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Cypen & Cypen
November 14, 2019

Stephen H. Cypen, Esq., Editor

Does the investment community rely too heavily on proxy advisory firms to inform their votes? The Securities and Exchange Commission seems to think so. In August the SEC issued new guidance, likely a precursor to upcoming regulation. The potential result? An increased administrative burden that could dramatically raise the costs associated with proxy voting--and with it the very real potential to discourage investors from holding companies accountable.
What is a proxy advisory firm?
Each year, shareholders cast proxy votes on thousands of company matters, from board nominations, executive pay, and auditor ratification to mergers and proxy contests. Casting an informed vote requires gathering all the relevant facts as well as understanding the company’s peer group and best governance practices. For example, in assessing whether a company’s CEO compensation plan is doing its job in retaining and incentivizing the CEO in light of the company’s performance, investors typically find it helpful to understand what competitors are paying for similar performance. After all, that should be a decent yardstick for what the CEO might make if she were to jump ship to a competitor. Proxy advisors make that assessment easier by aggregating compensation market data and making it digestible. As with basic stock or credit research, rather than each investor conducting this due diligence individually, it’s more efficient for experts to assemble the information and make it available for purchase to investors to use as they see fit in their proxy-voting decisions. This is where proxy advisory firms add value. Although some provide only governance research, others also provide voting recommendations based on investor preferences. For example, some investors might want to vote against the election of a non-independent director on the compensation committee and ask the proxy advisor to alert them when this occurs. However, the investor still has complete discretion over which proxy advisors to work with and how to use the research to make a voting decision. This arrangement is an efficient, market-based solution, similar to the research and decision-making process seen in other parts of the investment industry.
Why is the SEC looking to further regulate proxy advisory firms?
Similar to equity or credit research, there can be a natural tension between research providers and the companies being researched. Proxy advisors have at times been a thorn in public companies’ sides. They may recommend votes that management disagrees with, and companies worry the advisory firms could have an outsize influence on proxy votes. As a result, some of these public companies have long lobbied the SEC to cast its regulatory eye on proxy advisory firms. But governance research should be evaluated based on whether it provides value to the investors who pay for it, not whether it pleases the companies being researched. While the new guidance isn’t earth shattering, there’s a looming threat of burdensome regulation in the coming months. In the past a few ideas to further regulate the advisors included a proposal to force them to allow companies to review the research before proxy advisors could publish it to their paying investor clients. That would reduce the already very limited amount of time investors have to digest the analysis before the shareholder meeting. Another idea was to make proxy advisory firms liable for research “mistakes.” Unfortunately critics often appear to confuse factual mistakes with disagreements of opinion. With so much uncertainty on what’s coming, we’re wary that the SEC might break a system that’s currently working. And this could have big ramifications not only for proxy advisors but also for institutional and individual investors alike.
What are the implications of additional proxy advisor regulation?
Additional regulation would make it much more expensive for proxy advisory firms to operate--and, realistically, those costs would be passed on to investors. Plus, with only two firms making up the vast majority of the proxy advisor market, this could further consolidate an already small playing field and pose additional barriers to entry for new proxy firms. So if public companies and the SEC are worried about too few voices having too much influence, additional regulation doesn’t figure to help matters. It means institutional investors risk having access to less diversity of opinion on proxy measures. And when was the last time you heard anyone say less independent research was a good thing? And finally, this will harm individual investors as well--the exact market players the SEC intends to protect. Since the 1950s, individual investors have increasingly opted to leverage institutional investors to manage their assets instead of directly holding individual stocks. They hire these larger entities to be stewards of their capital and represent their interests. It’s therefore paramount for institutional investors to be able to make informed and cost-effective voting decisions as they fulfill their fiduciary duty to the end investor.
