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Cypen & Cypen
NOVEMBER 6, 2008

Stephen H. Cypen, Esq., Editor


On October 17, 2008, the Department of Labor published two interpretive bulletins under Employee Retirement Income Security Act:

A. Following Advisory Opinion No. 2007-07A (December 21, 2007) (see C&C Newsletter for January 17, 2008, Item 2), the Department of Labor has published an interpretive bulletin relating to exercise of shareholder rights and written statements of investment policy, including proxy voting policies or guidelines. Here are summaries of the four categories treated:

(1) Proxy Voting. The fiduciary act of managing plan assets that are shares of corporate stock includes management of voting rights appurtenant to those shares of stock. Votes shall be cast only in accordance with a plan’s economic interests. If the responsible fiduciary reasonably determines that cost of voting (including cost of research, if necessary, to determine how to vote) is likely to exceed the expected economic benefits of voting, or if the exercise of voting results in imposition of unwanted trading or other restrictions, the fiduciary has an obligation to refrain from voting.

(2) Statements of Investment Policy. Maintenance by an employee benefit plan of a statement of investment policy designed to further purposes of the plan and its funding policy is consistent with the fiduciary obligations set forth in ERISA. Such investment policy may include a policy or guidelines on voting of proxies on shares of stock for which the investment manager is responsible. Such guidelines must be consistent with the fiduciary obligations set forth in ERISA and this Interpretive Bulletin, and may not subordinate economic interests of plan participants to unrelated objectives.

(3) Shareholder Activism. An investment policy that contemplates activities intended to monitor or influence management of corporations in which the plan owns stock is consistent with the fiduciary’s obligations under ERISA where the responsible fiduciary concludes that there is a reasonable expectation that such monitoring or communication with management, by the plan alone or together with other shareholders, will enhance economic value of the plan’s investment in the corporation, after taking into account costs involved. Said reasonable expectation may exist in various circumstances, for example, where plan investments and corporate stock are held as long-term investments or where a plan may not be able easily to dispose of such an investment.
(4) Socially-Directed Proxy Voting, Investment Policies and Shareholder Activism. Plan fiduciaries risk violating the exclusive purpose rule when they exercise their fiduciary authority in an attempt further to legislative, regulatory or public policy issues through the proxy process. The mere fact that plans are shareholders in the corporations in which they invest does not itself provide a rationale for a fiduciary to spend plan assets to pursue, support or oppose such proxy proposals. Because of heightened potential for abuse in such cases, fiduciaries must be prepared to articulate a clear basis for concluding that the proxy vote, the investment policy or the activity intended to monitor or influence management of the corporation is more likely than not to enhance economic value of the plan’s investment before expending plan assets. Use of pension plan assets by plan fiduciaries to further policy or political issues through proxy resolutions that have no connection to enhancing economic value of the plan’s investment in a corporation would, in view of the Department, violate the prudence and exclusive purpose requirements of ERISA. For example, the likelihood that adoption of a proxy resolution or proposal requiring corporate directors and officers to disclose their personal political contributions would enhance economic value of a plan’s investment in the corporation appears sufficiently remote that the expenditure of plan assets to further such resolution or proposal clearly raises compliance issues under ERISA. Federal Register, Vol. 73, No. 202, October 17, 2008, Pages 61731-61734.

B. Following Advisory Opinion No. 2008-05A (June 27, 2008) (see C&C Newsletter for July 3, 2008, Item 5), the Department of Labor has published an interpretive bulletin relating to investing in economically targeted investments. Given the significance of ERISA’s requirement that fiduciaries act “solely in the interest of participants and beneficiaries,” the Department believes that, before selecting an economically targeted investment, fiduciaries must have first concluded that the alternative options are truly equal, taking into account a quantitative and qualitative analysis of economic impact on the plan. ERISA’s fiduciary standards do not permit fiduciaries to select investments based on factors outside economic interests of the plan until they have concluded, based on economic factors, that alternative investments are equal. A less rigid rule would allow fiduciaries to act on basis of factors outside economic interest of the plan in situations where reliance on those factors might compromise or subordinate interest of plan participants and their beneficiaries. The Department rejects a construction of ERISA that would render the Act’s tight limits on use of plan assets illusory, and that would permit plan fiduciaries to expend ERISA trust assets to promote myriad public policy preferences. Federal Register, Vol. 73, No. 202, October 17, 2008, Pages 61734-61736.

