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September, 2001

Stephen H. Cypen, Esq., Editor

1. DEDICATION: We dedicate this issue to those individuals, including hundreds of firefighters and police officers, who lost their lives in the terrorist attacks on September 11, 2001. Mere words are inadequate to express our sympathies to the families of the innocent people who were killed and to the brave individuals who lost their lives trying to save others. America will never forget its true heroes.

liberty

2. ON-LINE TRADING INVESTOR PROTECTIONS HAVE IMPROVED BUT CONTINUED ATTENTION IS NEEDED: The United States General Accounting Office has released a report to Congress. GAO found that the on-line trading industry has changed substantially since 1999. Rapid growth in trading activity has been followed by a decline in trades, although the number of on-line trading accounts continued to grow. While the Securities and Exchange Commission continued to receive substantial numbers of complaints involving on-line trading through the end of last year, the overall number declined relative to the overall number of on-line trades. During the first quarter of 1999, 4 complaints were filed for every 100,000 on-line trades; but by the fourth quarter of 2000, complaints fell to 1.1 per 100,000. Moreover, composition of on-line customer complaints changed between 1999 and 2000. Although difficulty gaining access remains a common complaint, complaints involving margin position sellouts increased dramatically, as might be expected in a declining market. The report contains three recommendations. First, GAO recommends that SEC work with the securities industry to establish a consistent and meaningful measure for outages and delays, and insure that broker-dealers maintain consistent records of system outages and delays, and disclose potential for service disruption on their web sites. Second, SEC should take steps to ensure broker-dealers disclose additional information related to investor protection on their web sites. Third, GAO recommends that SEC monitor the extent to which broker-dealers accept Office of Compliance Inspections and Examinations recommendation on disclosing trading risk, potential for systems outages and failures, and protecting investor records and information. (If SEC finds that broker-dealers are not incorporating such recommended practices, GAO recommends that SEC consider further rule making in these areas.) By the way, the ten most frequent on-line complaints filed with SEC in 2000 are (in descending order) failure/delays in processing orders; margin position sellout; difficulty accessing account; transfer of account problems; errors in processing orders; problems with depositing/withdrawing funds; "best execution" problems; errors/omissions in account records/documents; problems with executing cancellation orders; and problems with opening an account. The entire report can be viewed at http://www.gao.gov/new.items/d01858.pdf.

3. ARE "TIPS" AN ENDANGERED SPECIES?: Very early last year we suggested that Trustees should consider the potential of U.S. Treasury Inflation-Protected Securities (TIPS) to protect the real value of their portfolio (see C&C Newsletter for January, 2000, Item 3). Well, according to an article in Pensions & Investments, TIPS may be on the government’s hit list. According to bond dealers on a committee advising the Treasury Department, in the 4-1/2 years that TIPS have been available, they have cost the Federal Government $1.5 Billion more in interest payments than would have nominal bonds. That amount could rise to $6.3 Billion by time the bonds mature. (Killing the inflation-protection securities might also preserve liquidity in the shrinking pool of nominal Treasury securities.) Here’s how TIPS, of which a total of $120 Billion have been issued, work: The bonds pay a flat interest rate every six months; principal is adjusted daily to reflect changes in the Consumer Price Index. When inflation rises, principal rises. When inflation falls, principal falls. As long as the inflation rate is higher than the spread between TIPS and nominal Treasury Bonds, investors are better off investing in TIPS.

4. FLORIDA LEGISLATURE CHANGES "GOING OR COMING" RULE: Senate Bill 770, which was substituted for House Bill 1055 (see C&C Newsletter for April, 2001, Item 18), enacts Chapter 2001-168, amending the "Going or Coming" Rule. Section 440.092(2), Florida Statutes, has been amended to provide that an injury to a law enforcement officer, during his work period or while going to or coming from work in an official law enforcement vehicle, shall be presumed to be an injury arising out of and in the course of employment unless the injury occurred during a distinct deviation for a non-essential personal errand. If, however, the employer’s policy or applicable collective bargaining agreement permits such deviations for non-essential errands, the injury shall be presumed to arise out of and in the course of employment. The Legislature specifically declared that law enforcement officers perform state and municipal functions, and that it is a proper and legitimate state purpose to provide workers’ compensation coverage to law enforcement officers during work periods and while going to and coming from work in an official law enforcement vehicle.

