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Cypen & Cypen
SEPTEMBER 20, 2007

Stephen H. Cypen, Esq., Editor

Never Forget - September 11, 2001


The Florida Division of Retirement has released the list of October 2007 supplemental distribution amounts for qualifying firefighter pension plans. The total supplemental distribution is $25,189,488.38, a whopping increase over last year’s $10 million. Our client Fort Lauderdale fire (which is combined with police) led the pack at $1,414,492.97. Checks will be mailed by Department of Revenue on or about September 21, 2007 to those plans that have already been “approved” by the Division for regular distribution. If regular distribution monies are being held pending compliance with Chapter 175, Florida Statutes, then supplemental monies will be similarly withheld. For a detailed explanation of how this supplemental distribution works, (see C&C Newsletter for October 5, 2006, Item 1).


Make plans now to attend the 39th Annual Police Officers' & Firefighters' Pension Trustees' Conference to be held at the St. Petersburg Radisson Hotel & Conference Center on October 22-24, 2007. The Conference is sponsored by the Division of Retirement and is provided free of charge. You must make hotel reservations as soon as possible because space is limited. Topics for the conference will include: legislation, legal issues, actuarial issues, investments and other retirement related issues specific to Chapters 175 and 185, Florida Statutes. We encourage trustees to take advantage of this unique educational opportunity. October 22 will be a pre-conference program designed for newest trustees; October 23 and 24 will be the regular conference program for all trustees, service providers, participants and all other interested parties. Full conference details are available on the Division’s website,


According to a report from Associated Press, Chief Justice John Roberts has compared attorneys to firefighters, telling a law school gathering that both have to jump into tough situations to contain problems. Roberts referred to the work of the late author Norman Maclean, whose book Young Men and Fire chronicled the role of firefighters in a deadly 1949 fire. Like Maclean, lawyers and judges must sift through mountains of information to find evidence that really matters. Roberts noted that both firefighters and lawyers are viewed as “a little bit nuts,” and have a strong sense of camaraderie. “If you are in the law simply to make a living, you are not likely to find it rewarding,” he said. In our judgment, surely the same is true for firefighting.


They charge into burning buildings, fight their way through noxious black smoke and blistering heat and risk their lives to save others. The biggest danger firefighters face is not fire or smoke or collapsing structures. It’s heart attacks, according to USA Today. The National Volunteer Fire Council and fire departments across the country are joining forces to try to change that situation. The Council mailed out heart health information this month to all of the nation’s 30,000 fire departments, and issued a fitness challenge. This action followed a June alert from the National Institute for Occupational Safety and Health urging fire departments to develop fitness programs and follow medical screening guidelines. Firefighters do have long periods of down time, followed by a sudden jolt when the alarm goes off. They must immediately get into gear, and their adrenalin shoots up, which is a lot of strain even for people who are in shape. Cardiac failure is the number one killer of firefighters, accounting for close to half of the line-of-duty deaths in the past four years, according to the U.S. Fire Administration. A study released in March by the Harvard School of Public Health showed that firefighters on active duty faced a heart attack risk up to 100 times greater than that of workers with non-emergency roles. In response, numerous departments across America are taking measures to address the issue.


The News-Press reports that an investigation by federal and state regulators of “free lunch” investment seminars aimed at seniors has found high-pressure sales pitches masquerading as educational sessions, pervasive misleading claims for unsuitable financial products and even fraud. Much of the blame goes to investment firms for failing properly to supervise their employees, who put on the seminars for seniors. By law, the sales pitches made at the seminars and the materials provided to participants must be approved by brokerage or investment firm’s supervisors. Examination by the Securities and Exchange Commission, state regulators and the securities industry’s self-policing organization, the Financial Industry Regulatory Authority, covered seven states that have large numbers of retirees: Alabama, Arizona, California, Florida, North Carolina, South Carolina and Texas. The investigation, which ran from April 2006 to June 2007, focused on 110 investment firms and branch offices that sponsor sales seminars for seniors with free meals. SEC Chairman Christopher Cox called the investigation’s findings a wake-up call for securities regulators, the financial-service industries and (especially) older investors. Among the findings:

  • The popular “free lunch” or dinner seminars, often held at upscale hotels, restaurants and golf courses, are advertised as educational sessions or workshops at which no products will be sold. Actually, they are sales presentations, pushing those attending to open new accounts and make investments on the spot or in follow-up meetings with sales people.
  • Nearly 60% of the 110 investment firms and branch offices examined showed evidence of weak supervision of employees running the seminars, including failure to review seminar materials.
  • Exaggerated or misleading claims -- like “Immediately add $100,000 to your net worth” -- showed up in about half of the 110 inspections performed by regulators.
  • Recommendations for unsuitable investments were found in 23% of cases.
  • Thirteen percent showed apparent instances of fraud, such as liquidating accounts without a customer’s knowledge or consent, or selling bogus investments.

