Comment Text:
I am writing regarding Section 4s(h)(5) which “authorizes the Commission to establish duties for swap dealers and major swap participants that offer swaps or enter into swaps with Special Entities, including requiring a swap dealer or major swap participant to have a reasonable basis to believe that the Special Entity has a representative, independent of the swap dealer or major swap participant, that meets certain criteria, including having sufficient knowledge to evaluate the transaction and risks, undertaking a duty to act in the ‘‘best interests’’ of the Special Entity, and being subject to pay-to-play restrictions.” I believe that as written, this rule can have several unintended consequences including creating a fragmented market for advisors and potentially introducing conflicts of interest.
As a Muni Advisor, we are hired by our borrower clients to represent their interests as they negotiate with dealers over interest rate swaps and similar transactions. Our clients hire us or our competitors because they believe that the selected advisor represents the best combination of expertise and fee structure without regard to the subjective views of any particular dealer.
Inserting a dealer required “stamp of approval” undermines the selection process and potentially creates conflicts of interest at the dealer opining on an advisor’s qualifications. Additionally, it has the potential to create confusion in the market. Determining whether or not a Muni Advisor has sufficient knowledge to evaluate a transaction is, by its nature, subjective. Each dealer will evaluate this knowledge using dealer specific criteria. As a result, each dealer effectively becomes a mini regulator.
Currently, the MSRB has proposed fiduciary standards for Muni Advisors. Additionally, we understand that they are contemplating qualification standards (e.g. testing). We respectfully propose that the CFTC consider amending this rule to require that when a dealer enters into an interest rate swap transaction with a Special Entity, that it instead merely be required to affirmatively confirm that the Special Entity is licensed by the appropriate regulator to advise on the transaction structure under consideration. We further propose that the CFTC involve itself in this process so that it can assure itself that the resulting regulatory framework means that a licensed Muni Advisor is qualified to advise and act in the best interests of a Special Entity. Thank you.
