Fiduciary requirement in Wall St reform draws fire

* Provisions sought to curb disastrous swap sales

* Retirement plan sponsors say changes would add costs

By Ross Kerber

BOSTON, June 18 (Reuters) - Proposals to curb abusive securities sales have drawn fire from companies who say new rules would add steep costs to their retirement and 401(k) savings plans.

Some of the biggest U.S. employers have been drawn into the issue as part of the package of financial oversight changes being negotiated in Congress in response to the financial crisis.

Among other things, the version of reform already passed by the Senate would limit Wall Street's sales of complex instruments known as "swaps" after several cases in which the instruments proved disastrous to buyers who proved unsuited to use them.

For instance, Jefferson County, Alabama wound up defaulting on $3.8 billion worth of sewer bonds in 2008 after interest rate swaps led its payments to spiral out of control.

Several people, including a former mayor of Birmingham, Alabama, were sentenced to prison over the matter, and JPMorgan Chase & Co (JPM.N) agreed to a settlement worth more than $722 million to end a probe by the U.S. Securities and Exchange Commission.

But some business pension plan leaders say the new rules proposed by the Senate would go too far, harming larger swaps customers in the name of protecting smaller ones.

In particular they worry about language that would require the banks to owe a "fiduciary duty" both to buyers of the instruments and to banks' own shareholders.

As a result, they say, most banks would simply stop selling swaps to parties like corporate pension plans, which rely heavily on swaps to reduce the amount of money they set aside to pay benefits each year.

"Without swaps, funding obligations become hugely more volatile, and that will have a corresponding severe effect on the money available to invest in the business and to create jobs," said Kent Mason, a partner in the law firm of Davis & Harman LLP, speaking on a conference call with reporters on Friday.

The call was sponsored by the American Benefits Council, whose members include Boeing Co (BA.N), DuPont (DD.N) and Ford Motor Co(F.N).

Mason gave the example of a $10 billion pension plan typical of a large company with around 50,000 employees. For such a plan, a one percent change in interest rates could increase the plan's future liabilities by $1.5 billion, and force it set aside an extra $250 million a year if it could not use swaps to manage its interest rate and equity risks.

Another issue, Mason said, is that proposed reforms could make it harder for 401(k) plans to invest in so-called "stable value" funds that invest in long-term corporate bonds.

In all, 401(k)s hold about $700 billion in stable-value funds, according to estimates cited by Mason. These funds tend to pay higher interest rates than shorter-term money market funds.

But under the Senate's rules, the funds might be considered "swaps," and thus raise the same problems with the proposed new fiduciary duty rules, he said.

Most members of the American Benefits Council are not financial sector companies.

"What you're seeing is a gradual understanding of the possible unintended consequences by parties outside of financial institutions," said Andrew DeSouza, a spokesman for the Securities Industry and Financial Markets Association, a Washington trade group that counts as members large institutions like Bank of America Corp(BAC.N) and Wells Fargo & Co.(WFC.N).

The fiduciary provisions still have backers, however, including the Pension Rights Center, a Washington organization that represents employees on retirement matters.

Norman Stein, a Drexel University law professor and advisor to the center, called the business groups' concerns overblown and said banks would find a way to keep selling the instruments.

"The complaints are panicky and crying wolf," Stein said. The benefit of the new rules would be to make sure banks do not sell swaps to parties who cannot understand then.

But Stein and Mason, the lawyer for plan sponsors, did agree on one fix that is not currently in either the House or Senate versions of the legislation: requiring customers to use an independent advisor when buying swaps or similar instruments to make sure they are understood. (Reporting by Ross Kerber; Editing by Tim Dobbyn)