The bottom line
In an era when more and more investors want to practice active ownership and gain visibility into company business practices, the independent research proxy advisors provide is crucial. This is why Parametric and more than 50 other investors signed a letterfrom the Council of Institutional Investors outlining our concerns to the SEC and requesting that no additional regulatory requirements be imposed. The SEC and a number of public companies appear to believe they’d be doing the right thing by further regulating proxy advisors. We respectfully disagree.
Gwen Le Berre, Director of Responsible Investing, Parametric, November 4, 2019.
National Veterans Small Business Week is the perfect time for veterans who are business owners to check out the IRS’s online resources. Here are a few of the webpages that can help small businesses understand their tax responsibilities.
Self-Employed Individuals Tax Center
This a great resource for sole proprietors and others who are in business for themselves. This site has many handy tips and references to tax rules a self-employed person may need to know. Self-employed taxpayers will find info on topics including how to make quarterly payments and self-employed tax obligations.
Small Business and Self-Employed Tax Center
This page features links to useful tools and common IRS forms with instructions. Taxpayers can find help on everything from how to get an employer identification number online to how to engage with the IRS during an audit. A link to the IRS Tax Calendar for Businesses and Self-Employed also provides at-a-glance key tax dates for businesses.
Sharing Economy Tax Center
It provides fast answers to tax questions and links to forms and resources related to the sharing economy. People who are involved in the sharing economy are those who use online platforms to engage in businesses, such as renting a spare bedroom, providing car rides and providing other goods and services.
Issue Number: Tax Tip 2019-154, IRS Tax Tips, November 4, 2019.
For starters, you’d hope a Nobel Prize winning economist would base his case on numbers remotely close to accurate. But Roger Myerson isn’t even in the ballpark – he’s off by at least 200%, and perhaps 500% according to one of his Nobel colleagues. A recent WGN story and video lay out Myerson’s defense of Illinois’ pending progressive income tax hike. Myerson is a Professor in Economics at the Harris Graduate School of Public Policy Studies. He won the Nobel Prize in economics in 2007. Illinois owes about $132 billion in unfunded pension debt, which is “not so bad,” he says. “Less than $30,000 per household.” Wrong. That $132 billion is just for the five state pensions. Add on another $70 billion for local pensions and at least another $70 billion for pensioner healthcarewhich is entirely unfunded and constitutionally protected, and therefor part of the pension problem. That takes you to twice Myerson’s starting premise. But that’s using the government’s numbers based on rosy, widely ridiculed assumptions. His fellow Nobel economist at the University of Chicago, Eugene Fama, said the real pension liability may be three times worse than official numbers. Apply that to all pensions, add healthcare and you’d get about $670 billion – five times worse than Myerson says. We like to use Moody’s Analytics’ numbers, which are in the middle, and for per household liability we think you should disregard people who don’t have the means to pay anything. Chicago is the epicenter of our pension problems and its households with any real ability to pay face an average pension liability of over $400,000 at least, based on Moody’s numbers. That’s over 13 times Myerson’s per household number. Now, let’s get to the heart of Myerson’s argument in favor of a progressive income tax, which is no less perplexing. His case is based on pension obligations, taxes to pay for them and property values. He starts by saying unfunded pension are a “hidden mortgage, hidden debt that politicians didn’t tell us about because they weren’t taxing us.” True enough, but here is the rest of his case summarized:
