SEC May Propose Fiduciary Duty for Swap Dealers

Aiming to manage risk and guard clients from abusive practices, the SEC is laying out conduct rules for swap dealers.

(June 29, 2011) — The US Securities and Exchange Commission (SEC) may propose rules that would impose a fiduciary duty for public fund swap advisers.

The rules outlined in a more than 200-page SEC proposal are part of the government’s efforts to impose more stringent regulations on the trade in derivatives. “The rules we are proposing today would level the playing field…by bringing needed transparency to this market and by seeking to ensure that customers in these transactions are treated fairly,” SEC Chairman Mary L. Schapiro said.

Under the SEC’s plan to aid buyers in evaluating whether they’re getting a fair deal, dealers would be forced to disclose to their buyers the risks of transactions and any conflicts of interest. Additionally, dealers would be forced to disclose incentives and would have to adhere to rules aimed at prohibiting pay-to-play practices.

Large swap traders and dealers including Goldman Sachs, Morgan Stanley, and JP Morgan Chase would be subject to the rules, required by the Dodd-Frank Wall Street overhaul law.

The proposal is subject to a period of public comment and a final vote.

In April, the SEC and the Commodity Futures Trading Commission (CFTC) laid out swaps definitions covered under the Dodd-Frank law. Under the proposals — aimed at limiting risk and boosting transparency in the $583 trillion global swaps market — swaps would include foreign exchange swaps and forwards, foreign currency options, commodity options, cross-currency swaps, and forward rate agreements. An exemption would apply to certain insurance products, consumer and commercial transactions.

“The proposed definitions balance several policy and legal issues in a way I believe is practical, takes into account the specific nature of derivatives contracts, and is consistent with existing securities regulations,” said SEC Chairman Mary L. Schapiro in a statement. “The proposal seeks to provide guidance in rules and interpretations by using clear and objective criteria that should clarify whether a particular instrument is a swap regulated by the CFTC, a security-based swap regulated by the SEC, or a mixed swap regulated by both agencies.”

President Obama signed the Dodd-Frank financial regulation bill last July, giving the CFTC and SEC oversight of the OTC derivatives market while forcing most swaps to be cleared on a regulated exchange. Obama’s signature marked a legislative push that has become increasingly aggressive since the 2008 financial crisis pummeled the US economy.

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href=''></a>; 646-308-2742