US - BlackRock Inc. and the largest US business lobby groups are fighting to strike a provision in the regulatory-overhaul legislation that they say could harm millions of investors in retirement plans and pension funds.
A measure requiring swaps dealers to treat clients as a fiduciary, or to act in their best interest, would effectively bar retirement plans from buying derivatives they use to manage portfolios, BlackRock and the groups say. It would make it impossible for them to offer stable-value funds in 401(k) or other tax-deferred saving plans, they said.
"This would be the poster child for unintended consequences," said Barbara Novick, a BlackRock vice chairman and head of government affairs at the New York-based firm. "It's a technical issue, but it has very broad implications."
The Securities and Exchange Commission's fraud suit against Goldman Sachs Group Inc., one of the biggest US swaps dealers, has fueled congressional efforts to expand protections for so- called sophisticated investors such as pension funds and asset managers. The SEC last month accused Goldman Sachs, which is fighting the suit, of failing to disclose key information about mortgage-backed securities it sold to institutional investors.
BlackRock, which manages US$3.4trn, sent an alert to clients asking them to weigh in with lawmakers on the issue. The US Chamber of Commerce, the Business Roundtable, the National Association of Manufacturers and other trade groups sent a letter to senators this week, calling the provision a "grave threat to the private retirement system."
The lobbying campaign is complicated by a fissure among institutional investors, some of whom call the fiduciary provision an important corporate governance reform.
"We have this myth that these pension funds and school boards and municipalities can operate as equals when they are dealing with Wall Street firms," said Barbara Roper, director of investor protection at the Consumer Federation of America. "They can't."
Roper and other investor advocates contend that the biggest banks are overstating the potential harm from the legislation and are stirring up the business lobby groups because they aren't as toxic to Congress as the bailed out banking industry.
"Clearly it has been their tactic to put a more palatable or politically correct face on their arguments, and it's been incredibly effective," Roper said.
Kent Mason, a Washington attorney and outside counsel to the American Benefits Council, which is also lobbying to get the fiduciary provision eliminated, says such arguments are "flat wrong." The Washington-based association's members are generally corporations, including 3M Co., Coca-Cola Co. and Target Corp., that sponsor benefit plans.
"I represent the plans and my analysis, if I never talked to a swap dealer, would be exactly the same," Mason said.
The fiduciary requirement is endorsed by labor groups including the AFL-CIO and American Federation of State, County and Municipal Employees, which also have large pension funds.
"We support requiring derivatives dealers who are dealing with pension funds and state and local governments having a fiduciary duty to their clients," said Damon Silvers, policy director of the AFL-CIO in Washington.
Novick of BlackRock said her firm is taking on the issue because the restriction would limit investment choices and drive up costs for its corporate, union and public pension fund clients. She said the May 5 client alert prompted a lot of interest.
The business groups are concerned that the definition of fiduciary -- not spelled out in the legislation being debated in the Senate - would fall under the strict federal law that covers corporate and union benefit plans. Public funds would be affected under similar state laws.
If that happens, a swaps dealer would be required to put the plan's interest first. That's impossible, the groups say, because the two sides in a swap have conflicting interests -- one wants to buy at the lowest cost and the other wants to sell at the highest price.
Pension plans use derivatives, including interest-rate swaps and index swaps, to reduce risk or diversify portfolios.
Stable-value funds use a derivative known as a book-value wrapper that is integral to their conservative investment strategies. There is an estimated $700bn invested in stable-value funds, and more than 60% of defined contribution plans offer a stable-value option. The accounts, mostly bond portfolios, are designed to offer steady returns.
- With reporting by Lorraine Woellert in Washington.
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