign away their right to recommendations in their best interest as a condition of 

doing business, and there is no guarantee that the advice they get from their “independent” 

representatives will be any more disinterested. Finally, these standards incorporate an approach 

to reliance on written representation that is completely inadequate. In short, these provisions 

represent a complete betrayal of what Congress sought to achieve in adopting enhanced 

protections for special entities that participate in the swaps market.

Application of the Requirements: The legislation specifies that the enhanced protections 

for special entities would not apply to a transaction that is initiated by a special entity on an 

exchange or SEF and where the entity does not know the identity of the counterparty to the 

transaction. Noting that it may not always be possible to identify which party has initiated a 

transaction, the Commission proposes to exempt any transaction between a special entity and an 

SBS Entity on a SEF or an exchange where the SBS Entity does not know the identity of its 

counterparty. We believe this is a reasonable approach which is consistent with congressional 
27

intent that the enhanced protections apply to transactions where there is a degree of reliance by 

the special entity on the dealer or major swaps participant. 

1. Scope of the Definition of “Special Entity” 

We believe the definition of special entity in the statute is reasonably straightforward and 

should not require extensive clarification. To the degree that the Commission is called upon to 

provide additional guidance, it should do so consistent with the principals that led to the 

development of this category. Many though certainly not all of the entities in this category lack 

financial sophistication. The typical example here would be the municipalities and school 

districts who suffered devastating losses on interest rate swaps they bought to hedge their interest 

rate risks. Many though not all also lack the resources to hire highly sophisticated financial 

advisers or to withstand potential losses on swaps transactions. This might include pension plans 

and endowments, for example. And all have individuals behind them – whether taxpayers or 

workers or others – who would be likely to suffer significant financial harm if the entity were 

taken advantage of by more sophisticated market participants. Although some chafe at being 

included in this category, this third criterion holds true for even the largest government pension 

plans, as the recent financial crisis made all too clear. When deciding issues of who fits within 

the category, the Commission should err on the side of inclusion in any situation where the entity 

shares these basic characteristics.

One specific definitional area where we believe we can offer insight into congressional 

intent involves the question regarding applicability to non-ERISA plans, such as government 

pensions. While the drafting of this section of the legislation is awkward, having been directly 

involved in negotiations over the language of this subsection, we have absolutely no doubt that 

Congress intended government plans to receive the same protections as others. Indeed, the 

taxpayers and government workers who stand behind government pensions are precisely the sort 

of constituents Congress sought to protect through the heightened protections for special entities.

In order to keep these entities within the definition, committee staff engaged in extensive 

negotiations with representatives of government pensions in order to ensure that the legislation 

was drafted in a way that would be workable for them. 

2. Best Interests

We do not believe it is necessary, or even appropriate, for the Commission to try to 

strictly define what is meant by “best interests.” It may, however, be appropriate for the 

Commission to provide guidance on how to apply the standard in particular circumstances. 

Having been directly involved in the negotiations over this language, we believe we can offer 

useful insight into congressional intent. First, Congress certainly did not intend to apply the 

ERISA fiduciary standard, with its strict limits on conflicts of interest, to these interactions. 

Indeed, members worked hard to ensure that the legislation did not have that effect. Instead, 

Congress‟s model for the heightened standard that would apply to a swap dealer that acts as an 

advisor to a special entity is the Investment Advisers Act fiduciary duty. That is reflected in the 

statutory language, which is modeled on the provisions of the Advisers Act from which that 

law‟s fiduciary duty flows. Consistent with that approach, Congress sought not to eliminate all 

conflicts of interest, but to ensure that conflicts would be appropriately managed and fully 
28

disclosed (something the proposed disclosure requirements do not achieve). And they sought to 

ensure that the swap dealer would have a reasonable basis for believing its recommendations 

were in the best interest of the special entity, a standard they viewed as being higher than the 

suitability standard that has traditionally been applied to recommendations by brokers. 

It is likely that issues that arise as the Commission seeks to determine precisely how to 

apply this standard would be similar in nature to issues that would arise from the imposition of a 

fiduciary duty on brokers when they give personalized investment advice to retail clients. If this 

is the case, it would certainly be appropriate to look to the approach to fiduciary duty outlined by 

the Commission in its Section 913 study as a model. While not every aspect of the application of 

the standards is likely to be identical, the basic principles outlined in the Section 913 study are 

appropriate – that the best interest standard is intended to provide protections that go beyond 

those of a suitability standard, that it is consistent with various different methods of 

compensation and with proprietary trades, but that it requires the full disclosure of any conflicts 

of interest. It is particularly important, in providing guidance in this area, that the Commission 

make clear that not all suitable recommendations would satisfy a best interest standard. Rather, 

as the term implies, the SBS Entity would be required to recommend from among the various 

suitable options the approach they believe to be best for the special entity.

