Cypen & Cypen
MAY 13, 2010
Stephen H. Cypen, Esq., Editor
1. RETIREMENT ASSETS TOTAL $16 TRILLION: Total U.S. Retirement Assets were $16.0 Trillion at Year-End 2009, up nearly $2.0 Trillion, or 14 percent, from Year-End 2008. The increase in retirement assets largely was driven by investment returns. Nearly all asset classes experienced positive total returns in 2009. Other key findings from the Investment Company Institute study include:
In addition to relying on Social Security and private savings to prepare for retirement, Americans use a variety of tax-advantaged investments specifically earmarked as retirement savings, including IRAs, employer-sponsored DC/DB retirement plans and annuities.
2. NYSE CIRCUIT BREAKERS: In light of the roller coaster ride the Dow Jones Industrial Average took on May 6, 2010, we thought a review of the New York Stock Exchange Circuit Breakers would be of interest to readers. In response to the market breaks in October 1987 and October 1989, the New York Stock Exchange instituted circuit breakers to reduce volatility and promote investor confidence. By implementing a pause in trading, investors are given time to assimilate incoming information and the ability to make informed choices during periods of high market volatility. Effective April 15, 1998, SEC approved amendments to Rule 80B (Trading Halts Due to Extraordinary Market Volatility), which revised the halt provisions and the circuit-breaker levels. The trigger levels for a market-wide trading halt were set at 10%, 20% and 30% of the DJIA, calculated at beginning of each calendar quarter, using average closing value of the DJIA for the prior month, thereby establishing specific point values for the quarter. Each trigger is rounded to the nearest 50 points. The halt for a 10% decline would be one hour if it occurred before 2 p.m. and for 30 minutes if it occurred between 2 p.m. and 2:30 p.m., but would not halt trading at all after 2:30 p.m. The halt for a 20% decline would be two hours if it occurred before 1 p.m. and between 1 p.m. and 2 p.m. for one hour, and close the market for the rest of the day after 2 p.m. If the market declined by 30% at any time, trading would be halted for remainder of the day. Under the previous Rule 80B trigger points (in effect since October 19, 1988), for a market-wide trading halt, a decline of 350 points in the DJIA would halt trading for 30 minutes and a drop of 550 points one hour. These trigger points were hit only once, on October 27, 1997, when the DJIA was down 350 at 2:35 p.m. and 550 at 3:30 p.m., shutting the market down for the remainder of the day. Based upon the current criteria, the following are circuit-breaker levels for the second quarter of 2010:
Note that on May 6, 2010, the DJIA intra-day decline of just under 1,000 barely missed the first circuit-breaker level.
3. STATEMENT OF SEC AND CFTC: Apropos the above item, the Securities and Exchange Commission and the Commodity Futures Trading Commission have released the following statement:
In other words, we have no idea what the heck happened. Release 2010-73 (May 7, 2010).
4. LEAVE PENSION SYSTEM ALONE: In a special letter, Sheila Wade Kneeshaw, chairwoman of the General Retirement System of the City of Detroit, responds to a guest column entitled "Pension bills make sense for Michigan," written by the CEO of Municipal Employees Retirement System. For MERS to say this proposed legislation is not about Detroit’s pension system is disingenuous -- especially since Detroit’s Mayor is one of the driving forces behind it. MERS and others supporting the proposed legislation also say that it is about distressed municipal pension systems. Kneeshaw disagrees: It is about distressed cities and their inability to make legally-required employer contributions to their pension systems. However, transferring control of municipal pension plans to MERS does not eliminate or reduce the legally-required contributions of a municipality into its pension funds. It also does not guarantee any cost savings. Detroit's two pension funds, with assets of about $6 Billion, have outperformed MERS in recent years and have also had substantially higher funding levels. As of the end of 2008, MERS was 75 percent funded. As of the end of June 2008 the General Retirement System was 101 percent funded and the Police and Fire Retirement System was 107 percent funded. A transfer of the Detroit pension funds to the poorer-performing MERS could, in actuality, cost the City of Detroit even more money. With these facts in mind, Kneeshaw does not see how this legislation could make sense for any municipality. Kneeshaw wrote in detnews.com.
