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Cypen & Cypen
January 17, 2013

Stephen H. Cypen, Esq., Editor

1.    REPORT ON US PENSION INVESTMENT CONSULTANTS A BOMBSHELL :  Diligence Review Corp. has issued a report on US Pension Investment Consultants, designed for fiduciaries, internal audit and risk management professionals.  The roles and responsibilities of US pension investment consultants have changed over the past decades as pension plan sponsors of every size have made use of information, technology and tools that were once only available and affordable to larger and more highly specialized organizations. Still, pension plans continue to rely on consulting firms for their experience, ideas, and ability to manage risks, as well as to generate portfolio returns. There is no doubt that investment consultants continue to hold great influence over the structure and composition of pension investment portfolios, including the selection of firms that manage assets at large US pension funds.  The source of data is the Form ADV for advisors registered with the U.S. Securities and Exchange Commission as of December 31, 2012.  A completed Form ADV consists of two parts.  Part 1 contains information about the investment advisor's business, ownership, clients, employees, business practices, affiliations, and any disciplinary events of the advisor or its employees. Part 2 requires investment advisors to prepare narrative brochures written in plain English that contain information such as the types of advisory services offered, the advisor's fee schedule, disciplinary action, conflicts of interest and the educational and business background of management and key personnel. The benefit of the Form ADV Part 2 brochure is that it distills into common language many of the disclosures made in Form ADV Part 1. Sometimes an adviser discloses a good deal more information in the brochure then is disclosed in Form ADV Part 1. An investment advisor's Form ADV information can change frequently. SEC-registered investment advisors are required to file annual amendments to Form ADV within 90 days of the close of the investment advisor's fiscal year. Additionally, investment advisors must update Form ADV within 30 days of any material changes at the firm. About 9% - 10%, or nearly 1000, advisors change their Form ADV in any given month. It is important for pension fund clients to monitor Form ADV for changes, and pension funds should examine their investment advisors' filings for changes at least quarterly.  Pension plan participants and beneficiaries benefit when fiduciaries and professionals share knowledge, perspectives, common practices and best practices. The report is intended to highlight many facts that a pension fund investor might wish to consider when conducting due diligence of a pension fund investment consultant. There are many issues that relate to due diligence and ongoing oversight of investment consultants, and the report addresses only some of the more serious issues. Each organization is responsible for its own due diligence effort and this report is no substitute for that process.  This report makes no assessments about which pension consultants are capable of delivering superior after-fee investment performance to their clients. However investing in today's global market is sufficiently complex without the added risk that a pension investment consultant might not be working in full alignment with interests of the plan's participants and beneficiaries.  Diligence Review Corp. identified 155 pension investment consultants registered with the SEC. To be included, an investment advisory firm met the following four criteria:

  • The firm filed Form ADV with the SEC since January 1, 2012.
  • The firm is a pension consultant with respect to assets of plans having an aggregate value of at least $200 million. 
  • The firm provides pension consulting services. 
  • The firm selects other advisors.

