The U.S. Senate is currently considering the Restoring American Financial Stability Act of 2010 (S. 3217), a comprehensive piece of financial industry reform legislation proposing a range of restrictions and obligations on financial market participants. Among other things, this legislation would regulate “swaps” used to manage financial risks, such as interest rate or currency hedges.
Of greatest concern to plan sponsors is a provision in the Senate bill that would impose fiduciary duties on swap dealers offering to enter into, or entering into, a swap with a retirement plan. This fiduciary status would create a conflict of interest under the Employee Retirement Income Security Act of 1974, as amended (ERISA), and would prevent retirement plans from engaging in swap transactions. This provision would affect both defined benefit and defined contribution plans. Defined benefit plans often use swap trades to manage risk, and the inability to do so would likely increase volatility and potential costs as plans would have to find alternative approaches to risk management. Many defined contribution plans offer stable value funds, and the guarantees issued in connection with these funds could be considered swaps under the proposed legislation. As a result, plans would have to eliminate or modify this fund option. Further, the legislation would affect both private benefit plans governed by ERISA and public benefit plans governed by common law fiduciary principles.
While several steps need to occur before this legislation is signed into law, including agreement by the Senate and reconciliation of the Senate and House versions of financial reform bills, there appears to be strong momentum behind the adoption of some form of financial industry reform legislation. Plan sponsors will want to follow the progress of this legislation closely and consult with legal counsel if it is passed to evaluate its impact on their plans.