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Cypen & Cypen
JANUARY 11, 2007

Stephen H. Cypen, Esq., Editor

Never Forget - September 11, 2001


As our readers know, the U.S. Securities and Exchange Commission issued an Interpretive Release narrowing the scope of permissible services under the soft dollar safe harbor contained in Section 28(e) of the Securities and Exchange Act of 1934 (see C&C Newsletter for October 12, 2006, Item 7). The final rule, published July 24, 2006 in the Federal Register, is effective July 24, 2006. However, market participants were allowed to continue to rely on SEC’s prior interpretations of Section 28(e) until January 24, 2007. Well, folks, January 24, 2007 is less than two weeks away. Those interested should check the entire release at


Speaking of soft dollars, Pensions & Investments reports that money managers and broker-dealers have launched a last-ditch effort to derail a Department of Labor proposal to require pension plans to report soft-dollar payments and other compensation involved in the administration of their plans. Managers and brokers are arguing that the Department of Labor’s proposal to track and report soft-dollar payments would be extremely difficult and expensive to implement, and that plan sponsors could get stuck with the tab for the new obligation. In its formal proposal made last July, the Department of Labor said proposed changes in Form 5500 reporting requirements for private plans were intended to ensure that plan officials obtain the information they need to assess reasonableness of the compensation paid for services rendered to the plan, taking into account revenue sharing and other financial relationships or arrangements and potential conflicts of interest that might affect quality of those services. Under a typical soft-dollar arrangement, a manager receives, for no additional charge, research reports and investment advice from the broker-dealer that executes trades for the manager’s clients, including pension plans. Because the plan ultimately picks up the tab for the trades -- and the money manager receives advice and reports from the broker-dealer, not the plan -- the Department of Labor’s proposed reporting requirement would essentially require broker-dealers and managers to account for what the plan is getting from the soft-dollar payments. The deadline for public comments was last September, and an announcement on final rules is expected any time now. However, changes would not be effective until January 1, 2008.


Eligibility for leave under the Family and Medical Leave Act depends in part on an employee’s having been employed by the relevant employer “for at least 12 months.” Rucker worked as a car salesman for his employer for five years. Rucker left, and five years later, rejoined his employer as a full-time employee. Seven months after rejoining his employer, Rucker took medical leave. Approximately two months later, Rucker’s employment was terminated. He filed suit, claiming that the termination was in violation of FMLA. The United States District Court granted the employer’s motion to dismiss, holding that Rucker could not combine his previous period of employment with his more recent period, and thus could not satisfy FMLA’s 12-month employment requirement. On review, the court of appeal was faced with a case of first impression, raising the issue of whether and under what circumstances an employee who has had a break in service may count previous periods of employment with the same employer towards satisfying the 12-month requirement. The appellate court held that FMLA itself is ambiguous as to whether previous periods of employment count toward the 12-month requirement, but regulations promulgated by the United States Department of Labor, as interpreted by the Department of Labor, establish that previous periods of employment do count. Accordingly, the lower court’s granting of a motion to dismiss was reversed, and the cause remanded for further proceedings. Read: Rucker is ultimately going to prevail on the merits. Rucker v. Lee Holding Co., Case No. 06-1633 (U.S. 1st Cir., December 18, 2006).


Effective January 1, 2007, Florida’s minimum wage increases 27¢ an hour, to $6.67. Two years ago, Florida voters approved a constitutional amendment that raised the state minimum wage above the current federal level -- $5.15 -- and required an adjustment each fall for inflation. Eligible employees who receive tips must receive at least $3.65. Fewer than 400,000 (about 5%) of Florida’s 8.7 million workers earn minimum wage, although some argue that those who make within a dollar or so of that base rate will see their pay rise when the standard is lifted. A related law, also effective January 1, requires businesses that pay minimum wages to post signs in English and Spanish stating the minimum pay and the rights of employees.


Many former public employees receive retirement benefits under the Alaska Public Employees’ Retirement System. Monthly retirement benefits are calculated by taking some percentage of average monthly compensation and multiplying that amount by years of service. Retirees sixty-five years old or older, or who first entered the system before a certain date, residing in Alaska are entitled to a monthly cost-of-living allowance in addition to the base benefit. The COLA is the greater of fifty dollars or ten percent of the basic monthly benefit. A retired employee who receives benefits under the system, but because he lives in Hawaii does not receive a COLA, filed a class action against the system, arguing that the COLA residency requirement was an unconstitutional restriction on the right to travel and a violation of equal protection of the law under provisions of the federal and state constitutions. After the parties filed cross-motions for summary judgment, the trial court ruled that the residency requirement was invalid on state equal protection grounds and granted plaintiff’s motion for summary judgment. On appeal, the Supreme Court of Alaska reversed. The purpose of the COLA payments -- encouraging retired public employees to remain in the state -- is legitimate. COLA payments are a means fairly and substantially related to that purpose. They do not substantially infringe on the right of member retirees to live elsewhere. Considering these determinations, the court concluded that limiting COLA payments to resident retirees does not violate the equal protection clause of the Alaska Constitution Public Employees’ Retirement System v. Gallant, Case Nos. S-11926/11945 (Alaska, December 29, 2006).