As we have often stated, although this guidance deals with ERISA (which does not apply to public plans), public plan trustees need to be mindful of its provisions.


In a new survey, Fidelity Investments reports that nearly half (45%) of Americans age 61 today are planning to begin taking Social Security at age 62, the first year that eligible recipients can apply. The top reasons driving their decision to collect early are immediate financial needs and health/longevity concerns. Of those who plan to begin drawing down at age 62, more than three-quarters will use funds to pay for basic living expenses, such as food, utility costs and mortgages. This group expects that Social Security payments will provide as much as half of their total retirement income. Yet, when asked to quantify their Social Security payments, only 22% knew exactly how much their check will be. Nearly three-quarters of those planning to start taking Social Security at age 62 are also making their decision without having a formal retirement income plan. While more than three-quarters of 61 year-olds report knowing when they will start taking Social Security, many show a very limited awareness of basic Social Security knowledge needed to make an informed decision. When quizzed about issues such as filing requirements and taxation, a vast majority (85%) correctly identify age 62 as the earliest possible age that people may become eligible for Social Security, but 56% do not know when they will be eligible for full Social Security benefits (age 66 for those born 1943-1954). More than half are unaware that they need to file for their benefit three months in advance of the date they wish to start receiving benefits. Seven percent of respondents incorrectly believe that the Social Security Administration will contact them when it is time to receive benefits. Nearly one-third also believe that Social Security payments are not taxable, and 12% were not aware that working in retirement could impact their benefits. There is also confusion among 61 year-olds regarding spousal benefits. Nearly three-quarters do not know that a non-working or lesser-earning spouse could be eligible for Social Security based on a higher-earning spouse’s work history alone; and a full 64% answered incorrectly when asked what percent of their spouse’s benefit they could be eligible for (up to 50%). Half also are not aware that when a spouse passes away the surviving spouse may be eligible to receive the larger of their two Social Security payments. Just some more evidence about the public’s lack of knowledge concerning items of importance.


The Center for Retirement Research at Boston College has released a new Issue in Brief, reporting that since the mid-1960s, the median retirement age for men has declined from 66 to 63. If Americans continue to retire at age 63, a great many will risk income shortfalls, especially at older ages. This risk is even greater for those currently nearing retirement who have recently seen a large portion of their nest eggs evaporate. Work directly increases current income, Social Security benefits and retirement saving, and decreases length of retirement. But are Americans healthy enough to work longer? Life expectancy has been steadily increasing, but disparities in health and mortality outcomes have widened, and improvement in health outcomes for the population in general may have slowed or even reversed. In determining whether people will be able to work longer, it is not simply measuring how long they will live, but rather how much longer they will be capable of working. Life expectancy may be increasing, but can the same be said for healthy, disability-free life expectancy? The brief uses recent survey results to estimate trends in disability-free life expectancy for men at age 50. The first section calculates trends in disability-free life expectancy for the population as a whole, revealing an increase between 1970 and 2000 of almost three years. The second section estimates trends in disability-free life expectancy by race and educational attainment, showing that the three-year increase is attributable primarily to movement up the education ladder, with minimal increases within educational groups. Moreover, major disparities remain between those in the bottom and top quartiles of the population. The third section looks to the future, suggesting that improvement in health outcomes for the population in general may have slowed or even reversed, and that increases in educational attainment may have ceased. The final section concludes that the level and dispersion in disability-free life expectancy that we have today may be with us for a long time, and that a vulnerable portion of the population -- perhaps those who most need to work longer -- might not be able to extend their work lives. As always, interesting, if technical, information from CRR.


