Alert November 27, 2012

CFTC Staff Provides Pay-to-Play No-Action Relief for Swap Dealers

The staff of the CFTC’s Division of Clearing and Intermediary Oversight issued a no-action letter providing guidance regarding CFTC Regulation 23.451, a “pay-to-play” rule which prohibits (subject to certain exceptions) swap dealers from entering into a swap with a governmental Special Entity within two years after any contribution to an official of such governmental Special Entity was made by the swap dealer or its “covered associates” (certain managers and employees of the swap dealer).  Regulation 23.451 is a component of the business conduct standards for swap dealers adopted by the CFTC in February 2012.  The no-action letter addresses dealings with certain “governmental plans,” as defined in the Employee Retirement Income Security Act of 1974 (“ERISA”), and the application of the Regulation’s “look-back” provision.

Governmental Plans.  In the no-action letter, the CFTC’s Division of Swap Dealer and Intermediary Oversight states that it will not recommend enforcement action against any swap dealer or covered associate for failure to comply with Regulation 23.451 with respect to “governmental plans” as defined in Section 3 of ERISA.  The letter notes that Regulation 23.451’s limitations continue to apply with respect to other governmental Special Entities as defined in the Regulation, which also include any “State, State agency, city, county, municipality, other political subdivision of a State, or any instrumentality, department, or a corporation of or established by a State or political subdivision of a State.”  The letter explains that the relief is intended, in part, to harmonize CFTC regulations in this area with “pay-to-play” rules enacted by the SEC and the Municipal Securities Rulemaking Board, neither of which apply with respect to officials of federal or other non-state or non-local government agencies, instrumentalities, or plans.

Two-Year Look-Back.  The no-action letter also clarifies that the two-year “look-back” during which contributions are prohibited does not include any time period that precedes the date on which a swap dealer is required to register as such.  For example, for an entity that is required to register as a swap dealer on December 31, 2012 (the earliest date on which an entity will be required to register as a swap dealer), any contributions made by it or its covered associates prior to December 31, 2012, are not included in the “look-back.”