5. FLORIDA TEACHERS AND ADMINISTRATORS GET STATUTORY DEATH BENEFITS: The Florida Legislature has created Section 112.1915, Florida Statutes, the "Barry Grunow Act." Named for the popular Palm Beach County high school teacher who was tragically shot to death by a student, the law provides benefits when a teacher or school administrator is killed as a result of an unlawful and intentional violent act inflicted by another person, and provided that: (a) such act is inflicted upon the teacher or school administrator while he is engaged in performance of duties or (b) motivation for such act is related in whole or in part to the fact that the individual is a teacher or school administrator. Some of the benefits are as follows: (1) the sum of $75,000, in addition to any other insurance, workers’ compensation, pension or other benefits under state or federal law -- and exempt from claims of creditors under the Florida Probate Code; (2) the sum of $1,000 toward funeral and burial expenses, under same conditions as item (1); and (3) payment of the entire health insurance premium for the school district’s health insurance plan shall continue for the surviving spouse until remarriage and for each dependent child. To assure that the Act covers the family of its namesake, it applies to incidents occurring on or after May 26, 2000. Chapter 2001-180, Laws of Florida.

6. HOW PENSION POLITICS ENABLE MONEY MANAGERS TO COMMIT FRAUD: The July 2001 Benchmark Alert is entitled "The Politics of Fraud: How Pension Politics Enable Money Managers To Commit Fraud." Pension trustees obviously have a fiduciary obligation to manage assets in the best interests of their beneficiaries. Selecting and monitoring qualified, reputable money managers is of paramount importance to those trustees who hire external managers. But most trustees delegate the responsibility by retaining a pension consultant to perform a due diligence review of candidates. The following is a direct quote: "We are of the opinion that consultants are arguably the least credentialed participants involved in institutional investing and are clearly the least regulated. Consultants are not required to meet any educational requirements or have any specialized training. They are not subject to any federal or state securities or investment advisory regulations. So what qualifies consultants to perform due diligence reviews of registered money managers? As far as we can tell, they can because they say they can. ... Apparently consultants do little more than compare performance data submitted to them by the manager with peer group numbers ... and ultimately offer their opinion as to the firm’s competence. ... The level of due diligence review of money managers undertaken by pension consultants, as described above, is the state of the art today. In other words, no meaningful review of money managers is undertaken. ... Is a substantive due diligence process possible today -- one that exceeds existing standards? The answer is a resounding ’yes.’ Pensions that wish to seriously examine the performance and behavior of their managers can do so and, in so doing, no longer move ’with the herd’ but ahead of it. ... Any analysis of pension decision-making must begin with an understanding of the political environment in which pensions operate. Unfortunately most pension participants are unaware of the political pressures that may influence decisions in connection with their fund. ... Every pension fund is subject to political influence and all decisions made by pensions have an attendant political component. ... Why would a pension not want to know when one of its managers is involved in fraudulent activity? Because to know, I have been told, is to be put in the uncomfortable position of having to either admit the mistake and take action or not to act and risk future adverse developments. ’Don’t tell me what I don’t want to know,’ is the response most pensions have to news of fraudulent or illegal activity. What executive director wants to tell one of his trustees that the manager he or the trustee selected is engaged in questionable activity? How often do funds publicly state the true reasons behind their firing managers? All-too-often staff and board members forget that their primary concern should be what’s best for participants in the fund, regardless of whether that means having to admit errors or problems. The chief beneficiaries of this political drama are the money managers. As long as pensions shirk their responsibility to truly scrutinize managers, marginal managers will be able to continue to garner business. ... Today it is possible for pensions to enforce higher standards of disclosure and ethical behavior than even the federal securities laws require. For those funds that strive for this higher standard, the benefits are clear. Participants will receive greater protection from risks related to fraud and illegality. ... As participants in pension funds become more knowledgeable in the ways that their interests can be compromised by fund politics, they will increasingly demand that those responsible for safeguarding their money demonstrate compliance with the highest standards attainable, regardless of how uncomfortable staff or trustees may be with such standards." Nobody ever accused Ted Siedle, the author, of pulling punches.

7. FLORIDA CIVIL RIGHTS ACT AMENDED: Section 760.11(1), Florida Statutes, part of the Florida Civil Rights Act of 1992, has been amended. In lieu of filing a complaint with the Florida Commission on Human Relations within 365 days of the alleged violation, a complaint may be filed with the federal Equal Employment Opportunity Commission or with any unit of government of the state which is a fair-employment-practice agency under federal regulations. If the date of filing is clearly stamped on the face of the complaint, that date is the date of filing. The date the complaint is filed with the Florida Commission on Human Relations is the earliest date of filing with the EEOC, the fair-employment-practice agency or the Florida Commission on Human Relations. Chapter 2001-187, Laws of Florida.