5. ROCK AND “ROLE”: We must have been hungry when we wrote the caption to item 11 of our May 6, 2010 Newsletter, because we misspelled “role” as “roll.” Thanks to eagle-eyed reader J.K., who was the first of many to call the error to our attention.
6. NYC, STATE PENSION FUNDS RECOUP SOME COUNTRYWIDE LOSSES: New York’s city and state pension funds lost millions of dollars when Countrywide Financial collapsed -- but they are getting some of it back. NYdailynews.com reports that the securities fraud case against Countrywide resulted in a massive $624 Million settlement, to be shared among hundreds of thousands of investors who lost money in what was once a high-flying mortgage firm. The city's five pension funds lost about $5 Million, while the state lost more than $10 Million. They will not get all of it back, but, as they say, it's better than a sharp stick in the eye. The settlement must be approved by a federal judge, and divvied up among all stockholders, so it is too soon to know how much the city and state will receive. Countrywide was a mortgage powerhouse during the real estate bubble, but fell apart when the bubble burst in 2007. The pension funds claimed Countrywide hid the risks of its bad loan portfolio to make the company appear stronger while it was rotting from the inside. Countrywide, which was later bought by Bank of America, will pay $600 Million and its accountant KMPG will pay another $24 Million. Another victory for the legal system.
7. PENSION SERIES POINTS FINGER AT POLITICIANS: A Letter to the Editor responded to the (Chicago) Daily Herald’s in-depth series on the public education financial situation in Illinois. The writer wants to make it very clear that this mess exists for one reason only: State government, decade after decade, has failed to meet its obligation to the teacher retirement system, to the point that Illinois has the worst pension funding record of any state in the nation, at a paltry 54 percent. If the funds had been properly invested, instead of diverted for any number of unrelated, politically expedient purposes, there would be no crisis today. By contrast, teachers have met 100 percent of their obligation for the past 70 years, annually contributing nearly 10 percent of their income to the system. The writer was most taken aback by the fact that the average annual pension for a retired classroom teacher (not administrator), who has dedicated 30 years of service to the community, is only around $43,000. “What we could really use now is a series thanking teachers for all that they do.” Good show.
8. CALIFORNIA CHARGES FORMER PENSION OFFICIALS WITH FRAUD: California's attorney general is suing two former officials from CalPERS, the nation's largest public pension fund, alleging they took kickbacks in exchange for a piece of the fund's lucrative investment portfolio. The lawsuit, reported in washingtonpost.com, is the product of an investigation into "placement agents," the middlemen hired by money management firms to help them win business with investors. The state attorney general charged that a former chief executive accepted tens of thousands of dollars in gifts and promises of future employment from a former CalPERS board member who is now a placement agent. The attorney general secured a court order freezing assets of the placement agent's firm, in an attempt to recover more than $40 Million in commissions. The court will also take control of the placement agent's 20 bank accounts and all of his assets, including two Bentleys, 14 properties and art worth more than $2.7 Million.
9. U.S. SUPREME COURT VACATES MUTUAL FUND DECISION: In 2008, the U.S. Seventh Circuit Court of Appeals handed mutual fund advisers a big win when it held that Section 36(b) of the Investment Company Act of 1940 does not require that investment adviser fees be reasonable in relation to a judicially-created standard (see C&C Newsletter for July 10, 2008, Item 5). Instead, the court of appeals held, the law provides that an adviser has a fiduciary duty and owes an obligation of candor and negotiation and honesty and performance, but may negotiate in his own interest and accept what an institution agrees to pay. Federal securities laws, of which the Investment Company Act is one component, work largely by requiring disclosure and then allowing price to be set by competition in which investors make their own choices. Last year, the United States Supreme Court granted a petition for writ of certiorari filed by investors who own shares in open-and mutual funds, which they contended were charged fees that were too high and violated the Investment Company Act of 1940 (see C&C Newsletter for March 19, 2009, Item 2). Now, in a decision we should have reported on a more timely basis, the United States Supreme Court vacated the Seventh Circuit’s decision. The Seventh Circuit rejected the Second Circuit’s test, which is essentially whether the fee schedule represents a charge within the range of what would have been negotiated at arm’s-length in light of all surrounding circumstances. To be guilty of a violation of §36(b) of the Investment Company Act of 1940, the adviser must charge a fee that is so disproportionately large that there is no reasonable relationship to the services rendered and could not have been the product of arm’s length bargaining. The United States Supreme Court held that based on §36(b)’s terms and the role that a shareholder action for breach of an investment adviser’s fiduciary duty plays in the Act’s overall structure, the Second Circuit adopted the correct standard. The standard has been embraced by other federal courts, and the Securities and Exchange Commission’s regulations have recognized, and formalized, such factors. (In fact, both parties generally endorsed the Second Circuit’s approach, but disagreed in some respects about its meaning.) The Seventh Circuit erred in focusing on disclosure by investment advisers rather than the Second Circuit standard, which it rejected. That standard may lack sharp analytical clarity, but it accurately reflects the compromise embodied in §36(b) as to the appropriate method of testing investment adviser compensation, and it has provided a workable standard for nearly three decades. Jones v. Harris Associates L.P., Case No. 08-586 (U.S., March 30, 2010).
