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Orrick's Compensation & Benefits Group features a unique, single point of contact, interdisciplinary team of globally recognized attorneys and legal professionals. We offer practical solutions for handling legal issues relating to Employee Benefits, Health and Welfare Plan, Say on Pay and ERISA Litigation practices, among other areas. Please click the "solutions" links to the right or the highlighted areas above for an overview of our specific service offerings. Additionally, Orrick offers a unique suite of Global Corporate Solutions Services including, Global Equity, Global Employment, Global Data Privacy and Global Corporate Secretary (Verbatim). Please click the link to the right or above for more information about these offerings.

The Alert:

The Commodity Futures Trading Commission ("CFTC") has issued final regulations (the "Final Regulations") under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 ("Dodd-Frank") that purport to resolve significant concerns that "Special Entities" (as defined in Dodd-Frank), including employee benefit plans subject to the Employee Retirement Income Security Act ("ERISA"), had with respect to swap transactions. ERISA-subject plans (and investment vehicles into which such plans invest) generally hold swaps and other derivatives to hedge against market risks. Swaps may also help defined benefit pension plan sponsors insofar as they reduce volatility and make funding obligations more predictable. 

As we indicated in our Client Alert of January 19, 2011, the CFTC had proposed rules in early 2011 (the "Proposed Regulations") under Dodd-Frank that, together with proposed U.S. Department of Labor regulations that significantly expanded the definition of a "fiduciary" under ERISA (the "Fiduciary Regulations"), created significant uncertainty for ERISA-subject plans and other Special Entities entering into swap transactions. 

As we indicated in our earlier Client Alert, we had two main concerns about the Proposed Regulations:

• ERISA Fiduciary Issues. We were concerned that the Proposed Regulations and the Fiduciary Regulations could bestow fiduciary status on swap dealers, thus completely precluding swap dealers from entering into swap transactions with Special Entities subject to ERISA. 
• Issues Regarding the Definition of Special Entity. We were concerned that certain investment vehicles such as a fund in which 25 percent of more of its equity interests are held by "benefit plan investors" (a term that includes ERISA-subject plans and investment vehicles) could also be completely prohibited from entering into swap transactions. 

Purported Resolution of Concerns.

The Final Regulations specifically provide that the CFTC and DOL are in agreement that the ERISA fiduciary concerns of ERISA-subject plans and swap dealers have been "addressed appropriately" by the agencies and that the Final Regulations, together with any regulations issued by the DOL, should not adversely affect ERISA-subject plans and swap dealers. In particular, the CFTC cites the withdrawal of the Fiduciary Regulations and a statement delivered by the DOL to the CFTC on January 17, 2012 (the "DOL Statement") as factors in this determination. The DOL Statement provides in part as follows:

The Department of Labor has reviewed these final business conduct standards and concluded that they do not require swap dealers or major swap participants to engage in activities that would make them fiduciaries under the Department of Labor's current five-part test defining fiduciary advice 29 C.F.R. § 2510.3-21(c). In the Department's view, the CFTC's final business conduct standards neither conflict with the Department's existing regulations, nor compel swap dealers or major swap participants to engage in fiduciary conduct. Moreover, the Department states that it is fully committed to ensuring that any changes to the current ERISA fiduciary advice regulation are carefully harmonized with the final business conduct standards, as adopted by the CFTC and the SEC, so that there are no unintended consequences for swap dealers and major swap participants who comply with these business conduct standards.

While the DOL statement indicates that it will make sure that swap transactions with ERISA-subject plans are not adversely affected with respect to any future re-proposed Fiduciary Regulations, the scope of coverage of re-proposed Fiduciary Regulations remains to be determined, and swap dealers and ERISA-subject plans will want to continue to monitor the proposals from the DOL.

The Final Regulations also specifically provide that the definition of "Special Entity" under Dodd-Frank does not include collective investment vehicles that have Special Entity participants. In the preamble to the Final Regulations, the CFTC states that "the Commission is not convinced that extending the Dodd-Frank Act definition of Special Entity to collective investment vehicles based on a DOL-type look through test is appropriate or necessary." The CFTC did state, however, that this conclusion would not apply to a master trust holding the assets of more than one plan sponsored by a single employer or group of related employers.

The foregoing determinations by the CFTC under the Final Regulations should permit ERISA-subject plans, swap dealers and collective investment vehicles into which Special Entities invest to have a (qualified) sigh of relief that their swap transactions will not, in general, be adversely affected or precluded by the Final Regulations.