Alert February 12, 2013

DOL Issues Advisory Opinion Clarifying ERISA Issues With Respect to Cleared Swap Transactions Involving ERISA Plans

On February 8, 2013, the Department of Labor (the “DOL”) issued Advisory Opinion 2013-01A in response to a written request from the Securities Industry and Financial Markets Association (“SIMFA”), regarding the application of certain ERISA requirements to “cleared swap” transactions involving plans subject to ERISA.  Effective September 9, 2013, certain types of swaps with an ERISA plan as a counterparty generally must be cleared through certain clearing organizations (as discussed in the December 4, 2012 Financial Services Alert).  Prior to the issuance of this Advisory Opinion many swap clearing organizations, clearing members of such organizations and futures commission merchants had expressed concern that engaging in cleared swaps (and related transactions) with ERISA plans could subject such organizations to fiduciary liability under ERISA.  Specifically, the Advisory Opinion clarifies the following, subject to the conditions discussed below:

  • Margin Is Not a “Plan Asset.”  The DOL clarified that margin received from an ERISA plan and held by a swap clearing member is not a “plan asset” for purposes of ERISA.  Instead, when an ERISA plan engages in a cleared swap transaction, its asset consists of the rights embodied in the swap contract between the plan and the clearing member (including the rights regarding margin).
  • Exercise of Rights Upon Default and Other Specified Events by a Clearing Member Does Not Result in Fiduciary Status.  The Advisory Opinion explains that a clearing member that exercises its rights pursuant to an agreement negotiated with an ERISA plan’s fiduciary would not be “exercising any authority and control with regard to plan assets and would not be a plan fiduciary . . . solely by reason of liquidating the swap contracts in a plan’s account and selling any collateral posted as margin in order to pay off losses suffered by such account.”
  • Clearing Members Are “Parties in Interest” to ERISA Plans.   The DOL concluded that a clearing member that enters into a direct contractual agreement with an ERISA plan provides a service to the plan and is therefore a “party in interest” with respect to such plan.  Consequently, an exemption from ERISA’s prohibited transaction rules must be available in order to enter into any such arrangement.  Pursuant to the Advisory Opinion, swap central counterparties (i.e., the clearing organization) would not be deemed to be “parties in interest” to ERISA plans solely by reason of providing swap clearing services to a plan’s clearing member because such central counterparties do not provide services directly to the plan.
  • QPAM Exemption Relief.  As noted above, because a clearing member providing services to an ERISA plan is considered a “party in interest” to such ERISA plan, an exemption from ERISA’s prohibited transaction rules must be available in order to enter into any such arrangement.  The DOL explained that Prohibited Transaction Exemption 84-14, the so called “QPAM Exemption” (granting relief to transactions entered into on behalf of an ERISA plan by a “qualified professional asset manager,” or a “QPAM”) would generally be available (assuming all other conditions of the QPAM Exemption are met) to the extent that (i) a QPAM negotiates and makes the decision on behalf of the plan to enter into the services arrangement and (ii) the agreement entered into by the QPAM “sets forth all of the material terms of the provision of services and guarantee” by the clearing member.  Further, the DOL explained that the QPAM Exemption can provide relief for the guarantee provided by the clearing member and liquidation and close-out transactions executed by a clearing member if the agreement covering the primary swap transaction (i.e., the agreement to provide swap clearing services) “contains sufficient terms of the subsidiary transaction such that the potential outcomes of the subsidiary transactions are reasonably foreseeable to the QPAM when entering into the [a]greement.”
The DOL noted that the same analysis would apply to Prohibited Transaction Exemption 96-23 regarding In-House Asset Managers, but the DOL did not comment as to whether any other prohibited transaction exemptions (e.g., Section 408(b)(17) for a transaction with a service provider or Prohibited Transaction Exemption 91-38 for transactions of a bank-maintained collective fund) would provide relief for cleared swap arrangements and subsidiary transactions.

The DOL stressed in the Advisory Opinion that an ERISA plan’s decision to enter into any swap arrangement remains a fiduciary action subject to ERISA’s general fiduciary duties and standards.  Finally, the DOL confirmed that it had conferred with Commodity Futures Trading Commission (“CFTC”) officials regarding the Advisory Opinion, who authorized the DOL to state that they “do not believe the conclusions reached in this [Advisory Opinion] are inconsistent” with the Commodity Exchange Act (the “CEA”) or “the CFTC’s regulation of cleared swap transactions under the CEA.”