“They say taxes are going to want to make people leave the state and they just sort of stop there, and don’t think where it’s going to go next,” Myerson says. To determine whether or not the state is better or worse off because of this unpaid obligation, you need to compare it to a hypothetical Illinois where everyone has been paying more taxes over the last 30 years. There, Myerson says, future tax bills for each household would be less, on average. But as a result, that state would have become more desirable and housing would become more expensive, so homeowners would need to take on more debt to buy a house. “That debt, in equilibrium, as we say in economic analysis, would be of the same order of magnitude as the tax debt that you’d be escaping by moving over there [to the other Illinois],” Myerson says. Good grief. There’s so much missing and so much wrong in that. First, Myerson’s presupposes that higher taxes for pensions are matched something near one-for-one by reduced property values. He doesn’t back that up and it’s surely not true. Local pensions are paid primarily by property taxes, which do suppress property values. But sales taxes, fees and all the other sources of local revenue also contribute to pensions. Money is fungible. And none of the state pension and healthcare liabilities are paid by property taxes. Taxes for them still suppress property values indirectly, but surely not anything close to one-for-one. In other words, taxes for pensions don’t equilibrate with property values nearly as closely as Myerson asserts with no foundation. They come out of, and suppress, myriad other economic activities including spending and investment, and there’s no long term value in that. Second, some of the impact Myerson describes – lower Illinois property values – has already come to pass, and it hasn’t helped. Chicago, especially, is unquestionably cheaper because of our crisis and high taxes, and fleeing Illinoisans have already helped push prices up in other places, though probably not by much. Yet flight continues – five years straight of population decline. In other words, the balancing effect Myerson theorizes about isn’t working. That’s partly because there’s a staggering downside to lower property values. Subpar home appreciation has cost Illinoisans a quarter trillion dollars over ten years. That’s how much more their homes would be worth if they had appreciated at the national average, as we reported here. The negative wealth effect and other damage caused by that loss is massive. Third, the $270 billion of unfunded retiree obligations are yet-to-be-assessed as taxesDoes Myerson really think that looming bill, whether it’s a mortgage on Illinois properties or something else, doesn’t scare people away? I emphasize “yet-to-be-assessed” because Illinois and most of its municipalities are still far from taxing what would be needed just to tread water on its pensions. He apparently thinks Illinoisans needn’t worry about higher taxes because they will be offset by hammering home prices lower. Some consolation. To stabilize our pensions and begin covering the unfunded debt, unthinkably high tax increases would be needed. Remember that proposal from Chicago Federal Bank economists? They suggested a special, statewide, property tax dedicated solely to pensions. That tax would have to be one percent of true value and last for 30 years just to cover the state pensions. It would have to be double that to cover pensioner healthcare liability and local pensions. Fourth, and most importantly, Myerson’s hypothetical state is incomplete and disconnected from the true alternatives taxpayers face. In actuality, most other states have less generous pension benefits and most have been cutting them, which Illinois courts prohibit. Take Wisconsin as a clear example. It has been taxing sufficiently to cover future pension outlays, yet their total tax burden is no worse than ours. Residents there face no “hidden mortgage” for pensions because they are fully funded. Property and other costs aren’t higher than in Illinois. And they have better roads, better schools and better services for most everything else. You can see results along the Wisconsin border, which is dotted with former Illinois companies. Myerson, in other words, presents an entirely unrealistic and meaningless choice between Illinois and his theoretical Illinois. The real choice is between Illinois and states with better services, lower costs, lower taxes and lower unlevied taxes for pensions. Let’s make this simpler and put this into context. What would Myerson say to Warren Buffet? He told CNBC, clearly referring to Illinois, “If I were relocating into some state that had a huge unfunded pension plan, I’m walking into liabilities…. I’ll be here for the life of the pension plan and they will come after corporations, they’ll come after individuals. They’re going to have to raise a lot of money.” What would Myerson say to the countless people and employers that have fled or are planning to flee partly because of high taxes? His answer to all of them would be that they got it wrong because they didn’t think of the comparison to a hypothetical Illinois where higher taxes had fully funded our pensions. Wouldn’t you love to see the looks on their faces if Myerson told them that?
Mark Glennon, Wirepoints, November 4, 2019.
The tentative agreement raises the cap on accrued sick days from 40 to 244; some longtime teachers could use those days to retire a year early and still collect their full pension.
