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Cypen & Cypen
APRIL 13, 2004

Stephen H. Cypen, Esq., Editor

Never Forget - September 11, 2001


Last month David M. Walker, Comptroller General of the United States, testified before the Senate Committee on Banking, Housing and Urban Affairs. Here are the highlights of what he said. Since September 2003, widespread allegations of abusive practices involving mutual funds have come to light. An abuse called “late trading” allowed some investors, at times in collusion with pension plan intermediary, broker-dealer, or fund adviser staff, to profit at other investors’ expense by submitting orders for fund shares to receive that day’s price after the legal cutoff. Other investors were allowed to conduct market timing trades to take advantage of stale prices used by funds to calculate their net asset values at funds with stated policies against such trading. The Securities and Exchange Commission and other regulators have responded with numerous proposals for new or revised practices. Based on a body of work that the United States General Accounting Office has conducted involving mutual funds, GAO analyzed and provided views on proposed and final rules involving (1) fund pricing and compliance practices intended to address various mutual fund trading abuses that have come to light recently, (2) fund boards’ independence and effectiveness, (3) fund adviser compensation of broker-dealers that sell fund shares and (4) additional actions regulators could take to further improve transparency and investor understanding of the fees they pay. GAO commends the SEC and other regulators for their swift regulatory response to these abusive practices. However, some proposed actions need to be thoroughly assessed to ensure equitable treatment for all investors and others will need to be reinforced with enhanced compliance, enforcement and investor education programs to be truly effective. Given the increased spotlight that Congress and regulators are placing on the mutual fund industry, GAO believes the time is right more effectively to address the conflicts of interest created by soft-dollar arrangements. In addition, GAO identifies further actions that could be taken to improve disclosure of mutual fund fees to enhance competition among funds on the basis of fees that are charged to shareholders. GAO-04-533T is available online at

In an assault on the so-called glass ceiling, a new study reported in shows women with salaries of $100,000 a year or better more than tripled in ten years. In 2001, 861,000 women earned $100,000 or more, compared to 242,000 a decade before. However, the study, from Employment Policy Foundation, still shows inequities: five times as many men, 4.3 million, earn above $100,000. And, on average, women were paid $.77 for every $1.00 paid to men in 2002..

Milliman USA’s fourth annual survey of defined benefit plans at 100 largest U.S. corporations reveals that the average actual return on assets in defined benefit plans was 19.6% in 2003. This return is double the average expected return of 8.55%. These plans held $880 Billion in assets at the end of last year. In 2003, employer contributions increased from $33.8 Billion the year before to $56 Billion. (Although GM is responsible for about $14 Billion itself, almost half of the companies saw increases of greater than 50%.) Yet even with 2003's stellar performance, asset smoothing resulted in these 100 funds’ earning average investment returns of 1.3% over the past four years. There is an interesting sidelight about the average expected return of 8.55%: it is down from 9.25% in 2002 and from 9.5% in 2001. The highest earning assumption for 2003 was 9.5% (versus the prior year’s highest assumption of 10.5%). In fact, only 6 of the 100 surveyed used an assumed rate of higher than 9%, down from 55 in 2002. Apparently the Securities and Exchange Commission’s announcement that it would review any filings that use expected returns in excess of 9% really worked. The whole survey is available at

As reported by Governing, Florida Governor Jeb Bush received the Mixed Metaphor of the Month award for April, 2004. Commenting on his plan to create a Gubernatorial Fellows program to bring in college students to work closely with his administration for a year at a time, Governor Bush proclaimed “it’s helpful for me to get outside the box as to who I hang with as a leader.”

A cover story in the April 19, 2004 edition of Forbes, entitled “A Bribe By Any Other Name,” says that regulators are finally digging for dirt in the pension management business -- and they’re going to need a big shovel. The Santa Clara Valley Transportation Authority Board recently fired its international equity portfolio manager, as recommended by its pension fund adviser. The Board didn’t mention that the pension fund adviser had picked this particular portfolio manager just a few years ago. The Board also failed to mention that the pension fund adviser and the portfolio manager are part of the same firm. Another unmentioned fact: the pension fund adviser receives millions of dollars annually from many of the money managers it is supposed to evaluate objective for clients. (As of now, those payments are legal, if the arrangement is disclosed to the client.) Just what do pension plans get for their consulting fees? Not much, it seems: although 80% of public pension funds use pension consultants compared with only 41% for corporate funds, public pension funds averaged annual returns of only 8.1% in a decade through 2002, half a point less than corporate retirement plans. In addition, many brokerage firms also act as advisers, compensated by having money managers route trades their way. Such soft-dollar payments make brokerage firms big players in consulting; the biggest names in brokerage firms are among the biggest names in public pension fund consulting. The article poses the following “good question:” Why are pension funds so oblivious to the conflicts? A good question, indeed.