8. A BASIC VALUE RULE OF THUMB FOR SCREENING STOCKS: Techniques for selecting and analyzing stocks are continually presented and discussed based upon new rules, old rules and new versions of old rules. These rules often are deceptively simple, such as "look for price-earnings rations below market average," while others combine elements into complex rules, such as the PEG ratio, which divides the price-earnings ratio by the earnings growth rate. Many traditional value rules are based upon dividend yields and have become difficult to implement as investors have de-emphasized the importance of dividends and focused on earnings growth potential. One old value screen still applicable today combines earnings yield, dividend yield and earnings retained to book value. These elements are well known and frequently used by value investors. When combined, a score is computed that can help indicate if a stock merits further analysis. In order to use any screen effectively, an individual investor should understand the rationale for the screen, components of the screen, how these components interact and how to interpret and adjust results when applied to specific stocks. The rationale for a screen that combines earnings yield, earnings retained to book value and dividend yield is simple: every value investor should seek high growth and high dividends at a bargain price. Of course, high growth and high dividends in one company are contradictory, thus trade-offs are necessary. Exceptional growth can offset a low or non-existent dividend yield and can be worthy of further analysis if the stock is relatively low. On the other hand, a high dividend yield and a low price relative to earnings can compensate for lower growth. The foregoing is from an article in AAII Journal, a publication of American Association of Individual Investors.

9. FLORIDA SBA SHORT-LISTS DC PROVIDERS: Having selected CitiStreet as third-party administrator for its optional defined contribution plan that will be offered to state employees next summer (see C&C Newsletter for June, 2001, Item 12), the Florida State Board of Administration has short-listed five bundled providers. A bundled provider offers a wide range of investment options and customer services. In the no-services category, consultant William M. Mercer has recommended Fidelity and Prudential. (The no-services provider will interface only with other service providers.) In the moderate-services category, ING-Aetna and Nationwide have been recommended. (The moderate-services provider will also offer investment products with limited education and administrative services.) And TIAFF-CREF and Fidelity have been recommended in the significant-services category. (The significant-services provider will offer investment products with broader education, financial advice and administrative services.) Florida’s 401k-type plan is the most comprehensive ever offered by a public pension fund. According to a Dow Jones report in the Miami Daily Business Review, observers are closely watching the new program because of its parallels to potential privatization of Social Security. With the stock market having tanked, we’re betting that notwithstanding continuing efforts toward privatization (see C&C Newsletter for July, 2001, Item 24), cries for Social Security privatization will wane.

10. NC GOVERNOR PLAYS REAL HARDBALL: According to the Associated Press, North Carolina Governor Mike Easley has withheld the July payment due the state retirement system. Earlier this year, the Governor withheld $151 Million in an attempt to balance the state’s budget through June 30, 2001 (see C&C Newsletter for June, 2001, Item 11). A trial judge dismissed a suit filed by the State Employees Association of North Carolina, but the state’s largest employees’ group is appealing. The Governor’s actions are passing strange, considering that the state ended last fiscal year with a surplus of more than $600 Million.

11. NEW YORK STATE PENSION SUSPENSION LAW UPHELD: Similar to New York City’s Charter (see C&C Newsletter for August, 1997, pp. 1-2), New York State has a statute that requires its retired public employees, while they are employed in a subsequent public job, either to forego receipt of pension benefits from the first job or forego accumulation of additional pension benefits from the second job. A federal appeals court has sustained the law in face of challenges under the Due Process and Equal Protection clauses of the 14th Amendment. The court applied the "rational basis" test, which means that a statute will be upheld as long as there is a rational relationship between the disparity of treatment and some legitimate government purpose. Under this test, a classification must be upheld against an Equal Protection challenge if there is any reasonably conceivable state of facts that could provide a rational basis for the classification. At root, the law furthers a state’s legitimate interest in saving money by barring pension practices that have the character of "double-dipping," and there is nothing irrational about the state deciding that at any one time a public employee should not both be accruing a new public pension and receiving an old one. Incidentally, we believe the "waiver" provision helped saved the law: a retired person may be employed and earn compensation in a position of public service, without any effect on his status as retired and without suspension or diminution of his retirement allowance, provided that he be excluded from participation in the pension plan associated with his second public job. (We do not know if the city charter provision involved in the earlier Newsletter item cited above contained a similar provision for waiver.) Connolly v. McCall, Case No. 00-7631 (U.S. 2d Cir., June 14, 2001).

Copyright, 1996-2004, all rights reserved.

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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