We are disturbed by the statement in the “Advisor to Special Entities” section of the 

proposing Release that the best interest standard requires the SBS Dealer to provide suitable 

advice. This would seem to equate suitability and best interests in a way that is not consistent 

with the approach the Commission has adopted in other contexts, including its recent Section 

913 study. It is one thing to suggest that a recommendation in the best interests of the special 

entity would satisfy a suitability standard, which is the message we hope the Commission 

intended to convey. It would be quite another to suggest that a recommendation that is suitable 

would automatically satisfy a best interest standard. If the latter is the intent of the comment, it 

would suggest that the Commission plans to adopt a completely inadequate approach to 

enforcing the best interest standard. Whether special entities receive the benefits of a best 

interest standard will depend in large part on how the Commission enforces that standard. It is 

essential that it do so in a way that imposes a heightened duty beyond mere suitability. Because 

the discussion in the Release is ambiguous on this point, we urge the Commission to clarify that 

this is its intent.

3. Advisor to Special Entities: Proposed Rules 15Fh-2(a) and 15Fh-4(b)

Where the rules go badly astray is in the definition of what it means to act as an advisor

to a special entity. Accepting without question exaggerated industry claims of difficulties in 

applying this term, the Commission has proposed an approach that will not provide the 

heightened protections Congress intended for special entities and is likely to do little if anything 

to change the abusive practices targeted by the legislation. The primary flaw is not with the 

standards that would apply should an SBS Entity be deemed to be acting as an advisor, but rather

that, under the approach proposed by the Commission, those standards are unlikely ever to apply. 

Adding insult to injury, the conditions the Commission proposes for permitting SBS Entities to 

make recommendations without triggering the best interest standard are completely inadequate, 

relying as they do on a definition of “independent representative” that does nothing to ensure that 
29

these representatives are even remotely independent. As a result of these faulty definitions, the 

rule proposal which would otherwise be perfectly adequate is a sham, failing to provide any 

enhanced protections precisely where Congress intended that those protections be strongest. 

In developing its proposal, the Commission has completely ignored congressional intent. 

There is no discussion in the proposing Release regarding the abuses that led Congress to adopt 

this provision or the best way of implementing the provision to ensure that it is effective in 

combatting those abuses. Instead, the entire discussion in the Release revolves around industry 

concerns, which are accepted without question. In fact, the industry arguments on which the 

Commission has based its proposal include a grain of truth amidst a load of exaggeration and 

misdirection. In letters to the Commission, for example, SIFMA and ISDA have argued that,

without legal certainty about when they are acting as an adviser, swaps dealers will simply stop 

doing business with special entities. They have suggested that it may be “impractical” to meet a 

best interest standard when acting as a counterparty. And they have raised concerns that the 

standard could trigger regulation as a fiduciary under ERISA. (We discuss each of these issues 

in greater detail below along with the appropriate means of addressing any legitimate concerns 

they raise.) In crafting its proposal in response to those arguments, the Commission goes far 

beyond what would be necessary to address legitimate industry concerns and, in the process, 

neuters the standards.

Legal Certainty: We are sympathetic to industry arguments that defining acting as an 

advisor as making a recommendation does not provide SBS Dealers with enough legal certainty 

about what conduct would and would not trigger the definition. In revising the definition, the 

goal should be to clarify when the heightened protections would apply, not, as the Commission 

has done, to provide a mechanism for evading those protections entirely. The approach in the 

CFTC proposal offers a good starting point that, with a little tweaking and with additional 

guidance from the regulators, could address legitimate concerns about the need for greater legal 

certainty without gutting the rule in the process. 

Like the Commission, the CFTC begins by defining the term “acting as an advisor” to 

mean making a recommendation. As we noted in our comment letter on the CFTC proposal, 

defining recommendations as advice is consistent not only with congressional intent but also 

with the approach that SIFMA and other industry groups have taken in suggesting a definition 

for personalized investment advice in commenting on the SEC‟s Section 913 study. In that 

context, SIFMA proposed to define personalized investment advice as: as “investment 

recommendations that are made to meet the objectives or needs of a specific retail customer after 

taking into account the retail customer‟s specific circumstances.” Adapted for the current 

purpose, an appropriate definition of advice might be: “recommendations related to a securitybased swap or a security-based swap trading strategy that are made to meet the objectives or 

needs of a specific counterparty after taking into account the counterparty‟s specific 

circumstances.” This refinement of the definition would draw a clearer line than the existing 

language and, as such, should provide greater legal certainty about when the heightened 

standards would apply.

