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Cypen & Cypen
AUGUST 23, 2007

Stephen H. Cypen, Esq., Editor

Never Forget - September 11, 2001


The New York State Comptroller has announced that the New York State Common Retirement Fund had a funded ratio of 104%, making it the best funded pension fund in New York State and among the best in the nation. As reported by, the Comptroller is optimistic that he will be able to lower 2009 contribution rates that state and local governments pay for their employees’ retirement. The Common Retirement Fund has achieved consistently high returns on investments for many years. In May, the Comptroller announced that the Fund earned 12.58% for the fiscal year ending March 31, 2007, outperforming its target return of 8%. Wilshire’s Trust Universe Comparison Service, a widely-accepted benchmark for performance of institutional assets, ranks the Fund’s results in the top ten percentile of comparable public funds, and notes that the Fund has among the lowest risk profiles of public pension funds.

2. AMERICANS SUFFER FROM VACATION DEPRIVATION: has published its 7th Annual Survey on Vacation Deprivation, which spotlights the growing trend of employed American workers not taking all of their vacation days. Here are some interesting statistics:

  • 51.2 million Americans are vacation deprived, earning 14 days and taking 11 days, the least amount of vacation days among their international ounterparts.
  • About one-third of employed U.S. adults usually do not take all of the vacation days they receive each year, representing a continued directional increase reported in 2006 and 2005.
  • About two in five employed U.S. adults report regularly working more than 40 hours per week. As in 2006, a sizeable minority -- 23% -- of employed adults check work e-mail or voice mail while vacationing, compared to only 15% in 2005.
  • About one in five employed adults also reported that they have canceled or postponed vacation plans because of work.
  • Nearly two in five employed U.S. adults reported feeling better about their job and feeling more productive upon return from vacation.
  • Two in five employed U.S. adults most commonly anticipate using the majority of their vacation time for 2007 by taking a power week (taking at least one full week of vacation and using the remaining time here and there); only 14% plan to take a full two week vacation in 2007.
  • One-third of employed U.S. adults often have trouble coping with stress from work at some point during the vacation cycle.

Bon Voyage.


According to a Mercer Human Resource Consulting study, reviewed by, U.S. employers plan to increase salaries by 3.8% this year, slightly more than the 3.7% pay increases last year. In addition, pay is slated to remain stagnant in 2008 at 3.8%. Even though pay increases have seen little change, pay gains compared to inflation are projected to be the best they have been in 5 years, which means that raises could be worth more this year and next, if the dip forecast in the Consumer Price Index actually occurs.


Hawaii, New York and Alaska are the most expensive states for business, maintaining the top three spots for the second consecutive Milken Institute Cost-of-Doing-Business Index. All three states increased of their year-over-year costs. A major factor in the rankings is the cost of electricity. South Dakota, meanwhile, maintained its position as the least expensive state for business, decreasing its cost to 30% below the national average. The Cost-of-Doing-Business Index measures wage costs, taxes, electricity costs, and real estate costs and industrial and office space. The biggest mover in this year’s Index was Maine, moving up 11 spots to 17th from 28th, thanks in large part to higher electricity costs, which jumped from 6% above the national average in the 2006 national rankings to 43% above the national average in this year’s rankings. Of the states that moved down in the rankings most, Michigan leads the pack in reining in its costs, moving from 13th place in the 2006 rankings down to 20th. Michigan had a slight increase in all the rated factors, but dropped down because those states ranked near it had more pronounced increases. The Cost-of-Doing-Business Index indicates each state’s comparative advantages or disadvantages in attracting and retaining businesses. Each state is measured under five individual categories, and those weighed scores are compiled to make the overall index.


There are three well known companies that rate debt securities (bonds) of issuers. They are Standard & Poor’s, Fitch IBCA and Moody’s Investors Service, Inc. Standard & Poor’s and Fitch IBCA use the same categories; Moody’s does it slightly differently:

S&P/Fitch Moody’s


Although the companies do not describe their respective ratings identically, the following
is a “combination” description for each of the none categories:

Rating Description

1st (Highest) Highest credit quality; lowest risk; capacity to pay extremely strong

2nd Very High Quality; very strong capacity to pay

3rd High credit quality; low expectation of credit risk

4th Good credit quality; adequate capacity to repay

5th Speculative; possibility of credit risk developing

6th, 7th, 8th, 9th Highly speculative; significant credit risk

Caveat emptor.


According to a recent report from Greenwich Associates, institutional investors sharply cut back last year on the use of commission payments for third-party products or so-called “soft dollar” transactions. However, new research suggests that institutions are starting to return to business as usual when it comes to paying third-party brokers for research and other services based on a growing belief that Securities and Exchange Commission is not planning a dramatic overhaul of rules pertaining to Section 28(e). For the past several years, uncertainty about how regulators would ultimately rule on the issue of soft-dollar arrangements had prompted U.S. institutions to adopt a conservative stance in their use of applying commissions to pay for third-party broker research and services. Due in large part to this uncertainty, industry-wide soft dollar totals dropped 25% to 725 million dollars in 2006-2007, from 970 million in the prior year. But, in recent months the SEC has provided guidelines about what it considers appropriate and inappropriate with regard to third-party payment. In particular, in two January “no-action” letters to Goldman Sachs, the SEC provided a stamp of approval to client commissions sharing arrangements and soft dollar transactions. The letters explains that institutions can use client commissions paid to an executing broker to pay for research and research-related services provided for by third-party firms, including both broker-dealers and non-broker-dealers. These letters followed a 2006 statement in which the SEC clarified in broad terms a definition of what types of content and services are appropriate for commission-based payment under the Section 28(e) safe harbor. These SEC communications have lessened the sense of uncertainty that has surrounded third-party deals for the last several years. Institutions’ uneasiness about the issue has been evident in the shrinking share using soft-dollar arrangements in their U.S. equity businesses. As recently as 2004, more than 80% of institutions used soft dollars; by 2007 that proportion had fallen to 62%. The fall-off has been most pronounced among mutual funds, which, after the trading scandals of 2003, are also the group most affected by and concerned with regulatory scrutiny. The proportion of mutual funds using commissions to pay for third-party products or services fell to 56% in 2007 from 75% in 2005. Banks, the heaviest users of third-party services overall, were the only group that did not cut back on usage last year. The Greenwich Associates research reveals a sharp turn in sentiment, however. When asked to project their intended budgets for third-party products or services for the coming year, institutions predict a market-wide bounce back to 10% of total commissions. Investment managers predict that third-party allegations will jump to 13% in 2008, and banks expect to increase allocations slightly from the current 20%. Research uncovers another sign that institutions are becoming more comfortable with regulatory environment:
about 30% have set up client commissions sharing arrangements with brokers, and 60% say they will have one in place within the next 12 months. Hedge funds are leading the charge into client commission sharing arrangements, with 43% of hedge fund managers reporting that they have established at least one. Investment managers are not far behind at 36%. Two-thirds of the market’s largest institutions and most active traders expect to have a client commission sharing arrangement in place by year-end.


