SEC Proposes New Swap Rules

Public fund swaps advisers would be required to assume fiduciary duty.

The U.S. Securities and Exchange Commission will seek comment on a rule that would require swap dealers advising pension funds, endowments and municipalities to place the interests of such investors above their own.

SEC commissioners voted 5-0 today to propose a rule that would impose the fiduciary duty as part of business-conduct practices for swap dealers advising so-called special entities. Dealers would also have to “reasonably believe” the investors have an independent representative capable of evaluating risks, according to an SEC fact sheet released in Washington.

The Dodd-Frank Act called on regulators including the SEC, which oversees security-based swaps, to crack down on abuses in sales to states, cities and school districts after swaps pushed Jefferson County, Alabama, to the brink of bankruptcy. The Commodity Futures Trading Commission, which oversees swaps tied to interest rates, has already proposed a similar rule.

“The rules we are proposing today would level the playing field in the security-based swap market by bringing needed transparency to this market and by seeking to ensure that customers in these transactions are treated fairly,” SEC Chairman Mary Schapiro said in a statement.

The SEC will seek public comment through Aug. 29 on the rule, which would also require dealers to provide counterparties with material information about swaps, including risks and conflicts of interest. Dealers would have to provide information on daily valuations and determine whether recommendations to clients meet suitability standards.

Dealers would also be required to verify whether a client is a special entity, and to comply with so-called pay-to-play rules that restrict campaign contributions to politicians who hold the power to award contracts, according to the fact sheet. Special entities generally include federal agencies, states, employee benefit plans and endowments, the SEC said.


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