The CFTC provides additional clarification in its proposed definition that the term does 

not include either providing general transaction, financial or market information to the special 
30

entity or providing swap terms in response to a competitive bid request from the special entity. 

These are appropriate additions that ought to be included in the Commission definition. To the 

degree that additional clarification is needed to provide the legal certainty industry is demanding, 

the Commission should provide that clarification in the form of guidance at the time the rule is 

issued and as needed thereafter. One point the Commission should make clear in issuing that 

guidance is that customization, which by definition implies that the swap was designed with the 

particular needs of the counterparty in mind, would be included within the definition of acting as 

an advisor. The goal should be to limit customization to those circumstances in which it is 

suitable for the counterparty, under the institutional suitability standard, or in the best interests of 

the special entity, under the heightened best interest standard that would apply to transactions 

with special entities Properly implemented, this approach would provide adequate legal 

certainty without gutting the rule. 

In contrast, the Commission proposal provides legal certainty at the expense of 

heightened protections. It does so by creating a mechanism for SBS Dealers to escape the best 

interest standard when they are engaged in conduct to which it would otherwise apply. That 

alternative method of “compliance” with the best interest standard rests on completely 

inadequate conditions. The first and most important condition is that the special entity represent 

in writing that it will not rely on recommendations provided by the security-based swap dealer 

and that it will rely on advice from a qualified independent representative instead. First, in any 

transaction involving a customized swap, the special entity will by definition be relying on the 

swap dealer‟s assertion that the customization was designed with the particular needs of the 

special entity in mind. If the swap dealer knows or has reason to believe that the customized 

swap is not in the best interests of the special entity, the dealer should be precluded from doing 

the transaction regardless of what representations the special entity provides about who it may be 

relying on. Second, as we will discuss in greater detail in the appropriate section below, the 

Commission proposal does nothing to ensure that the qualified independent representative is 

either qualified or independent. Under the circumstances, the required disclosures are just a way 

to protect the SBS Dealers from liability, not to protect the special entities from abuse.

Conflicts between Acting as an Advisor and Serving as a Counterparty: Industry 

commenters have also suggested that it may be “impractical” to meet the best interest standard 

when serving as a counterparty. If the Commission were to adopt the strict ERISA limitations on 

conflicts, or even the Advisers Act restrictions on principal trading, that might be the case. 

Neither was intended by Congress. The solution, however, is not to subvert congressional intent 

by providing a way for dealers to act as advisors without triggering the best interest standard. 

The solution is to interpret the best interest standard in a way that is consistent with the 

counterparty role and provide industry with guidance, as we have described in greater detail 

above. In this regard, it may be appropriate, as the Commission suggests in its request for 

comments, for the Commission to clarify “that it would not be inconsistent with an SBS Dealer‟s 

duty to act in the best interests of the special entity of the SBS Dealer, as principal, were to earn 

a reasonable profit or fee from the transaction it enters into with the special entity.” The 

Commission certainly should not prohibit an SBS Dealer from acting as both an advisor and a 

counterparty to a special entity; that is something Congress specifically sought to avoid.
31

Possible Conflicts with the ERISA Fiduciary Definition: Congressional staffers involved 

in drafting this section of the legislation worked hard to ensure that it did not create an 

inappropriate conflict with ERISA. They were sensitive to the need not to bring ERISA‟s 

restrictions on conflicts to bear on a counterparty relationship where they would not be workable. 

DOL staff consulted by those congressional staffers assured them that there was not a conflict 

with the legislation. Certainly, DOL‟s proposed revisions to its fiduciary definition include a 

seller‟s exemption that is more than broad enough to accommodate this situation. Given the 

careful consideration that Congress gave to these issues, it is not appropriate for the Commission 

to undermine the business conduct rules in response to an industry argument that Congress 

specifically rejected. If there is a conflict, or a perceived conflict, between the two sets of rules, 

the solution is to clarify that through guidance or, if necessary, additional prohibited transaction 

exemptions under the DOL fiduciary definition. That can easily be accomplished without 

gutting the business conduct rules as the Commission proposes to do.

