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Cypen & Cypen
JANUARY 12, 2006

Stephen H. Cypen, Esq., Editor

Never Forget - September 11, 2001


According to a Bloomberg News piece in Daily Business Review, some analysts believe that mortgage-backed bonds sold by companies such as Fannie Mae will lag behind U.S. Treasuries for a second year, as banks cut their purchases in face of rising interest rates. Debate over direction of the $6 Trillion market is heating up, as 2-year treasury yields recently rose above 10-year yields, hurting profits for many investors. Mortgage bonds had their first losing year versus treasuries since 2001, earning about 2.7% compared to treasuries’ 2.83%. The rise in the 2-year yields to above those on the 10-year notes created a so-called inverted yield curve, further disincentivising banks and other investors to buy mortgage securities. U.S. banks have already slowed growth in holdings in mortgage securities, raising their investments in 2005 by just $39 Billion (from $878 Billion) compared to a $95 Billion boost between 2003 and 2004.


Like Internal Revenue Service before it (see C&C Newsletter for December 8, 2005, Item 1), the General Services Administration has announced a new mileage reimbursement rate, lowering it 4 cents to 44.5 cents per mile for 2006. The rate, which applies to employees who use personal vehicles for government business, is retroactive for all official travel performed on or after January 1, 2006. GSA’s reimbursement rate generally matches the annual rate established by Internal Revenue Service, and by law, cannot be higher than the IRS rate. IRS based its rate on a study of cost of operating vehicles, including gas prices, oil, tires and general maintenance costs. According to federal travel regulations, employees may use personal vehicles for official travel if they obtain permission from their agency. The reimbursement rate applies only to authorized means of travel. A nifty little chart showing GSA vehicle reimbursement rates back to 1995 (when it was 30 cents) is available at


We recently reported on the degree to which companies that sponsor ongoing pension plans are “freezing” benefits (see C&C Newsletter for January 5, 2006, Item 1). While companies may see freezing a plan as the way out of a underfunding dilemma, benefits consultants warn that it only solves part of the problem: although freezing a defined benefit plan reduces costs, it has little immediate effect on the financial risks associated with the plan. According to Treasury & Risk Management, it is surprising how long it takes most typical plans after they are frozen to achieve a reduction in financial risk. In many cases, decades pass before there is an appreciable drop in liabilities and exposure to risk. Some argue that financial risks of a DB plan may be even greater after the plan is frozen. For one thing, companies tend to put frozen plans on the back burner, and that lack of attention can be dangerous. A frozen plan has to be managed just as actively, if not more so, than an active plan. When a plan is frozen, the company is just starting a new process, not finishing an old one. Companies that froze well-funded plans years ago have been disconcerted to see that those plans became underfunded when financial markets fell, resulting in stepped-up contribution requirements. Of course, companies could eliminate financial risks by terminating their DB plans. But that option could be more expensive, because it requires either paying a lump sum or purchasing an annuity for each plan participant. With interest rates still relatively low, termination costs could be up to 20% higher than full funding!


Speaking of freezes, International Business Machines Corp. announced that it will freeze its $48 Billion pension plan in 2008. Beginning January 1 of that year, IBM workers’ pension benefits will be locked in place, based on salary and length of service to date. IBM will increase contributions to its 401(k) plans, which are defined contribution plans that employees are responsible to invest. This “hard freeze” follows the “soft freeze” of January 1, 2005, after which the existing plan was closed to new employees.


When it comes to vacations, “use it or lose it” is a well known condition. However, American workers are losing vacation days big time: more than 421 million vacation days evaporated in 2005. According to’s fifth annual “Vacation Deprivation” survey, each employed U.S. adult left an average of three vacation days on the table. In fact, nearly one-third of Americans reported that they do not always take all their vacation days, despite half admitting that they come back from a vacation feeling rested, rejuvenated and reconnected in their personal life. The value of vacation days Americans gave back is estimated at $54 Billion.