Trusts & Estates has a special report entitled “Asset-gathering Machines,” which deals with independent registered investment advisors enjoying new opportunities because of problems plaguing Wall Street firms. Among other things, the piece lists the largest 100 registered investment advisors in America. (Those advisors averaged 85% growth in assets between 2006 and the first quarter of 2008.) So, what is the difference between a registered investment advisor and a wirehouse representative (broker/dealer)? Here is the scoop:

Obligation to Clients

RIA Fiduciary duty to act in clients’ best interest at all times.

Broker/Dealer Can put firm’s interests first, as long as recommendation is “suitable” for client.

Compensation Model

RIA Fee-based or asset-based.

Broker/Dealer Fee-based or commission-based.


RIA Must tell clients of any and all fees received as compensation for services.

Broker/Dealer Disclosure rules governed by variety of sources, making them less obvious.


RIA No SEC educational requirements.

Broker/Dealer Required to pass appropriate financial industry regulatory authority qualification examination.


RIA Advisors handling more than $25 million in client assets must register with SEC. Those with less must register with their state’s securities regulator.

Broker/Dealer SEC, FINRA and applicable states.

Governing Law

RIA Investment Advisers Act of 1940.

Broker/Dealer Securities Exchange Act of 1934.


Plaintiffs won in more than half the state court civil trials in 2005, and were more likely to get a favorable decision in bench trials than jury trials, according to a new U.S. Department of Justice report. Plaintiffs won in 56% of all general civil trial cases. Judges ruled in their favor in 68% of the cases, while juries favored plaintiffs 54% of the time. The study is the first nationally representative measure of general civil bench and jury trials in state courts. The report found that plaintiffs were awarded an estimated $6 Billion in compensatory and punitive damages, with a final median damage award of $28,000. More than 14% of plaintiff winners were awarded damages of more than $250,000, while about 4% received more than $1 Million. State courts handled nearly 27,000 civil cases through bench or jury trials. Sixty-one percent of them involved a tort claim, and the most common tort claim involved a motor vehicle accident. Out of the 14,000 civil trials that went in plaintiffs’ favor, punitive damages were awarded in about 5% of the cases, with $64,000 as the median punitive damages award. The report also pointed to a major drop in the number of civil trials, with numbers decreasing by 52% from 1992 to 2005 in the nation’s 75 most populous counties. In these counties, the median final award also decreased, from $72,000 in 1992 to $43,000 in 2005. But some tort cases did see higher awards. In products liability trials, median awards were five times higher in 2005 and median medical malpractice awards more than doubled, from $280,000 in 1992 to $682,000 in 2005.


Most people have a general idea of what the Emergency Economic Stabilization Act of 2008 covers. In fact, we recently did a short summary (see C&C Newsletter for October 8, 2008, Item 1). But few people know about the extremely important part that was designed for the William Tells of the world: Section 503. That section is entitled “Exemption from Excise Tax for Certain Wooden Arrows Designed for Use by Children.” It exempts from excise tax wooden arrow shafts consisting of all natural wood with no lamination or artificial means of enhancing the spine of such shaft (whether sold separately or incorporated as part of a finished or unfinished product) of a type used in the manufacture of any arrow which after its assembly measures 5/16 of an inch or less in diameter and is not suitable for use with a certain described bow. Oh, and the amendment shall apply to staffs first sold after date of enactment of the law (October 3, 2008). Now, there is something real important. (Seriously, though, we suspect the President needed support from a member of Congress in whose district such arrows are manufactured.)


Section 211 of the Emergency Economic Stabilization Act is entitled “Transportation Fringe Benefit to Bicycle Commuters.” In essence, Section 132(f) of the Internal Revenue Code is amended to add a “qualified bicycle commuting reimbursement,” whereby an employer may reimburse an employee for the purchase of a bicycle and bicycle improvements, repair and storage, if such bicycle is regularly used for travel between the employee’s residence and place of employment. The applicable annual limitation is $20 multiplied by the number of qualified bicycle commuting months during such year. We guess this fringe benefit is better than a sharp stick in the eye.