Under their new contract, Chicago Teachers Union members would be able to accrue more than six times as many unused sick days as before. The tentative agreement reached Thursday between the city, Chicago Public Schools and the CTU allows union members to bank 244 sick days, up from 40. That’s more than enough days to cover an entire school year -- an increase that could allow a longtime employee to retire a year early and still receive their full pension. The 40-day cap was the result of 2012 contract negotiations following scrutiny of a policy that allowed employees to cash out up to 325 sick days at retirement, resulting in tens of millions of dollars in payout to employees when they retired. After a Better Government Association report on the practice was published in the Sun-Times in 2012, the Board of Education cracked down. A 30-day payout cap was put in place for non-union employees; that included longtime principals and other administrators, such as former CPS CEO Arne Duncan. Then, through CTU contract negotiations later that year, a 40-day cap on sick-day accruals was put in place for union employees with under 40 days saved, but employees with more than 40 days accrued didn’t have any taken away. Employees could no longer cash out unused sick leave, but were allowed to use up to 40 days toward their pension service credit. In negotiations with the city this year, the union fought to raise the cap. Union documents tracking negotiations, obtained by the Sun-Times, show that as early as Oct. 25, the city was open to raising the number of sick days that could be banked to 244. Under the new contact, employees can use those accrued sick days as regular sick days, or as paid leave under the Family and Medical Leave Act, or to supplement short-term disability leave, as they had been allowed to do under the previous cap. Days accrued under the higher cap still can’t be used for cash payouts at retirement, but can still be used toward their pension service credits. If a union employee used no sick days, it would take more than 20 years to reach the sick-day cap -- though past the 17-year mark, they’d already have enough days saved up to retire a year early, with their full pension. Teachers can retire at age 55 with 35 years of service, age 60 with 20 years of service or age 62 with five years of service to receive their full pension benefit, according to CPS.
Gifting sick days to another employee
CPS employees can also share days from their sick-day bank with other employees, which continues without change from the last contract. An employee can gift up to 10 days to another employee, who can receive as many as 45 days from other employees. The gifts can be given to another employee who is suffering from a serious medical condition or on another approved leave of absence. An employee can receive a donation only once during their employment.
Matthew Hendrickson, Chicago Sun Times, November 1, 2019.
The Massachusetts Institute of Technology has agreed to pay $18.1 million to settle allegations of ERISA violations against the university's 401(k) plan, according to a notice filed with a U.S. District Court in Boston. The proposed settlement, which requires court approval, also contains a series of non-monetary provisions, including MIT's agreement to issue an RFP for record keeping and to conduct annual training for plan fiduciaries on ERISA guidelines. The proposed settlement also prohibits MIT's current and future record keepers from contacting participants about non-plan products and services such as life insurance and wealth management services unless participants request specific information. "The non-monetary terms are substantial and materially add to the total value of the settlement," said an Oct. 28 notice of the settlement agreement to the court filed by Jerome Schlichter, the lead counsel for the plaintiff. Mr. Schlichter is the founding and managing partner of Schlichter Bogard & Denton LLP. The initial complaint was filed by a plan participant in August 2016. In October 2018, the U.S. District Court in Boston granted class certification covering all participants and beneficiaries of the MIT Supplement 401(k) Plan from Aug. 9, 2010 through the date when the court approves the settlement. The parties reached a settlement on Sept. 12, four days before a trial was scheduled to begin; the terms were announced Oct. 28. The original complaint alleged a series of ERISA violations, some of which were dismissed or rejected by the court. However, MIT was still subject to a trial on claims of breach of fiduciary duty for failing to monitor plan investments; breach of prudence for excessive record keeping and administrative fees; and failure to monitor fiduciaries. "Defendants dispute these allegations, deny liability for any alleged fiduciary," the proposed settlement notice said. They also "contend that the plan has been managed, operated and administered at all relevant times in compliance with ERISA and applicable regulations." Among other non-monetary requirements in the proposed settlement:

  • MIT will issue an RFP to at least three record keepers that will agree to assess fees based on a per-participant basis rather than a percentage-of-assets basis.
  • If MIT decides to retain its current record keeper, Fidelity Investments, following an RFP, Fidelity will abide by all of the requirements in the proposed agreement.
