Corporate & Securities Law

By Jim Hamilton

SIFMA Objects to Mandated Fiduciary Duty for Swaps Dealers

The revised draft of the Senate financial reform bill, S3217, would impose a fiduciary duty on swap dealers with regard providing advice to or entering into a swap with Governmenta units, such as states, state agencies, cities and counties and other political subdivisions of a state or federal agency. Similarly, under Section 731, a swap dealer that provides advice regarding, or offers to enter into, or enters into a swap with a pension plan, endowment, or retirement plan must have a fiduciary duty to the pension plan, endowment, or retirement plan, as appropriate.

Section 731 of S 3217 deals with the regulation of swap dealers. It was incorporated into S 3217 from the Wall Street Transparency and Accountability Act, which was recently reported out of the Agriculture Committee.

In a letter to Senate Agriculture Chair Blanche Lincoln and Senator Saxby Chambliss, the Ranking Member, SIFMA said that the swap dealer is a counterparty to and on the opposite side of the table from the governmental entity or pension fund and thus has interests that are inherently opposite to the other party. Since fiduciaries have a duty to place the interests of their principal above their own, reasoned SIFMA, it is inconsistent for a swap dealer, as a counterparty, to act as a fiduciary. One counterparty could never negotiate a transaction with another counterparty whose interests must be paramount to its own. Faced with this dilemma, predicted SIFMA, dealers would decline to do business with these entities, thereby denying them valuable access to risk management tools that ultimately provide higher investment returns to pension funds and lower cost financing to state and local governments.

Full post as published by Jim Hamilton's World of Securities Regulation on May 03, 2010 (boomark / email).