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Cypen & Cypen
AUGUST 19, 2004

Stephen H. Cypen, Esq., Editor

Never Forget - September 11, 2001


In a Pensions & Investments op-ed piece, Gary Findlay, Executive Director of the Missouri State Employees’ Retirement System, calls for consultants to disclose existence of possible conflicts. Findlay, who has a way with words, said it all -- in one paragraph:

It seems to me that it’s time for the consulting community to simply recognize that the genie is finally out of the bottle and just get on with disclosures that will allow plan sponsors to fully evaluate the situation and make informed decisions. How about something like this: “My consulting firm does not accept payments, directly or indirectly, from service providers that are plan sponsor clients, whom we serve as full fiduciaries, do or will potentially contract with.” Or, “We receive income from service providers that are plan sponsor clients, whom we serve as full fiduciaries, do or will potentially contract with, and such income totaled $X during the last year. The following is a detailed listing of the service providers that paid us directly or indirectly, the amount they paid, and the services they received for such payments. As a senior officer of my firm, I attest that this listing is complete and represents full disclosure of all revenues that my firm, or any of its affiliates, received from each firm listed.” If this information were readily available, I’d be perfectly happy to let the marketplace sort it out.

Kudos to Findlay, who has been saying these things for many years, long before the Securities and Exchange Commission investigation into the subject.


Consultants differ on the outcome of the Securities and Exchange Commission’s investigation of investment consulting firms, according to an article in Pensions & Investments. Regardless, business apparently will improve for independent consultants who avoid doing business with money management firms. Battle lines have been drawn between consultants priding themselves on being “independent” and those insisting they have systems in place faithfully to serve two masters: pension plans and money managers. While much remains uncertain about how the debate will ultimately unfold, independent consultants say heightened focus on potential conflicts of interest has helped them. One potential problem: a bottleneck if numerous public pension plans decide to switch from “conflicted” consultants. If the SEC takes a strong stand regarding potential conflicts inherent in serving both pension clients and money managers, public pension plans, in particular, could come under pressure to seek safer ground. Large consultants having many public clients could prove particularly vulnerable.


Despite the market’s strong performance in 2003, interest rate changes along with current accounting increased obligations to keep most pension plans under-funded, according to Standard & Poor’s Pension Status Report for the S&P 500. For 2003, the overall position of 362 S&P 500 companies offering defined benefit pensions improved to $165 Billion under-funded from $219 Billion under-funded at year-end 2002. For the year, pension assets grew 17.2%, while obligations grew 9.3%. Almost 50 issues were over-funded while 290 were under-funded. By contrast, in 1999, S&P 500 issues were over-funded with a surplus of $280 Billion, as 296 issues were over-funded and 86 were under-funded. “In spite of the current and projected under-funding, companies on aggregate have sufficient proceeds, both on hand and via the capital markets, to meet current pension obligations,” says S&Ps press release on the subject.


Investment banker Nathan A. Chapman Jr., who once moved in Maryland’s highest political circles, was convicted in federal court on 23 counts of fraud and filing false tax returns. Jurors concluded that Chapman, 46, was innocent of seven additional counts and could not reach a verdict on two others, according to an article in the Baltimore Sun. Much has changed since officials of the Maryland State Employee Pension System learned in 2002 that Chapman, hired to make investments for the fund, had let a subordinate use $5 Million of that money to buy stock in Chapman’s struggling companies. The General Assembly passed reform legislation to put more people with financial expertise on the pension board. The board agreed to hire an independent consultant to guide investment decisions. The system adopted a detailed investment policy to help prevent future abuses. And the type of sub-manager arrangement that allowed Chapman to pressure a third party he supervised to buy the stock in his companies has been banned. Most agree that the retirement system is now a first-rate operation. As the state’s new executive director says, “My goal is to run a boring agency. If I can do my job and do my job well, we won’t be in the news -- and that’ll be a good thing.”


Seventeen employees of Miami-Dade County, Florida, who work at Jackson Memorial Hospital, sought special risk retirement classification under the Florida Retirement System. In creating the special risk class of membership within the Florida Retirement System, the Legislature intended to recognize that persons employed in certain categories of law enforcement, firefighting, criminal detention and emergency medical care positions are required as one of the essential functions of their positions to perform work that is physically demanding or arduous, or work that requires extraordinary agility and mental acuity, and that such persons, because of diminishing physical and mental faculties, might find that they are not able, without risk to the health and safety of themselves, the public or their co-workers, to continue performing such duties and thus enjoy the full career and retirement benefits enjoyed by persons employed in other positions and that, if they find it necessary, due to the physical and mental limitations of their age, to retire at an earlier age and usually with less service, they will suffer an economic deprivation therefrom. (That run-on sentence not ours; it is right from the statute!) In 2000, the Florida Legislature amended the Florida Retirement System to add other classes of employees, who meet listed criteria, and who are employed by the Department of Corrections or the Department of Children and Family Services. The hospital workers claimed they work in a hazardous environment performing the same job functions as their state employee counterparts and met the same statutory criteria for special risk eligibility. The Florida Retirement Commission denied their request, finding the statute did not apply: the Commission recognized that persons in positions similar to those listed by the Legislature may engage in work similar to or equivalent to the job classifications of the Department of Corrections or Department of Children and Family Services; however, the Commission does not have legal authority to expand the Legislature’s unequivocal limits on special risk membership. On appeal from summary judgment in favor of the State, the Third District Court of Appeal affirmed based upon the Commission’s cogent analysis. The plain and ordinary meaning of the statute requires that a special risk member be employed by the Department of Corrections or the Department of Children and Family Services. Since appellants are not employed by either department, they do not qualify for special risk retirement coverage. The court empathized with the situation faced by health care providers who work in county prisons. However, the court recognized that it is the function of the Legislature, not the judiciary, to determine how public funds are to be used and to ascertain the parameters of the Florida Retirement System. Wiggins v. State of Florida, Department of Management Services, Division of Retirement, 29 Fla. L. Weekly D1823 (Fla. 3d DCA, August 11, 2004).