4. Counterparty to Special Entities: Proposed Rule 15Fh-5

Although Congress ultimately abandoned its original proposal to impose a fiduciary duty 

on all transactions between swaps entities and special entities, it did seek to ensure that special 

entities would be protected in any such transactions. It did so by requiring any swaps dealer or 

major swap participant who enters into or offers to enter a swap with a special entity to have a 

reasonable basis for believing the special entity has a qualified independent representative acting 

in its best interests to evaluate the transaction. This is a poorly written section of the statute, 

which creates the odd and somewhat awkward mechanism of making the swap dealer or major

swap participant that is counterparty to a particular transaction responsible for verifying that the 

representative meets the established criteria. Even considering the problems with the statute,

every aspect of the Commission proposal in this area is inadequate to fulfill congressional intent. 

The definition of qualified independent representative does nothing to ensure the representative 

is either qualified or independent. Nor is the rule adequate to ensure the independent 

representative is acting in the best interests of the special entity. 

The Commission requests comments on whether the proposed rules should apply to all 

transactions with all special entities. We believe they should apply to all transactions other than 

anonymous transactions on an exchange or swap execution facility. By applying the requirement 

to offers to enter into transactions as well as to transactions that are entered into, Congress 

signaled its intent that the rules should apply broadly. However, it isn‟t reasonable to expect 

SBS Entities to verify information about a counterparty whose identity is unknown to them or 

unknown to them until the actual moment of the transaction. In addition, the rules governing 

acting as an advisor would supersede where the SBS Entity makes a recommendation to the 

special entity, as discussed above. In other words, these two separate provisions are designed to 

create a comprehensive set of business conduct standards with regard to transactions involving 

special entities where recommendations are covered by one set of protections and other 

traditional counterparty relationships are subject to a different approach.
32

a. Scope of Qualified Independent Representative Requirement

We strongly support the Commission‟s interpretation of the scope of the qualified 

independent representative requirement. As we have noted above, whether particular business 

conduct standards apply to Major SBS Participants as well as to SBS Dealers should be dictated 

by whether the Major SBS Participants are likely to be engaged in the conduct that is the subject 

of the standard. Since this is the case here, we agree with the Commission interpretation that the 

rules should apply equally to both types of SBS Entities. Furthermore, we believe the 

Commission‟s interpretation that the requirement should apply to security-based swap 

transactions with all special entities is the correct one and reflects congressional intent. 

b. Independent Representative – Proposed Rule 15Fh-2(c) 

The Commission proposal outlines a general standard for determining independence –

that the “representative does not have a relationship with the SBS Entity, whether compensatory 

or otherwise, that reasonably could affect the independent judgment or decision-making of the 

representative.” Theoretically, this standard should provide for a generally appropriate level of 

independence. In the next clause, however, the Commission states that a representative would be 

deemed to be independent of an SBS Entity if two conditions are satisfied: (1) the representative 

is not and for the previous year has not been an associated person of the SBS Entity and (2) the 

representative has not received more than 10 percent of its gross revenues over the past year 

directly or indirectly from the SBS Entity. 

In short, under the proposal put forward by the Commission, a representative would be 

deemed to be independent even if he or she worked with the SBS Entity as recently as a year 

ago, was recommended by the SBS Entity, has a direct business relationship with the SBS Entity 

that makes the representative highly financially dependent on that entity, and earns more of its 

revenues from the SBS Entity than from the special entity he or she purports to represent. 

Indeed, under this definition of independence, the representative could earn virtually all of its 

gross revenues from various SBS Entities, so long as no more than 10 percent comes from the 

entity on the other side of the transaction. This is a travesty. It is inexcusable that the 

Commission would present this as an acceptable definition of independence. It must be 

completely revised.

In contrast, the CFTC has proposed only one exception to the prohibition on “material 

business relationships” between swap entities and independent representatives of special entities. 

It clarifies that the term would not include “payment of fees by the swap dealer or major swap 

participant to the representative at the written direction of the Special Entity for services 

provided by the representative in connection with the swap executed between the Special Entity 

and the swap dealer or major swap participant.” In commenting on the CFTC proposal, we 

questioned the wisdom of allowing even these permitted payments without additional 

restrictions, since they could be used to hide the cost of the independent representative off the 

books of the special entity, creating a potential for abuse and conflict of interest of the sort the 

legislation is intended to prevent. In addition, in determining independence, the CFTC has 

proposed to permit the receipt of compensation from the swap dealer or major swap participant 

in the prior year, so long as it is disclosed to the special entity and the special entity agrees that it 
33

does not create a material business relationship. In our letter, we encouraged the Commission to 

clarify that any such disclosure of prior compensation to the representative would have to be 

made to the board of the special entity, and that the written agreement that such payment does 

not constitute a material business relationship would have to come from the board.