Corporate fraud can be illusive, to say the least, or so says CFO. Fraudsters usually act alone, rarely have criminal records and are nearly as likely to be female as male. No wonder the typical case persists two full years. Here are some factoids from a recent report:

  • Percentage of frauds detected by a tip -- 46%; percentage of frauds detected by accident -- 20%
  • Frauds committed by accounting staff -- 29%; frauds committed by IT staff -- 2%
  • Median loss associated with male fraudsters -- $250,000; median loss associated with female fraudsters -- $110,000 (another glass ceiling?)
  • Frauds committed by employees earning less than $50,000 -- 41%; frauds committed by employees earning over than $200,000 -- 10%

Verrrrrrrrrrrrry interesting.


This item is relative to absolutely nothing. However, it deals with something we always wondered about, and thought you might, too. Does one dog year really equal seven human years? Well, according to Esquire, not exactly. A breed that weighs less than 20 pounds as an adult (if you consider that a real dog) ages 15 human years in its first year and nine in its second. Subsequent years are calculated as four human years each. For big, slower-growing breeds, the first two years are considered equal to, respectively, twelve and eight human years. Beyond that, figure seven years per dog year. It just goes to show that you cannot teach a new dog old tricks.


James LaRue, whose rare unanimous United States Supreme Court victory upheld his claim for damages against an ERISA fiduciary for investment losses (see C&C Newsletter for February 28, 2008, Item 1), has asked the trial court to dismiss his case “because he has decided not to pursue it further.” On remand, after beginning discovery, LaRue has decided that it is not financially feasible to continue to pursue his claim Although the dismissal is “with prejudice,” it shall not in any way affect LaRue’s right to pursue any other claim he may have against defendants based upon events occurring after 2002, if any such claim exists and if such claim is not barred by the statute of limitations or otherwise. Defendants do not concede that LaRue has any other viable claim against them. Neither party admits any fact raised in the matter or any allegation of an opposing party. Further, neither party admits any wrongdoing at all. Apparently, the “system” has claimed another victim. LaRue v. DeWolff, Boberg & Associates, Inc., Case No. 2:04-1747-DCN (DC SC, October 21, 2008) (consent order of dismissal pursuant to Fed. R. Civ. P. 41(a)(2)).

The Eleventh U.S. Circuit Court of Appeals recently considered an appeal in which the central question was whether the Securities Litigation Uniform Standards Act of 1998 barred Instituto de Prevision Militar from pursuing state law claims against Merrill Lynch and its affiliates for their role in a fraud committed on IPM by a non-party to the action. In a nutshell, that third party allegedly defrauded investors throughout Latin America -- including IPM -- by stealing their money rather than investing it. IPM claimed that, under Florida law, Merrill Lynch was liable for the third-party’s fraud because it allowed the third party to hold itself out as Merrill Lynch’s agent, and because it failed to stop the third party from misappropriating IPM’s funds. The trial court granted Merrill Lynch’s motion to dismiss, concluding that SLUSA precluded IPM’s state law claims and that IPM failed to state a claim for fraud under the Federal Securities Laws. The appellate court affirmed. Congress enacted SLUSA to ensure that securities fraud class actions were brought under federal law and in federal court. The appellate court held that Merrill Lynch had established all four elements of SLUSA preclusion: (1) the case qualifies as a “covered class action;” (2) the second amended complaint asserts state law causes of action; and (3) the state law claims are based on misrepresentations or omissions in connection with purchase of (4) a covered security. On the remaining question of whether IPM adequately pleaded a federal securities fraud claim, the District Court had found five fatal flaws in the complaint. Because it failed to challenge the lower court’s holding on four of those grounds, IPM abandoned the argument that it had adequately pleaded a federal securities fraud claim. Instituto de Prevision Militar v. Merrill Lynch, Case No. 07-15079 (U.S. 11th Cir., October 29, 2008).


Scratch a dog and you'll find a permanent job.


“Too much of a good thing can be simply wonderful.” The inimitable Mae West

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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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