Now that Congress has returned, making decisions on government spending will be a big and early order of business, according to Most federal agencies are operating on an interim spending bill that expires February 15. Key lawmakers have said they plan to put the government on a post-holiday diet that will stretch through September, and that could cause some headaches for federal employees. The funding crunch will not affect President Bush’s executive order, however, issued late last month, providing an average 2.2% pay raise for federal employees. Government retirees also will see their monthly pension checks increase this month, by 2.3% or 3.3%, depending on their retirement system. Officials said the administration will again ask Congress to rewrite laws so federal employees can switch to part-time work late in their careers without taking a pension reduction and to allow agencies to bring back federal retirees without salary offsets so the rehired annuitants can collect a full paycheck and a full pension. Those efforts began last year, but did not gain any traction on Capitol Hill. The Office of Personnel Management is also interested in exploring whether a program could be created to offer short-term disability insurance to federal employees. Such a program could help the government recruit employees and might be a way to provide maternity benefits, easing complaints from younger federal employees who would like the government to offer paid parental leave to care for newborns and adoptions. The National Active and Retired Federal Employees Association hopes that the Ways and Means Committee will show more interest in modifying laws that frustrate many federal retirees, such as the offset and windfall elimination provisions in Social Security Law (see C&C Newsletter for October 19, 2006, Item 1). Federal retirees are also campaigning for statutory changes that would permit them to pay their health insurance premiums with pre-tax annuities, similar to the tax break provided federal employees.


The number of securities fraud class actions filed in 2006 was the lowest ever recorded in a calendar year since adoption of the Public Securities Litigation Reform Act of 1995, according to a joint study from Stanford Law School and Cornerstone Research. Reported in, the study found securities fraud class actions decreased by 38% since 2005, falling from 178 filings to just 110 -- nearly 43% lower than the ten-year historical average of 193. Researchers found the decline to be even more dramatic when filings alleging options backdating are excluded. If options backdating cases are eliminated from the sample, “core” securities class action litigation in 2006 was only 90 cases, a decline of 53% from the historic norm. There have been 22 securities class actions filed related to options backdating allegations, 20 of which were filed last year. The total maximum dollar loss in 2006 (shareholder losses measured by largest capitalization decline experienced during class period) fell from $362 Billion in 2005 to $294 Billion in 2006. The total maximum dollar loss is now 57% below the historic average of $680 Billion per year. The study attributed the low record numbers of securities fraud class action filings in 2006 to:

  • The strengthened federal enforcement environment reflected in the pressure that the Securities and Exchange Commission and Department of Justice now bring to bear on corporations to conduct internal investigations that implicate individual executives responsible for fraud may be reducing the amount of fraud in the market,
  • A strong stock market combined with lower stock price volatility typically reduces the number of cases filed, and
  • The overwhelming majority of securities fraud class actions that were filed in the late 1990s to the early 2000s are now over.

8. MASSACHUSETTS OFFICIAL EXAMS HEDGE FUNDS: reports that Massachusetts Secretary of State William Galvin is investigating whether hedge funds have increased their trading fees to compensate banks for office space they lease as temporary quarters for hedge fund traders, and if funds are disclosing the fees to investors. The conflict is over whether hedge funds are paying banks for space by hiking their commissions for trading. These “soft dollars” are considered a conflict because investors are paying for services that primarily benefit the money manager.


Impact of the recent Bankruptcy Reform Act on treatment of contributions to retirement plans and repayment of retirement plan loans is illustrated by In re Njuguna, 2006 Bankr. LEXIS 3434 (Bankr. D. N.H., August 17, 2006). There, the court held that contributions to an IRC §401(k) plan and repayments of a loan from that plan do not constitute “disposable income” available for payment to creditors in a Chapter 13 bankruptcy.