We urge the Commission to adopt the CFTC approach with these minor adjustments. If 

the Commission feels it is necessary to provide additional clarification on what constitutes a 

material business relationship, it should adopt a standard consistent with that used by the 

Department of Labor‟s prohibited transaction exemption under ERISA that limits an independent 

fiduciary‟s annual income derived from or attributable to the party in interest and its affiliates to 

no more than one percent. This is consistent with the notion that the independent representative 

is intended to act in the best interests of the special entity. In addition, we would encourage both 

agencies to adopt a look-back period for the independence standards of at least two years. Under 

no condition should the Commission adopt an approach that would permit special entities to 

consent to additional conflicts of interest – an approach that would encourage collusion and 

evasion of the standards.

The Commission is correct in interpreting that Congress intended the representative to be 

independent of the swap dealer or major swap participant, rather than independent of the special 

entity. Having been involved in the negotiations over this section of the bill, we are aware that 

this issue was heavily discussed and that the clear intention was to allow internal employees of 

the special entity or others affiliated with the special entity to serve this function.

c. Reasonable Basis To Believe the Qualifications of the Independent Representative

We generally concur with the Commission proposal to allow SBS Entities to rely on 

written representations to determine that the representative is qualified. As discussed above, we 

do not support either of the two alternative standards the Commission proposes for relying on 

written representations without conducting an additional inquiry, but we are less concerned about 

that in this context than we are with regard to other aspects of the rule. That is because putting 

too much authority in the hands of the swap dealer or major swap participant to determine the 

qualifications of the independent representative could have the unintended consequence of 

undermining the ability of the representative to make an independent judgment on issues where 

the potential conflict with the swap dealer or major swap participant is greatest. 

The Commission requests comment on a variety of issues related to implementation of 

this provision. We offer the following responses with regard to a few of those issues:

 Qualification: The Commission requests comment on whether it should consider 

development of a proficiency examination for independent representatives. This is an 

idea that we believe has promise, since it would provide a measure of expertise that 

wouldn‟t be subject to influence by biased SBS Entities. We have not had an opportunity 

to think through all the possible implications of such an approach, but we do think it is 

one that deserves further consideration.

 Statutory Disqualification: We support the Commission‟s proposed approach.
34

 Best Interests: Requiring representatives to be regulated in some capacity that imposes a 

best interest standard would add teeth to this requirement. This is an area where it is 

particularly important that the SBS Entity not be the arbiter of what is in the special 

entity‟s best interests, a problem that this proposed approach would help to prevent. In 

the absence of a requirement, it would be appropriate to presume that a representative 

who is acting in a capacity that independently imposes a best interest standard (such as an 

investment adviser or ERISA fiduciary) would meet this requirement.

 Disclosures: We support the Commission interpretation that the disclosure requirement 

would cover material information and would encourage the Commission to clarify that 

this includes information about material conflicts of interest the independent 

representative is aware of regarding the SBS Entity that is counterparty to the transaction.

 Fair Pricing: We believe the independent representative should be required to disclose 

the basis on which it determines that a particular transaction is fairly priced. That 

documentation should have to be sufficiently detailed to enable a third party to evaluate

that conclusion. This is particularly important if the Commission persists in permitting 

representatives with massive conflicts of interest to serve as supposedly independent 

representatives.

 Pay to Play: We support the addition of this requirement.

d. Disclosure of Capacity

We support this requirement. By elucidating the several and potentially conflicting roles 

an SBS Entity may be playing in a particular transaction, the disclosures could have the added 

benefit of highlighting potential conflicts of interest. Indeed, the disclosures should be designed 

to draw attention to any potential conflicts between those different roles. While we support the 

disclosure requirement in general, we believe the Commission should make clear that the 

functions provided (e.g., making a personalized recommendation) and not the disclosures 

themselves would serve as the last word in determining the SBS Entity‟s legal obligations. In 

other words, we oppose the Commission‟s proposed approach of allowing SBS Entities to

disclose away their suitability and best interest obligations to counterparties and special entities. 

Moreover, we see no reason why the rule ought not to apply equally to Major SBS Participants if 

they act in more than one capacity with special entities. As we have discussed above, application 

of the rules to Major SBS Participants should be determined by their function and not their 

regulatory status.

5. Prohibition on Certain Political Contributions by SBS Dealers: Proposed Rule 

15F-6

We strongly support the Commission proposal to adopt pay-to-play rules for SBS 

Dealers. Pay-to-play has no more place in the swap market than it does in the securities markets. 

This proposal would help to eliminate what would otherwise be a serious gap in protections. 

