On May 1, 2013, ISDA® published sample letters designed to help swap dealers (SDs) comply with final Dodd-Frank external business conduct (EBC) rules (also referred to as external business conduct standards or EBCS) that prescribe how SDs must interact with certain "special entities" with which they enter into swaps. Under the final ECBS, which took effect on May 1, 2013, SDs must ensure that they remain independent of special entities in their swap dealings, or face increased advisory responsibilities. Special entities are certain local, state and federal government entities and qualified retirement plans.

The letters, which are part of ISDA's Dodd-Frank Documentation Initiative, contain various disclosures and representations from both parties outlining the independence of the SD from its counterparty in entering into the swap. These letters can be provided at the outset of communication by an SD with an ERISA special entity swap counterparty or potential counterparty, or a non-special entity counterparty or potential counterparty, prior to entering into a swap agreement with the counterparty to ensure that all communications relating to entering into the swap are covered by the safe harbor.

Note that the ERISA special entity letter is not necessary for parties that have already entered into the August 2012 Dodd-Frank Protocol Supplement Schedules 5 or 6, as those schedules contain representations that qualify the SD for the same safe harbor as the representations made in the ERISA special entity letter. The non-special entity letter is not necessary for parties that have already entered into the August 2012 Dodd-Frank Protocol Supplement Schedule 3, as that schedule contains representations that qualify the SD for the same safe harbor as the representations made in the non-special entity letter. For more on these Schedules, see Practice Note, The ISDA Dodd-Frank Protocol: The August Protocol DF Supplement and Schedules.

ISDA also recently published a non-ERISA special entity letter, which functions similarly to the ERISA special entity letter (see Legal Update, ISDA Publishes Sample 'Special Entities Letter for Swap Dealers).

In the ERISA special entity letter, the SD discloses that it:

In the ERISA special entity letter, the ERISA counterparty must choose between two sets of representations depending which of the following safe harbors for ERISA special entities it falls under:

If the ERISA counterparty falls under the "ERISA special entity only" safe harbor (corresponding to Schedule 5 of the August Dodd-Frank Protocol documents (see Practice Note, The ISDA Dodd-Frank Protocol: The August Protocol DF Supplement and Schedules), the ERISA counterparty makes the following representations under Option 1 of the letter:

In connection with Option 1, the designated fiduciary represents that:

If the ERISA counterparty falls under the "general special entity" safe harbor (corresponding to Schedule 6 of the August Dodd-Frank Protocol documents (see Practice Note, The ISDA Dodd-Frank Protocol: The August Protocol DF Supplement and Schedules), the ERISA counterparty makes the following representations under Option 2 of the letter:

In connection with Option 2, the designated fiduciary represents that it is exercising independent judgment in evaluating recommendations by the SD regarding any swap that are presented to it.

The representations contained in the ERISA special entity letter are sufficient to qualify the SD for the applicable safe harbor under 17 C.F.R. § 23.440, which relieves it from the duty to engage in any heightened suitability analysis for the counterparty and swap in question and from qualifying as an advisor under the CEA. While the EBCS also apply to MSPs that enter into swaps with special entities, ISDA does not address MSPs in the letter.

In the non-special entity letter, the SD discloses that it is acting in its capacity as a counterparty and is not undertaking to assess the suitability of any swap for the counterparty. This letter requires the counterparty to choose between two sets of representations depending on whether or not it has a designated evaluation agent. If the counterparty has a designated evaluation agent, the counterparty makes the following representations:

The designated evaluation agent represents that it is exercising independent judgment in evaluating the recommendations of the SD regarding any swap that are presented to the designated evaluation agent.

If a counterparty does not have a designated evaluation agent, it makes the following representations:

The representations contained in the ERISA non-special entity letter are sufficient to qualify the participating SD for the applicable safe harbor under 17 C.F.R. § 23.440, which relieves it from the duty to engage in any heightened suitability analysis for the swap in question and from qualifying as an advisor under the CEA. While the EBCS also apply to MSPs that enter into swaps with special entities, ISDA did not address MSPs in the letter.

For more on swaps with special entities and the special requirements surrounding them, see Practice Note, Swap Dealers and MSPs: Final Dodd-Frank External Business Conduct (EBC) Rules: Swaps with Special Entities.

For more information about the final Dodd-Frank EBCS for SDs and MSPs, see Practice Note, Swap Dealers and MSPs: Final Dodd-Frank External Business Conduct (EBC) Rules.

For a summary of ISDA's sample safe harbor letter for non-ERISA special entities, see Legal Update, ISDA Publishes Sample 'Special Entities Letter for Swap Dealers.