The Children’s Trust, an independent special taxing district in Miami-Dade County, Florida, entered into an agreement with a third-party, whereby the third-party agreed to provide the Children’s Trust with payroll, health insurance, life insurance, short and long-term disability insurance and dental and vision coverage. However, retirement benefits were not provided to employees of the Children’s Trust. Subsequently, the Children’s Trust applied for enrollment in the Florida Retirement System, but the application was denied because the Children’s Trust’s employees were under direction and control of the third-party, making them employees of a private entity ineligible for FRS participation. The Children’s Trust terminated the first personnel company and sought human resource services through a different company, whose employees could receive FRS benefits. Although FRS benefits became available prospectively, the Children’s Trust’s employees were denied past service credit for the period of time under contract with the first personnel company. The Children’s Trust brought suit, but the order of denial to purchase past service credit was affirmed. The first personnel company was a licensed employee leasing company, which authorizes employee leasing, an arrangement whereby a leasing company assigns its employees to a client and allocates direction and control of the leased employees between the leasing company and the client. Section 468.529(1), Florida Statutes, specifies that a licensed employee leasing company is the employer of the leased employees. Consequently, as a matter of law, as the employee leasing company, the first personnel company, not the Children’s Trust, was employer of the employees. As employees of a private entity, employees of the employee leasing company are not eligible for FRS benefits. The Children’s Trust of Miami-Dade County v. Department of Management Services, Division of Retirement, 32 Fla. L. Weekly D1884 (Fla. 3d DCA August 8, 2007).


Bloomberg reports that treasuries are getting an unexpected boost from pension funds controlling more than $14 trillion. Fund managers are shifting away from stocks to prepare for accounting changes requiring them more fully to disclose the value of their holdings. Bonds are gaining favor as funds seek to avoid wider swings in prices that may accompany equities as the new rules take effect, possibly later this year. The switch could not come at a better time for $4.4 trillion dollar market for US government bonds, which has not returned more than 3.5 percent a year since 2002. The recent surge in equities (until very recently) has wiped out pension deficits of the companies in the Standard & Poor’s 500 for the first time in six years. Now funds can afford to match future obligations to employees with fixed-income debt rather than trying to plug shortfalls in the funds. Demand from pension funds is typically strongest for the longest-maturity debt, which allows funds more closely to match assets with liabilities. The 30-year bond has returned 5.1%, including price gains and interest payment, since mid-June, compared with a 2.8% return for 10-year notes. If pension funds have gains in stocks, the prudent thing is to rebalance. The cheapest way for pension funds to fund future payments to retirees is through zero-coupon bonds because they are sold at a discount to their face value. Investment banks created $3.6 billion in zero-coupon treasuries in June, bringing the total outstanding to $201.5 billion dollars, the most in seven years.


CFO says that potential whistle-blowers may want to think twice. Of nearly 1,000 complaints filed under the whistle-blower provisions of the Sarbanes-Oxley Act, not one has survived company appeals to result in an unequivocal win for the complainant. Many have settled at some stage of the process, but the lesson so far seems to be that if companies continue to fight they will ultimately prevail. Here are the results of those 947 SOX cases: 70% were dismissed, 15% settled prior to Department of Labor ruling, 13% were withdrawn and 2% proceeded to a DOL administrative law judge.


A scholarly paper published in Journal of Financial Planning presents a unified framework that addresses differences in risk and returns on taxable and retirement accounts. It explains the logic of calculating an individual’s after-tax asset allocation, where one first converts all account values to after-tax funds and then calculates the asset allocation based on these values. For example, one must first convert pretax funds in tax-deferred accounts, such as 401(k)s, into after-tax funds before calculating after-tax asset allocation. The study examines how the choice of savings vehicles, such as a Roth IRA, tax-deferred account, or taxable account, affects the portions of principal effectively owned by, return received by and risk borne by the individual investor. The study explains how an investor’s stock management strategy affects the after-tax risk and returns on stocks held in taxable accounts. It demonstrates that, in a mean-variance optimization, a bond held in a retirement account is effectively a different asset than a bond held in a taxable account. The same statement usually applies to stocks. Finally the study examines implications of this united framework for the asset allocation decision. Except for extreme cases, individuals should locate bonds in retirement accounts and stocks--especially passively managed stocks–in taxable accounts, while obtaining their target asset allocation.


“The reason grandparents and grandchildren get along so well is that they have a common enemy.” Sam Levenson

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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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