However, we do not believe the Commission should exempt Major SBS Participants from these 
35

rules based on what may turn out to be a false “assumption” that they will not be engaged in the 

type of activity that would make them appropriate. The rules should follow the function rather 

than being based on the regulatory status of the entity absent an actual prohibition on the entity‟s 

engaging in the conduct that would trigger the rules.

6. Chief Compliance Office: Proposed Rule 15k-1

We generally support the Commission proposal with regard to designation of a chief 

compliance officer. Overall, the Commission appears to have made good use of existing 

requirements in other contexts to develop an appropriate regulatory approach. We are 

concerned, however, that the Commission appears to give the Chief Compliance Officer 

relatively little authority to resolve and mitigate conflicts of interest that are likely to be the chief 

source of compliance problems. Instead, the Commission makes a point of noting that ultimate

responsibility in this area would continue to reside with the business units that are subject to the 

conflicts. We would urge the Commission to strengthen provisions in this area. At the very 

least, the chief compliance officer should be required to highlight in its annual report any 

recommendations it made with regard to resolution or mitigation of conflicts of interest that were 

not adopted. The Commission should not permit reporting to a senior officer of the firm to 

substitute for reporting to the board, nor should it permit the compliance officer to qualify its 

report. On the other hand, suggestions to require the CCO to certify its report and to require the 

audit committee to review the report could be beneficial.

7. Consistency With CFTC Approach

As we have noted throughout these comments, the Commission has consistently taken a 

much weaker approach to its business conduct rules than has the CFTC. This is harmful not just 

because it threatens to leave participants in the security-based swap markets with completely 

inadequate protections, but also because it strengthens industry‟s hand as it seeks to undermine 

the CFTC‟s efforts. It is frankly inexcusable that the Commission has released such a weak rule 

proposal. While theoretically we believe the markets would benefit from greater uniformity 

between the approaches of the two agencies, this would only be true if the Commission were to 

radically revise its proposal to more closely resemble the CFTC proposal. Under no 

circumstances should the CFTC bow to pressure to take the SEC‟s proposal as its model.

Beyond that general overall weakness in the Commission proposal, we were disappointed 

that the Commission completely failed to include execution standards comparable to those 

proposed by the CFTC. As we said when commenting on that agency‟s proposal in this area: 

“A leading goal of Congress in adopting the derivatives title of the Dodd-Frank 

Act was to move as much of the market in standardized swaps as possible to central 

clearinghouses and transparent exchanges. A central component of a well-functioning 

market is the best execution requirement. In §155.7 of the proposed rules, the 

Commission has proposed to require Commission registrants, with respect to any swap 

that is available for trading on a DCM or SEF, to execute the swap on terms that have a 

“reasonable relationship” to the best terms available. While this falls short of a full-scale 

best execution obligation, it represents a strong first step toward creating such a standard. 
36

Moreover, the approach outlined by the Commission includes the flexibility necessary to 

allow it to evolve as the market becomes more fully developed. In the meantime, this 

approach would add significant benefits to end users. We strongly support the 

Commission recommendation that the obligation apply regardless of whether the 

transaction actually occurs on a DCM or SEF, thereby helping to ensure that end users 

who opt to engage in bilateral transactions also receive the benefits. 

“Just as the best execution requirement in securities markets includes 

consideration of a variety of factors in addition to cost, requiring transactions to occur on 

terms that have a “reasonable relationship” to the best terms will be similarly flexible 

depending on the particular interests of the client. Indeed, it will be incumbent on 

regulators to ensure that this flexibility is not abused. It may be appropriate for the 

Commission to provide additional guidance in this area, particularly if it identifies 

patterns of weak or non-compliance. In keeping with our preference for enforceable 

principles-based regulations, however, we would as a general matter discourage an overly 

prescriptive, rules-based approach.”

We urge the Commission to incorporate this approach to its business conduct rules before those 

rules are finalized. 

IV. Conclusion

When the Dodd-Frank Act was enacted, our organizations cheered its passage but warned 

that its effectiveness in delivering the promised reforms would depend in large part on 

regulators‟ willingness to stand up to industry pressure and adopt tough and effective 

implementing regulations. Nowhere is that more important than in bringing long-overdue 

regulatory oversight to the over-the-counter derivatives markets. And nowhere are the costs of 

regulation more justified, given the enormous economic harm that has befallen users of these 

markets from abusive practices that have become commonplace. When swaps customers are 

paying tens of billions of dollars in hidden and excessive fees, money that could have gone to 

productive uses, the costs of requiring clear disclosure of costs, risks, and conflicts are more than 

justified. When swaps dealers routinely trap municipalities and other unsophisticated users in 

contracts that include onerous and unjustified termination clauses, the costs of imposing a 

suitability and best interest standard on SBS Dealers‟ recommendations pales by comparison. 