  • MIT will submit information to Mr. Schlichter's firm regarding the results of the RFP process.
  • Subject to court approval, Mr. Schlichter's firm will receive no more than $6.03 million plus no more than $525,000 to cover costs, all of which will be paid from the settlement fund.

The MIT Supplemental 401(k) Plan had $4.5 billion in assets as of Dec. 31, according to the latest Form 5500 filing. Robert Steyer, Pensions & Investments, October 30, 2019.
Many are turning to innovative tech-enabled programs that cut costs for them while not shifting costs to employees, Mercer found.
The average total health benefit cost per employee grew 3% to reach $13,046 this year, according to the annual Mercer National Survey of Employer-Sponsored Health Plans 2019. Diverse workforce needs are increasingly shaping health program design. When asked about their priorities for the next five years, 42% of large and midsize employers (500 or more employees) identified “addressing health care affordability for low-paid employees” as an important or very important strategy. In 2019, most large and midsize employers backed off on requiring employees to pay more out-of-pocket for health services as a way to hold down premium costs: The average individual deductible in a Preferred Provider Organization (PPO), the most common type of medical plan, rose just $10 in 2019, to $992. However, Mercer notes that the average deductible rose by more than $250 among small employers (10 to 499 employees), which typically have less ability to absorb high cost increases and fewer resources to devote to plan management. Some larger employers that had offered a high-deductible health plan (HDHP) with a health savings account (HSA) as the only medical plan added a traditional PPO or Health Maintenance Organization (HMO) as an option. This trend was especially notable among employers with 20,000 or more employees. Those offering only a high-deductible account-based plan fell from 22% to 16%. “This doesn’t mean HSA plans are going away, but to meet the various needs and budgets of today’s five-generation workforce, employers are increasingly offering an array of health benefit plans,” says Tracy Watts, Mercer’s national leader for U.S. Health Policy.
Cost-cutting solutions with no employee cost-share
As employers look for cost-management strategies that do not shift cost to employees, the survey found many are turning to innovative tech-enabled programs that help employees manage chronic conditions or other health needs. In 2019, 58% of all large and midsize employers, and 78% of those with 20,000 or more employees, offer one or more of such targeted health solutions. “Typically the goals of these programs are empowerment, convenience and lower costs,” says Watts. “For example, a physical therapy app that reminds patients when to do prescribed exercises, provides instructions, and even counts reps could mean fewer trips to a clinic, less out-of-pocket cost for the employee, and a better outcome.” The survey also revealed another surge in telemedicine, with nearly nine out of 10 employers now offering a program to employees. Telemedicine expands access to care and is designed to reduce out-of-pocket spending. Telemedicine visits are typically less than half the cost of an office visit. In addition, teletherapy is now offered by 42% of employers with 5,000 or more employees. But, utilization of telemedicine by employees is growing only slowly. Last year, among employers offering telemedicine, on average 9% of eligible employees used telemedicine, up from 8% the prior year, and about one in seven employers reported utilization of 20% or higher. To improve utilization of health benefit offerings, 41% of large and midsize employers say all or most of their benefit offerings are accessible to employees on a single, fully integrated digital platform (most often through a smartphone app), up from 34% in 2018.