10. SAN DIEGO SUES ITS OWN PENSION SYSTEM: The City of San Diego is suing its retirement system in a dispute regarding how much financial responsibility, if any, city workers should bear for a pension deficit topping $2 Billion. If successful, The San Diego Union-Tribune reports, the lawsuit could lead to city workers helping pay for the pension fund’s investment losses, rather than the current practice of having taxpayers make up for any deficiencies. Potential taxpayer savings have been estimated at $40 Million for the fiscal year that begins July 1. The lawsuit is based on the new city attorney’s interpretation of the city charter. As he reads it, the charter states that the city and its employees shall contribute “substantially equal” amounts to pension obligations each year. Labor leaders strongly disagree, and say his theory runs contrary to how past city attorneys have interpreted the charter for decades. The city is asking the judge to increase employee contribution rates so that workers will pay their fair share of $80 Million, the portion of this year’s $232 Million city pension payment estimated to be attributable to investment losses. The lawsuit came after the city attorney asked the pension board to adhere to his interpretation of the city charter when setting contribution rates last month. Board members declined his request, saying they read the charter differently. Our take? Wethinks the city attorney needs to learn the difference between normal cost and past-service liabilities.
11. MUNICIPAL LAW ENFORCEMENT OFFICER MAY NOT SERVE OR SELL ALCOHOLIC BEVERAGES AT LICENSED ESTABLISHMENT: Section 561.25(1), Florida Statutes, by its terms, prohibits the direct or indirect employment of a law enforcement officer by a business that holds a license to sell alcoholic beverages and prohibits a law enforcement officer from engaging in the sale of alcohol. The sole exceptions are employment by an establishment selling only beer and wine for consumption off the premises and employment of an off-duty officer as an entertainer or for provision of security services. However, the question asked of the Florida Attorney General was whether a municipal law enforcement officer may serve or sell alcoholic beverages as an unpaid volunteer at activities or functions that occur at a licensed alcoholic beverage establishment. Even unpaid voluntary services at licensed alcoholic beverage establishments are prohibited. However, the statute does not appear to preclude the mere serving of alcohol under circumstances where the law enforcement officer is not employed by a business licensed under the Beverage Law and there is no sale of alcoholic beverages occurring. AGO 2010-13 (April 22, 2010).
12. AN ACTUAL PERSONAL AD?: To the Guy Who Tried to Mug Me Night Before Last.
13. CARTOON OF THE YEAR: Take a look at http://bit.ly/cNrYsf, which may well be the best cartoon of the year.
14. ALL PUNS INTENDED: "Doc, I can't stop singing The Green, Green Grass of Home." "That sounds like Tom Jones Syndrome." "Is it common?" "Well, It's Not Unusual."
15. OXYMORON: If all the world is a stage, where is the audience sitting?
16. FABULOUS RANDOM THOUGHTS: You never know when it will strike, but there comes a moment at work when you've made up your mind that you just aren’t doing anything productive for the rest of the day.
17. SIMPLE BUT BRILLIANT...QUOTES FROM WILL ROGERS, PROBABLY THE GREATEST POLITICAL SAGE THIS COUNTRY HAS EVER KNOWN: Always drink upstream from the herd.
18. QUOTE OF THE WEEK: “Life is the only game in which the object of the game is to learn the rules.” Ashleigh Brilliant
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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.