10. MORE ON “AGE 60 RULE”:

Despite the Federal Aviation Agency’s adherence to the current “Age 60 Rule,” (see C&C Newsletter for December 21, 2006, Item 1), the international body that governs commercial aviation raised the pilot retirement age to 65 in November, 2006. Most of the world quickly followed; only Colombia, France, Pakistan and the United States declined. U.S. pilots and airlines long regarded the Age 60 Rule as a sacred cow, and both sides gained from it. Pilots fought for, and won, better pensions and benefits than other airline employees largely based on the rationale that forced retirements at 60 cut into their peak earning years. Younger fliers welcomed the rule because it allowed them to move up seniority lists faster, gaining higher pay and better schedules sooner. Airlines found things to like about the rule, too, because it allowed them to replace their most senior, highest-paid workers with less costly junior pilots. The combination of radical post-9/11 drops in pilot pay and pensions, higher health care costs and a looming pilot shortage have brought together the interest of many senior pilots and airline managers. Pilots want to extend their top earning years. And those who fly for carriers that have dumped pensions on the federal Pension Benefit Guaranty Corporation are severely penalized for retiring at 60 instead of 65, even though FAA rules force them to do so. PBGC pays up to $45,000 a year to employees who retire at 65, but that number falls to $28,000 a year for age 60 retirees. Also, retired pilots face mounting medical insurance bills from the time they retire until they are eligible for Medicare. Raising the retirement age to 65 would bridge that gap. U.S. pilots also complain that they are now faced with blatantly unfair situations such as foreign airline captains being allowed to fly within the United States until age 65. Same-aged U.S. pilots within those borders are grounded.


In an effort to hang on to at least part of his almost-$200,000 a year pension, former Illinois Governor George Ryan filed a lawsuit. The Illinois General Assembly Retirement System had previously entered an order forfeiting Ryan’s entire pension (see C&C Newsletter for December 7, 2006, Item 5). His lawsuit reiterates the argument that he should be able to retain the approximately-$50,000 a year pension he “earned” before committing the crimes which resulted in forfeiture of his pension. Nevertheless, there is the usual consolation in pension forfeiture cases: Curious George will be able to receive a refund of his $250,000 in contributions -- which should be just enough to pay his attorneys’ fees.


The Securities and Exchange Commission is changing newly-adopted rules governing disclosure of executive and director compensation. In a statement issued late last month, SEC said it is altering requirements for disclosing value of stock option awards and giving firms more flexibility in how they report those expenses. The agency said the new rules should more closely conform with the reporting of stock option awards under standards in the Financial Accounting Standards Board’s rule FAS 123. That rule requires recognition of cost of stock option awards over the period in which an employee is required to provide service in exchange for the award. Using the same approach when disclosing executive compensation will give investors a better idea of the compensation earned by an executive or director during a particular reporting period. The SEC compensation rules were the most extensive overhaul of executive-pay regulations in 14 years. The SEC received more than 20,000 comment letters, a record, before adopting the new rules in July. The changes will become effective once published in the Federal Register.


According to a report from, 50% of European pension funds expect to boost their allocations to property funds and private equity funds. A study of 103 funds with total assets of more than $430 Billion also found that about four of ten pension funds polled expect to cut their exposure to equities, as they project private equity returns of 10.2% vs. 9.4% for public equities. After property and private equities, the most popular alternative investments were emerging market equities and bonds, followed by funds of hedge funds.


JPMorgan has examined the investment practices of 138 major U.S. defined benefit pension plans, corporate and public, accounting for roughly $845 Billion in DB plan assets. The survey was conducted during June and July 2006, immediately prior to enactment of extensive corporate pension reform under the Pension Protection Act of 2006 and SFAS 158. The survey results indicate that plan sponsors are receptive to change and are availing themselves of this expanding set of investment opportunities. Findings provide a striking illustration of how differences between corporate and public plans -- in their regulation and in what they see as their greatest challenges -- are shaping the distinctive investment behavior of both groups as they strive to succeed on the new pension playing field. Average expected return for financial reporting purposes was 8.3% for corporates and 8.0% for public funds. There are clear differences between what corporate and public plans view as their greatest challenges. Corporate plans are most concerned with two closely related challenges: impact of regulatory changes and volatility (of markets, rates, pension surplus, contributions and the balance sheet). Public funds (which are not affected by recently enacted corporate pension reforms) are most concerned with meeting target returns and earning those returns in a low market return environment. Over half of plan sponsors are using or considering absolute return, portable alpha and derivative strategies to achieve portfolio performance objectives, with a somewhat lower percentage of tactical asset allocation.


Sirius Satellite Radio paid Howard Stern a bonus worth nearly $83 Million for surpassing subscriber goals set in a 2004 contract. It’s good to be the king (of all media).


“If you ask me a question I don’t know, I’m not going to answer.” Yogi Berra

Copyright, 1996-2007, all rights reserved.

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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