Plansponsor. com reports that National Association of Securities Dealers has begun notifying a number of individuals who took the Series 7 Broker Qualification Exam between October 1, 2004 and December 20, 2005, to tell them that they incorrectly received a failing grade due to computer error. Only exams on the “cusp” of the pass/fail line were affected, causing some testees to show up just below minimum passing grade. Of the 1,882 people who incorrectly received a failing grade, over 1,000 have already retaken the exam and passed; more than 600 have not as yet rescheduled an exam and over 200 are already scheduled to retake the test. No one (fortunately) received an erroneous passing grade.


Irving, a former chief pediatrician for a New York school district, was convicted, among other crimes, of traveling abroad for the purpose of engaging in sexual acts with minors. Besides imprisonment, the federal district judge imposed a $200,000 fine. On appeal, besides challenging the conviction, Irving asserted that the $200,000 fine levied against him should be vacated because it violated ERISA’s anti-alienation provision. In making this particular argument, Irving relied primarily on a 1990 Supreme Court decision, in which the Court refused to create an exception to ERISA’s anti-alienation provision, even for criminal misconduct, and held that only Congress could create such an exception. Apparently, Congress accepted the Supreme Court’s invitation by enacting 18 U.S.C. § 3613(a), the Mandatory Victim Restitution Act of 1996. United States District Courts across the country have found that MVRA permits courts to consider ERISA protected assets in determining appropriate fines and restitution. Nothing in the text of the ERISA anti-alienation provision suggests that it needs to be specifically cited to in MVRA to justify such interpretation. Thus, the appellate court rejected Irving’s claim that the $200,000 fine levied against him violated ERISA’s anti-alienation provision. United States v. Irving, Case No. 04-0971 (U.S. 2d Cir., December 23, 2005).


The Journal of Accountancy contains an article on how to prevent investment adviser fraud. Fraud is still in the headlines and on the minds of investors. Over the last few years, investors have grown discouraged with accounts of fraud occurring in trusted sectors of American business, including the financial services industry. Except for large investment advisers implicated in the mutual fund trading scandals, the investment adviser profession has thus far avoided accusations of widespread fraudulent practices and the legislative scrutiny that ensues. The record, however, provides little comfort to an investment adviser firm when the U.S. Securities and Exchange Commission or a state agency starts a fraud investigation or files a fraud enforcement action. The article seeks to explain briefly the current legal framework defining fraudulent conduct and what an investment adviser firm can do to avoid accusations of fraud. In particular, the piece describes how an adviser may commit fraud by failing to disclose adequately potential conflicts of interests with clients, as opposed to affirmative misrepresentations to clients. Above all else, investment advisers services are based on trust between the adviser and its clients. An adviser cannot serve without this trust, nothing jeopardizes it more quickly than government accusations of fraud. Putting aside the enormous financial cost of defending against fraud accusations and the possibility of paying a civil money penalty in a negotiated settlement, fraud investigations test personal and professional reputations, client relations and the ability to generate professional referrals. Given these risk factors, it pays for every investment adviser to understand what constitutes fraud under the Investment Advisers Act of 1940. Stepping too close to the line, even inadvertently, can be very costly. From the executive summary:

  • Section 206 of the Investment Advisers Act of 1940 provides guidelines for investment advisers on what constitutes fraud.
  • The Supreme Court has held that the Act imposes a fiduciary duty on investment advisers to act in the best interests of their clients by fully disclosing all potential conflicts of interest.
  • Investment advisers should review carefully SEC and other disclosure requirements to ensure and clearly understand potential conflicts.
  • Investment advisers should review all SEC filings, client marketing materials and other significant documents to ensure that they have appropriately disclosed all potential conflicts.

The author, a certified public accountant, is special counsel with the SEC in Philadelphia.


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Someone once wrote that “50,000,000 Frenchmen can’t be wrong.” Well, that may be true, but it only takes one loopy French computer to give scores of retirees heart failure. A recent computer glitch, according to Associated Press, caused a French pension fund to produce letters to over 100 participants, demanding payment of more than $2 Billion in dues. The demand letter was quite cordial, concluding with wishes for the New Year and affording two full weeks for repayment. Now, is that a great holiday gift, or what?

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Items in this Newsletter may be excerpts or summaries of original or secondary source material, and may have been reorganized for clarity and brevity. This Newsletter is general in nature and is not intended to provide specific legal or other advice.

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