In the past two years, SEC has brought more than 40 enforcement cases involving alleged fraud against seniors, mainly in coordination with state authorities. In addition, the Financial Industry Regulatory Authority (FINRA), known until recently as National Association of Securities Dealers, has filed cases against a number of brokerage firms and individual employees. The old adage is definitely still true.


That’s the title of a recent BusinessWeek piece, which posits that public pension plans may have grown addicted to high-risk alternative investments. Despite the sharp ups and downs of the market lately, public pensions show no sign of abandoning the recent push into hedge funds and other nontraditional investments. But can they really afford to do so? Because of big stock market losses earlier this decade, some plans are underfunded, meaning their assets are not enough to cover the present value of the long-term retirement promises they have made. To make up that difference, public funds have two options: look for higher contributions from state and local employers or find a way to “juice” investment returns. Smaller funds with big holes to fill are among those moving fastest into more esoteric investments, but they are the ones least able to afford big losses. It is easy to see what has attracted public funds to these assets. Heady returns at a handful of university endowments that ventured into hedge funds early on were followed by successes at larger public funds like the Pennsylvania State Employees’ Retirement System. But they may be too late. This year’s volatility presents the first real test of the alternative strategy, and some of the lessons are disconcerting. One of the main arguments for getting into alternative investments is that they would lower volatility by spreading their bets over broader investments. It is a highly appealing idea to a group that still suffers from the dramatic market drops of five years ago. But one plan says in the recent turmoil its hedge fund investments did not move independently from the stock and bond markets, as hoped. For public plans, whose boards are often populated with political appointees, unfamiliar hedge funds pose the added risk of bad headlines. If the market crashes, people don’t say “why were you invested in equities?,” because people are familiar with them. But if the hedge fund blows up, it’s a disaster. One very telling statistic: 42% of public funds planned to up their hedge fund exposure in 2006; only 26% planned to do so in 2005.


The Securities and Exchange Commission’s Division of Enforcement plays a key role in meeting the agency’s responsibility to enforce securities laws and regulations. While Enforcement has brought a number of high-profile cases, questions have been raised over how effectively the Division manages its operations and resources. For example, the United States Government Accountability Office has previously reported on challenges Enforcement faces in managing its investigation information systems and overseeing the Fair Fund program. (Under this program, funds are distributed to investors who have suffered losses resulting from securities fraud and other violations.) GAO was asked to evaluate Enforcement’s (1) investigation planning and information systems and (2) oversight of the Fair Fund program. Among other things, GAO analyzed SEC and Enforcement documents and data, and interviewed agency officials as well as consultants involved in administering the Fair Fund program. The following summarizes key issues:

  • In March 2007, Enforcement established a centralized process for reviewing and approving new investigations. Unlike the previous decentralized approach, the new process is designed better to prioritize investigation staffing and to maintain quality control in the investigative process. However, Enforcement has not yet established written procedures and assessment criteria for reviewing and approving new investigations; such procedures and criteria are needed effectively to help manage the Division’s operations and resources.
  • In May 2007, Enforcement announced plans better to ensure the prompt closure of investigations that are no longer being pursued. While Enforcement’s plans to address this issue are positive, they will not fully resolve the potentially large backlog of investigations that have remained open for extended periods.
  • By late 2007, Enforcement plans to update its current information system for managing investigations with a new system that can significantly enhance the Division’s operations. However, Enforcement has not take sufficient steps to ensure that data are entered into the new system on a timely and consistent basis to maximize the system’s usefulness as a management tool.