High-cost claims
Whether the private- or public-sector is paying, one common finding is that health care costs are concentrated among a relatively small percentage of high need individuals, those who cost $50,000 or more in one year, the American Health Policy Institute notes. These “high-cost claimants,” as they are called, are at the top of a long list of the most expensive sources of health care costs, surpassing medical inflation, pharmaceuticals, and any specific disease or condition. The Institute says in its report, “High Cost Claimants: Private vs. Public Sector Approaches,” that according to the National Business Group on Health, high-cost claimants are the No. 1 cost driver for 43% of large employers. According to Mercer’s survey, employers are using innovative patient-centered programs to address high-cost claims. Managing these high-cost claims is the top priority for employers over the next five years. The largest employers are taking the lead in offering enhanced health advocacy and intensive case management services, as well as programs that make it easy for members to seek an expert medical opinion on a diagnosis or their treatment plan. “Health advocates help patients and their families navigate a complex health care system to get to the right provider at the right time. When care is better coordinated, we often see less wasteful healthcare spending,” says Watts. High-cost specialty drugs, such as those used in cancer treatment, are often a factor in high-cost claims. While spending on all prescription drugs rose 5.5% in 2019 among large and midsize employers, spending on specialty drugs rose 10.5%, according to Mercer. More than half of all large and midsize employers (52%) and more than three-fourths of those with 20,000 or more employees (78%) now steer employees to a specialty pharmacy, which typically provides enhanced care management. For example, some drug therapies can be administered at home at less cost and greater convenience for the patient and family. The Mercer National Survey of Employer-Sponsored Health Plans is conducted using a national probability sample of public and private employers with at least 10 employees; 2,558 employers completed the survey in 2019. The survey was conducted during the summer, and results represent about 700,000 employers and about 124 million full- and part-time employees. The survey report is available here.
Rebecca Moore, Plansponsor, October 30, 2019.
BlackRock and Vanguard continue to grow socially conscious investment vehicles.
Assets managed in environmental, social, and governance (ESG) are growing. Willis Towers Watson’s Thinking Ahead Institute released new research on Monday that showed the largest 500 asset managers increased their positions in ESG by 23.3% in 2018 compared to their overall assets. Client interest in sustainable investing rose 83%. BlackRock, which has been the largest asset manager since 2009, has almost $6 trillion in assets under management. Vanguard Group holds more than $4.8 trillion, and State Street Global has more than $2.5 trillion. Each has been in the top three list of global asset managers for five years. Fidelity holds more than $2.4 trillion in assets.
Beyond ESG, the Thinking Ahead study reveals several other trends:

  • The $91.5 trillion that the 500 managers hold declined 3% from the previous year.
  • The median assets under management was $45.6 billion, which rose from $44 billion the previous year.
  • Rowe Price joined the list of top 20 asset managers for the first time.
  • 57% of assets are in North America, compared with 31% in Europe and 5% in Japan.

The report revealed that the investment industry remains relatively unstable. Nearly half (242) of the names in the 2008 list of global 500 asset managers are not in the 2018 list. Experts attribute this to increased regulatory scrutiny, fee compression, and technology costs. Meanwhile, 81% of fund managers said that they increased resources to technology and data. And 57% of managers surveyed said they had experienced an increase in regulatory oversight. The results show that early ESG proponents are finally getting their due. Some have been pushing their beliefs for a long time. In 1982, John Streur, CEO of Calvert Research & Management, launched the first mutual fund that avoided any entities doing business in apartheid-era South Africa. More recently, in 2012, Unilever’s then-CEO Paul Polman made sustainability a core management principle. The company created the Unilever Sustainable Living Plan, an effort to ensure that 100% of the material used in the company’s products were sustainable, leading to an increase in revenue and lower carbon footprint. And in 2018, BlackRock CEO Larry Fink said at the The New York Times Dealbook conference that within five years, all investors will use ESG metrics to determine a company’s worth. Last month, Bloomberg introduced new indexes with ESG benchmarks. Sovereign wealth funds and US-based public pension funds have been early adopters of ESG. The Norwegian Government Pension Fund Global has been a pioneer, first turning to socially conscious investing in 2001. The California Public Employees’ Retirement System, the California State Teachers’ Retirement System, and the New York State Common Retirement Fund have incorporated ESG into their investment practices. Staff Report, Chief Investment Officer, October 29, 2019.
People who fly into a rage always make a bad landing.
If the world seems cold to you, kindle fires to warm it. - Lucy Larcom
On this day in 1908, Albert Einstein presents his quantum theory of light.

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