Section 790.08, Florida Statutes, requires officers making an arrest of a person who has a weapon while engaged in a criminal offense to take possession of such weapon and deliver it to the sheriff of the county or the chief of police in the municipality in which the arrest is made. If a person arrested is convicted, the seized weapon is immediately forfeited to the state, with the sheriff acting as custodian. If the person arrested is acquitted of the charges or the charges are dismissed, the weapon shall be returned. However, if the person fails to call for or receive the weapon within sixty days after acquittal or dismissal, the weapon shall be held by the sheriff. By law, weapons coming into the hands of the sheriff shall, unless reclaimed by the owner thereof within six months from that date, become forfeited to the state. Thus, the Florida Attorney General concluded the sheriff is bound by terms of the statute and may not return a weapon to the former owner once the six-month period for claiming the weapon has passed and ownership thereof has been forfeited to the state. AGO 2004-41 (August 6, 2004).


The California Public Employees’ Retirement System has received a benchmarking report that compares its cost and return performance to a pension performance data base maintained by Cost Effectiveness Measurement Inc. The database comprises 134 domestic pension funds, representing 30% ($1.8 Trillion) of U.S. defined benefit assets. The median fund had assets of $4.1 Billion, while the average U.S. fund had $13.2 Billion in assets. The summary for $166 Billion CalPERS shows:

  • Its 5-year policy return of 2.8% was below the peer median of 3.5%.
  • Its 5-year staff implementation value added was .9% per annum, higher than the peer median of .4%. In dollar terms, this difference equals $1.4 Billion per annum. (CalPERS used significantly less external active management than its peers -- 36% vs. 47%.)
  • Its 5-year average implementation risk was 1.4%, compared to the U.S. median of 1.9% and peer median of 1.3%.
  • It was a low cost fund. CalPERS’s 2003 cost of 27 basis points was low relative to its benchmark cost of 36 basis points (a $144 Million savings), primarily because it paid less for similar services and received costs savings from its lower cost implementation style of less external active management.


International investors stepped up purchases of U.S. securities in June, for the first time in five months amid faster economic growth than in Europe and Japan, according to Bloomberg News. Net purchases rose to $71.8 Billion from $65.2 Billion in May. Foreigners bought $40.5 Billion of Treasuries as the yield on the benchmark 10-year note climbed to near its highest in two years. The purchases may help alleviate concern about attractiveness of U.S. assets after a recent government report showed the U.S. Trade Deficit widened to a record. Demand for U.S. assets rose as the Fed lifted its interest rate target to 1.25% from 1%, the lowest since 1958.


PLANSPONSOR reports on a study conducted by it and Old Mutual Asset Management entitled “Research in a New Regulatory Environment.” Conducted in early 2004, the study shows that plan sponsors are keenly interested in the research processes as well as compensation practices at the managers they employ. Indeed, 86% of plan sponsors say it matters how research is organized at their investment managers. In fact, all plan respondents to the survey (123) indicated they are interested in how managers compensate themselves, and 79% claim that compensation practices figure into the manager selection process. However, only 55% of these plans ask about compensation in their requests-for-proposals. Plan sponsors are ambivalent about their managers’ use of soft dollars: about one-third are comfortable or very comfortable with their managers using soft dollars; but 57% are either very uncomfortable or uncomfortable with their use. There is also a split in plan sponsor attitudes toward flexibility given to portfolio managers to trade the same securities in their personal accounts -- less than a third are comfortable with rules that allow same. Conversely, 60% of respondents allow both their portfolio managers and analysts to trade securities in their personal portfolios that also are held in client portfolios. (On this last point, make sure to examine your manager’s code of ethics or policy on the subject matter -- you may be unpleasantly surprised.)


IPayments by a public school to a tenured teacher under an Early Retirement Incentive Program are wages subject to FICA withholding, according to a United States District Court ruling. The court held that the payments were for a right that arose out of employment regardless of whether they were also for a property right. The district court declined to follow the decision of a circuit court of appeals that found similar payments were for relinquishment of contractual rights, not remuneration for services rendered, and held that the payments were not subject to FICA withholding. Instead, the district court merely accepted broad interpretation of the term “remuneration for employment” pursuant to IRC Section 3121.

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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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