And that doesn‟t even include the multitrillion-dollar cost of a financial crisis in which securitybased swaps played a key enabling role. 

Instead of delivering the sweeping reforms promised by Dodd-Frank, the Commission 

has issued precisely the sort of timid, industry-friendly rules that landed us in the financial crisis. 

It is absolutely imperative that the Commission send the staff back to the drawing board to 

develop rules commensurate with the severity of the market abuses they are intended to address. 

Fortunately, the Commission has a good, if imperfect, model in the CFTC‟s proposed rules to 

use as it undertakes that task. Using the CFTC proposal as a model, and incorporating the 

strengthening amendments we have outlined above, we urge you to demand that these changes 

are made before the rules are finalized. Anything less would be unacceptable.
37

Respectfully submitted,

Barbara Roper

Director of Investor Protection

Consumer Federation of America

Marcus Stanley

Policy Director

Americans for Financial Reform

Michael Greenberger

Law School Professor 

Founder & Director 

University of Maryland Center for 

Health & Homeland Security

cc: Chairman Mary Schapiro, Securities and Exchange Commission

Commissioner Luis Aguilar, Securities and Exchange Commission

Commissioner Troy Paredes, Securities and Exchange Commission

Commissioner Elisse Walter, Securities and Exchange Commission
38

Appendix A:

Following are the partners of Americans for Financial Reform.

All the organizations support the overall principles of AFR and are working for an accountable, 

fair and secure financial system. Not all of these organizations work on all of the issues covered 

by the coalition or have signed on to every statement.

 A New Way Forward

 AARP 

 AFL-CIO 

 AFSCME

 Alliance For Justice 

 Americans for Democratic Action, Inc

 American Income Life Insurance

 Americans United for Change

 Campaign for America‟s Future

 Campaign Money

 Center for Digital Democracy

 Center for Economic and Policy Research

 Center for Economic Progress

 Center for Media and Democracy

 Center for Responsible Lending

 Center for Justice and Democracy

 Center of Concern

 Change to Win 

 Clean Yield Asset Management 

 Coastal Enterprises Inc.

 Color of Change

 Common Cause 

 Communications Workers of America 

 Community Development Transportation Lending Services 

 Consumer Action 

 Consumer Association Council

 Consumers for Auto Safety and Reliability

 Consumer Federation of America 

 Consumer Watchdog

 Consumers Union

 Corporation for Enterprise Development

 CREDO Mobile

 CTW Investment Group

 Demos

 Economic Affairs Bureau/Dollars & Sense

 Economic Policy Institute

 Essential Action 

 Greenlining Institute

 Good Business International

 HNMA Funding Company

 Home Actions

 Housing Counseling Services

 Information Press
39

 Institute for Global Communications

 Institute for Policy Studies: Global Economy Project

 International Brotherhood of Teamsters

 Institute of Women‟s Policy Research

 Krull & Company 

 Laborers‟ International Union of North America 

 Lake Research Partners

 Lawyers' Committee for Civil Rights Under Law

 Move On

 NASCAT

 National Association of Consumer Advocates 

 National Association of Neighborhoods 

 National Community Reinvestment Coalition 

 National Consumer Law Center (on behalf of its low-income clients) 

 National Consumers League 

 National Council of La Raza 

 National Fair Housing Alliance 

 National Federation of Community Development Credit Unions 

 National Housing Trust 

 National Housing Trust Community Development Fund 

 National NeighborWorks Association 

 National People‟s Action

 National Council of Women‟s Organizations

 Next Step

 OMB Watch

 OpenTheGovernment.org

 Opportunity Finance Network

 Partners for the Common Good 

 PICO

 Progress Now Action

 Progressive States Network

 Poverty and Race Research Action Council

 Public Citizen

 Sargent Shriver Center on Poverty Law 

 SEIU

 State Voices

 Taxpayer‟s for Common Sense

 The Association for Housing and Neighborhood Development

 The Fuel Savers Club

 The Institute for College Access & Success

 The Leadership Conference on Civil and Human Rights

 The Seminal

 TICAS

 U.S. Public Interest Research Group (PIRG)

