CFTC Division of Swap Dealer and Intermediary Oversight Clarifies Pay-to-Play Rule

Last week the Commodity Futures Trading Commission (CFTC) issued a No-Action letter that it would not enforce pay-to-play restrictions on banks that sell swaps to pension plans. As we previously reported, the CFTC adopted a pay-to-play rule in February 2012 pursuant to the Dodd-Frank Act, which makes it unlawful for a swap dealer (“SD”) to offer to enter or to enter into a swap with a “government Special Entity” for a period of two years after such SD or any of its “covered associates” make a political contribution to a government Special Entity. By excluding banks from the restrictions, the CFTC stated that its intention was to harmonize limits on political contributions from the SEC and Municipal Securities Rulemaking Board because, “unlike Regulation 23.451, neither the SEC’s nor MSRB’s ‘pay-to-play’ rules apply to officials of federal or other non-state or non-local government agencies, instrumentalities, or plans.”  Further, the CFTC letter clarifies the two-year lookback period, during which swap dealers could be prohibited from doing business with a government entity due to a prohibited contribution, does not encompass the time that precedes the date when a swap dealer is required to register as a swap dealer with the CFTC.