Read the whole hard-hitting report, including the list of the subject pension investment consultants, at content/uploads/2013/01/2013-US-Pension-Investment-Consultant-Report.pdf; odds are your consultant is there. 
In a comprehensive 157 page opinion, a  United States District Judge has declared unconstitutional the stop-and-frisk procedures employed by New York City Police Department outside buildings in the Bronx.  Although the subject case dealt only with stops made by the police on suspicion of trespass outside of certain privately-owned buildings in the Bronx, the legal issues raised have roots that stretch back decades.  In 1968, the United States Supreme Court heard a challenge to New York’s then stop and frisk statute (adopted in 1964) in context of two criminal convictions, and made some important points.  First, the Court held that although the states may develop their own laws on stop and frisk, they may not authorize police conduct that trenches upon Fourth Amendment rights, regardless of the labels that it attaches to such conduct.  The court stated, in no uncertain terms, that the question is not whether a particular search was authorized by state law but whether the search was reasonable under the Fourth Amendment.  Second, the Court held that it would not judge constitutionality of the New York statute on its face, but rather as applied to the particular facts of the two cases it was reviewing. Third, the Court stressed that a police officer must have reasonable grounds before he seizes a person. In that regard the Court stated the police officer is not entitled to seize and search every person he sees on the street or of whom he makes inquiries.  The Judge here was keenly aware that he did not stand in the shoes of the Police Department and was in no way qualified or empowered to engage in policy determinations. The sole role of the Court was to interpret and apply the law -- in this case, the Fourth Amendment as interpreted by the Supreme Court of the United States and the United States Court of Appeals for the Second Circuit.   Plaintiffs, all of whom are African-American or Latino residents of New York, argue that the Police Department has a widespread practice of making unlawful stops on suspicion of trespass outside buildings in the Bronx that are enrolled in the Trespass Affidavit Program.  This program allows police officers to patrol inside and around thousands of private residential apartment buildings throughout the City.  Plaintiffs argue that NYPD’s trespass stops outside TAP buildings are often made without reasonable suspicion, and thus violate the Fourth Amendment.  Plaintiffs stated that such stops have caused them to feel violated, disrespected, angry, and defenseless.  Plaintiffs filed a motion for a preliminary injunction seeking an order requiring the NYPD to create and implement new policies, training programs, and monitoring/ supervisory procedures that specifically address the problem of unconstitutional trespass stops outside TAP buildings.  Based on all the evidence presented, the court concluded that plaintiffs had shown a clear legal likelihood of proving that defendants displayed deliberate indifference toward a widespread practice of unconstitutional trespass stops by the NYPD outside TAP buildings in the Bronx.  While it may be difficult to say where, precisely, to draw the line between constitutional and unconstitutional police encounters, such a line exists, and the NYPD has systematically crossed it when making trespass stops outside TAP buildings in the Bronx. For those of us who do not fear being stopped as we approach or leave our own homes or those of our friends and families, it is difficult to believe that residents of one of the boroughs live under such threat.  In light of the evidence presented, the Judge felt compelled to conclude that such was the case, and, as a result, granted plaintiffs a preliminary injunction.  The court scheduled a further hearing on the appropriate scope of such relief.  Ligon v. City of New York, Case No. 12 Civ. 2274 (SDNY January 8, 2013).
The Internal Revenue Service announced annual inflation adjustments for the year 2013, including the tax rate schedules, and other changes from the recently passed American Taxpayer Relief Act of 2012. (See C & C Newsletter from January 3, 2013, Item 1). The tax items for 2013 of greatest interest to most taxpayers are 

  • A new tax rate of 39.6 percent has been added for individuals whose income exceeds $400,000 ($450,000 for married taxpayers filing a joint return). The other marginal rates -- 10, 15, 25, 28, 33 and 35 percent -- remain the same.  
  • The standard deduction rises to $6,100 ($12,200 for married couples filing jointly), up from $5,950 ($11,900 for married couples filing jointly) for the year 2012.  
  • The Act added a limitation for itemized deductions claimed on 2013 returns of individuals with incomes of $250,000 or more ($300,000 for married couples filing jointly).  
  • The personal exemption rises to $3,900, up from $3,800. However, beginning in 2013, the exemption is subject to a phase-out that begins with adjusted gross incomes of $150,000 ($300,000 for married couples filing jointly). It phases out completely at $211,250 ($422,500 for married couples filing jointly.) 
  • The Alternative Minimum Tax exemption is $51,900 ($80,800, for married couples filing jointly), the indexes future amounts for inflation. The 2012 exemption amount was $50,600 ($78,750 for married couples filing jointly). 
  • Estates of decedents who die during 2013 have a basic exclusion amount of $5,250,000, up from a total of $5,120,000 for estates of decedents who died in 2012.

IR-2013-4 (January 11, 2013).
4.      DEFINITIONS: TEARS: The hydraulic force by which masculine will power is defeated by feminine water-power!
      QUOTE OF THE WEEK:   A good novel tells us the truth about its hero; but a bad novel tells us the truth about its author.  G. K. Chesterton
In 1945, Auschwitz concentration camp begins evacuation
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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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