 UNITE HERE

 United Food and Commercial Workers

 United States Student Association 

 USAction 

 Veris Wealth Partners 

 Western States Center

 We the People Now

 Woodstock Institute

 World Privacy Forum
40

 UNET

 Union Plus

 Unitarian Universalist for a Just Economic Community

Partial list of State and Local Signers

 Alaska PIRG

 Arizona PIRG

 Arizona Advocacy Network

 Arizonans For Responsible Lending

 Association for Neighborhood and Housing Development NY

 Audubon Partnership for Economic Development LDC, New York NY

 BAC Funding Consortium Inc., Miami FL

 Beech Capital Venture Corporation, Philadelphia PA

 California PIRG

 California Reinvestment Coalition

 Century Housing Corporation, Culver City CA

 CHANGER NY

 Chautauqua Home Rehabilitation and Improvement Corporation (NY)

 Chicago Community Loan Fund, Chicago IL

 Chicago Community Ventures, Chicago IL

 Chicago Consumer Coalition

 Citizen Potawatomi CDC, Shawnee OK

 Colorado PIRG

 Coalition on Homeless Housing in Ohio

 Community Capital Fund, Bridgeport CT

 Community Capital of Maryland, Baltimore MD

 Community Development Financial Institution of the Tohono O'odham Nation, Sells AZ

 Community Redevelopment Loan and Investment Fund, Atlanta GA

 Community Reinvestment Association of North Carolina

 Community Resource Group, Fayetteville A

 Connecticut PIRG

 Consumer Assistance Council

 Cooper Square Committee (NYC)

 Cooperative Fund of New England, Wilmington NC

 Corporacion de Desarrollo Economico de Ceiba, Ceiba PR

 Delta Foundation, Inc., Greenville MS

 Economic Opportunity Fund (EOF), Philadelphia PA

 Empire Justice Center NY

 Enterprises, Inc., Berea KY

 Fair Housing Contact Service OH

 Federation of Appalachian Housing

 Fitness and Praise Youth Development, Inc., Baton Rouge LA

 Florida Consumer Action Network

 Florida PIRG

 Funding Partners for Housing Solutions, Ft. Collins CO

 Georgia PIRG

 Grow Iowa Foundation, Greenfield IA

 Homewise, Inc., Santa Fe NM

 Idaho Nevada CDFI, Pocatello ID

 Idaho Chapter, National Association of Social Workers
41

 Illinois PIRG

 Impact Capital, Seattle WA

 Indiana PIRG

 Iowa PIRG

 Iowa Citizens for Community Improvement

 JobStart Chautauqua, Inc., Mayville NY

 La Casa Federal Credit Union, Newark NJ

 Low Income Investment Fund, San Francisco CA

 Long Island Housing Services NY

 MaineStream Finance, Bangor ME

 Maryland PIRG

 Massachusetts Consumers' Coalition

 MASSPIRG

 Massachusetts Fair Housing Center

 Michigan PIRG

 Midland Community Development Corporation, Midland TX

 Midwest Minnesota Community Development Corporation, Detroit Lakes MN

 Mile High Community Loan Fund, Denver CO

 Missouri PIRG

 Mortgage Recovery Service Center of L.A. 

 Montana Community Development Corporation, Missoula MT

 Montana PIRG

 Neighborhood Economic Development Advocacy Project

 New Hampshire PIRG

 New Jersey Community Capital, Trenton NJ

 New Jersey Citizen Action

 New Jersey PIRG

 New Mexico PIRG

 New York PIRG

 New York City Aids Housing Network

 NOAH Community Development Fund, Inc., Boston MA

 Nonprofit Finance Fund, New York NY

 Nonprofits Assistance Fund, Minneapolis M

 North Carolina PIRG

 Northside Community Development Fund, Pittsburgh PA

 Ohio Capital Corporation for Housing, Columbus OH

 Ohio PIRG

 OligarchyUSA

 Oregon State PIRG

 Our Oregon

 PennPIRG

 Piedmont Housing Alliance, Charlottesville VA

 Michigan PIRG

 Rocky Mountain Peace and Justice Center, CO 

 Rhode Island PIRG

 Rural Community Assistance Corporation, West Sacramento CA

 Rural Organizing Project OR

 San Francisco Municipal Transportation Authority

 Seattle Economic Development Fund 

 Community Capital Development

 TexPIRG

 The Fair Housing Council of Central New York

 The Leadership Conference on Civil and Human Rights
42

 The Loan Fund, Albuquerque NM

 Third Reconstruction Institute NC

 TICAS

 Vermont PIRG

 Village Capital Corporation, Cleveland OH

 Virginia Citizens Consumer Council

 Virginia Poverty Law Center

 War on Poverty - Florida

 WashPIRG

 Westchester Residential Opportunities Inc.

 Wigamig Owners Loan Fund, Inc., Lac du Flambeau WI

 WISPIRG