Enforcement’s approach to managing the Fair Fund program may have contributed to delays in distributing funds to harmed investors. While factors such as the complexity of identifying harmed investors and tax issues likely contributed to some distribution delays, Enforcement’s decentralized approach to managing the program may have created inefficiency. SEC has announced plans to centralize Fair Fund management within a new office, but has not yet defined the office’s roles or described its responsibilities and procedures. Therefore, it is too soon to assess how the new office will affect the Fair Fund program. For the general information of readers, SEC is an independent agency created in 1934 to protect investors; maintain fair, honest and efficient securities markets; and facilitate capital formation. The agency has a five-member Commission that the President appoints, with the advice and consent of the Senate, and that a Chairman designated by the President leads. The Commission oversees SEC’s operations and provides final approval of SEC’s interpretation of federal securities laws, proposals for new or amended rules to govern securities markets and enforcement activities. Factoid: Joseph P. Kennedy, Sr., father of President John F. Kennedy, was appointed by President Franklin Delano Roosevelt to serve as first Chairman of SEC.


On September 7, 2007 Congressional Research Service updated its Report for Congress entitled “Older Workers: Employment and Retirement Trends.” As members of the “Baby Boom” generation -- people born between 1946 and 1964 -- approach retirement, the demographic profile of the U.S. work force will undergo a substantial shift: a large number of older workers will be joined by relatively few new entrants to the labor force. According to the Census Bureau, while the number of people between ages 55 and 64 will grow by about 11 million between 2005 and 2025, the number of people who are 25 to 54 years old will grow by only 5 million. This trend could effect economic growth because labor force participation begins to fall after age 55. In 2006, 91% of men and 76% of women aged 25 to 54 participated in the labor force. In contrast, just 70% of men and 58% of women age 55 to 64 were either working or looking for work in 2006. The rate of employment among persons age 55 and older is influenced by general economic conditions, eligibility for Social Security benefits, availability of health insurance and prevalence and design of employer-sponsored pensions. As more workers reach retirement age, employers may try to induce some of them to remain on the job, perhaps on a part-time basis. This phenomenon is sometimes referred to as “phased retirement.” There are several approaches to phased retirement -- job sharing, reduced work schedules and rehiring retired workers on a part-time or temporary basis.


FUNDfire reports that Securities and Exchange Commission has taken its first regulatory action stemming from its three-year investigation into the investment consulting industry (see C&C Newsletter for May 19, 2005, Item 1). SEC and the consultant have agreed to more than $200,000 in fines and a public censure stemming from what the SEC says were improper disclosures of some revenue streams. The Pittsburgh-based consultant says the problems were resolved internally long ago and that its clients are standing by the firm. Still, in addition to a formal censure from the agency, the consultant will pay $175,000 in fines while its president will pay $40,000. The settlement, in which the consultant neither admits nor denies the allegations, is the first time the agency has taken action against an investment consultant in its much-ballyhooed investigation into pay-to-play and other potential conflicts of interest in the pension consulting industry. The investigation led various consulting firms to change some business practices, but the agency has been largely silent on the issue for many months. The subject consultant is a relatively small player in the field: it consults to 135 institutions with combined assets of $21 Billion; and also maintains a proprietary database of managers and their product performance. The firm sold subscriptions to that database to some managers, a business that SEC says generated more than $600,000 for the firm. That business line was disclosed in the firm’s Form ADA Parts II, but SEC says the firm gave clients and prospective clients other documents (like responses to RFPs) that contained materially misleading information regarding potential financial conflicts of interest created by the sale of database subscriptions. More specifically, in some cases, RFP responses did not mention the subscription sales. SEC says such failure is the problem, as it amounts to the firm’s breaching its duty to clients and prospective clients by misrepresenting and omitting to disclose material information about certain potential financial conflicts of interest. Quoted in the article, Lori Richards, Director of SEC’s Office of Compliance Inspections and Examinations, says its an important case: “When pension consultants claim they’re independent, this is a key conflict of interest that should be disclosed.” Separately, another SEC official hints that further regulatory actions against consultants may be coming soon. Stay tuned.


If you think your sleep patterns are changing as you get older, you are right. You are getting less “deep” sleep and less REM sleep. Deep sleep is when the body performs physical repairs; REM is when it performs mental repairs. But by age 65 most of us will wake up a dozen times a night and spend no more than 30 minutes in deep sleep. By comparison, a typical 20-year-old sleeps virtually uninterrupted, spending as much as two rich hours in the well-insulated caverns of deep sleep. The drop in REM is much less drastic: it provides about two dreamy hours per night at age 20 and around an hour at age 80, according to Health.


“Bores can be divided into two classes: Those who have their own particular subject, and those who do not need a subject.” A. A. Milne (Oh, Pooh.)

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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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