In 1996, Congress restored to the Age Discrimination in Employment Act an exemption permitting state and local governments to place age restrictions on employment of police officers and firefighters. Four years later, the Chicago City Council exercised its authority under this exemption to reestablish a mandatory retirement age of 63 for certain of the City’s police officers and firefighters. Police officers and firefighters subject to the age restriction filed suit against the City, asserting that the re-instituted mandatory retirement program amounted to a subterfuge to evade the purposes of ADEA. Although text of the City’s ordinance indicated that the City was reestablishing a mandatory retirement age in furtherance of public safety, plaintiffs asserted that in truth the City, as evidenced by remarks of certain City Councilmembers and City Officials, acted out of bias against older workers and a desire to open positions on its police and firefighting forces for younger and more diverse individuals. After denying the City’s motion to dismiss, a federal district judge certified for interlocutory appeal the question of whether there is any evidence through which a plaintiff might prove that a mandatory retirement program, so long as it satisfies the other criteria specified by the statutory exemption, constitutes a subterfuge to evade the purposes of ADEA. Although the appellate court answered that question in the affirmative, it also concluded that the particular theory of subterfuge that plaintiffs pursued in the instant case is not viable. A plaintiff can establish subterfuge if he or she can demonstrate that a state or local government took advantage of the exemption and imposed a mandatory retirement age for police and firefighting personnel in order to evade a different substantive provision of the statute. Because ADEA expressly permits employers like Chicago to reinstate mandatory retirement programs for police and fire personnel and thus to discharge employees based on their age, proof that local officials exercised this right for impure motives will not in and of itself suffice to establish subterfuge. Given that plaintiffs’ theory of subterfuge relies solely on proof that Chicago City Councilmembers and other City Officials may have harbored discriminatory attitudes about older workers when they reinstated a mandatory retirement age of 63 for police officers and firefighters and that they adopted the mandatory retirement age for illicit motives unrelated to public safety, plaintiffs have failed to state an ADEA claim on which relief may be granted. Fortunately, those of us in Florida do not have to worry about mandatory retirement ages: the Florida Civil Rights Act of 1992 (Chapter 760, Part I, Florida Statutes) prohibits all age discrimination, without an ADEA-like exemption for bona fide hiring or retirement plans that are not a subterfuge. Minch v. City of Chicago, Case No. 02-2587 and 02-2588 (U.S. 7th Cir., April 9, 2004).


The Ethical Funds Company, Canada’s leading manager of socially responsible investments, has released its 2004 Proxy Voting Guidelines. The Securities and Exchange Commission now requires mutual funds to disclose proxy voting policies and procedures, allowing investors to evaluate the commitment of their mutual funds to good corporate governance. Generally, the Ethical Funds Company, believes that the governance framework should recognize rights of stakeholders (employees, communities, customers, suppliers and future generations) and encourage active participation between corporations and stakeholders in creating long-term wealth, employment, a safe workplace and a healthy environment. Specific highlights from the new Proxy Voting Guidelines (Fifth Edition) include:

  • Support proposals splitting the position of chair and chief executive officer
  • Support proposals to make nominating committees, audit committees and compensation committees independent
  • Support proposals to institute annual election of directors at corporations where this is not the practice
  • Support proposals calling for individual votes for each director nominee where this option does not exist
  • Support proposals that call for implementation of cumulative voting
  • Support proposals to require boards to submit a formula for designing and administering stock option plans to shareholders for approval
  • Support proposals to require severance packages for executives and directors to be approved by shareholders
  • Support proposals to disclose amounts and recipients of any contributions that companies make to political parties, candidates for public office, political action campaigns and other political contributions, with the rationale for making each such contribution
  • Oppose proposals for reincorporation as a takeover defense or limitation on director liability

The whole set of guidelines is available on the company website at http://www.ethical

Copyright, 1996-2004, 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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