Month: January 2004

The Denver Business Journal is reporting via MSNBC.com: “SEC Targets Pension Consultants.” According to the article, the SEC sent out a mid-December letter to a number of pension fund consulting firms probing whether or not they were receiving payments from money managers that gave the managers preferential treatment in being recommended by the consulting firms to pension plans.

Quote of Note: “Don Trone, president of Sewickley, Pa.-based Foundation for Fiduciary Studies, confirmed pay-to-play can supply up to 25 percent of consulting firms’ revenue. Pay-to-play “is very widespread with the public pension market (30 percent to 60 percent), much less so with corporate retirement plans, foundation and endowments,” Trone said via e-mail. Trone stressed when consulting firms deny conducting pay-to-play activities, “they’re referring to explicit actions,” rather than implicit actions. He said the implicit schemes come in four types of “services” sold by consultants to money managers: Conferences with the consultant’s clients, performance measurement reports, performance measurement software, and training, marketing and sales consulting.”

To what extent are directors fiduciaries under ERISA and charged with monitoring the appointment of fiduciaries under ERISA? That is the question being debated again and again in the latest wave of ERISA cases. In the In re: WorldCom, Inc. ERISA Litigation, the DOL filed an Amicus Brief discussing this issue. You can read the press release here. The DOL states its position in the press release:

The department’s brief argues that appointing fiduciaries have an obligation to periodically monitor the work of those they appoint, and to take appropriate action if the appointees’ conduct falls short of ERISA’s standards. The brief stresses, however, that appointing fiduciaries are not guarantors of the actions or of the success of the investment decisions made by the fiduciaries they appoint. Rather, the obligation of appointing fiduciaries is to make appointment and removal decisions with prudence and loyalty, and to periodically monitor the performance of those they appoint. Appointing fiduciaries have an important responsibility to implement reasonable procedures to review and evaluate the performance of appointees on an ongoing basis.

The courts have in the last year been forced to focus again and again on this issue of when directors should be liable under ERISA for a failure to monitor. Here are a few of the cases and what they have said:

• In re: WorldCom, Inc. ERISA Litigation: In the first round of motions to dismiss by defendants, the court addressed the plaintiffs’ contention that members of the Board of Directors for WorldCom were fiduciaries. According to the plaintiffs’ argument, the Plan had named WorldCom as the appointing fiduciary, and therefore under corporate law, the Board had supervisory authority and therefore a duty to monitor under ERISA. The court, however, held that the complaint did not sufficiently allege that “the Director Defendants functioned as ERISA fiduciaries” and said that the plaintiffs’ argument had gone too far.

• In re: Williams Cos. ERISA Litigation: Apparently, after the court granted motions to dismiss by director defendants in the Williams case, the DOL filed an amicus brief in the case, asking the court to reconsider and advocating this duty to monitor on the part of the Board under ERISA. However, the DOL apparently lost the argument as reported in an unpublished decision on October 27, 2003 in which the court stated:
  

  The Court has considered carefully the brief submitted by the United States Department of Labor (“DOL”) in support of the instant motion. The Court observes that the position argued by DOL would effectively expand the responsibility of any appointing authority to establish an ongoing process that effects continuous and comprehensive monitoring of appointed fiduciaries and to be a guarantor for any and all actions by those fiduciaries. DOL derives this position first from its regulations and second from its own interpretation of these regulations. The Court finds that this expansion of responsibility is not warranted by the statute and would be inconsistent with the body of law that requires measuring the scope of any plan fiduciary’s duty by the terms of the plan itself. See e.g., Crowley v. Corning, Inc., 234 F.Supp.2d 222, 229-30 (W.D.N.Y. 2002). Accordingly, the Court declines to adopt DOL’s interpretation of the law on this issue.

  The DOL comments on the result in the Williams case in its WorldCom Amicus Brief:
  

  The Williams decision misapprehended the Secretary’s position, however, and is contrary to the weight of precedent. Thus, the Secretary believes that the decision in Williams was simply wrong, and should be accorded no weight by this Court.

• Tittle v. Enron Corp., 2003 WL 22245394 (S.D. Tex. Sept. 30, 2003): The court in Enron held that the directors did have a duty to monitor, and distinguished the result in WorldCom stating:
  

  This Court finds that the facts in the case before Judge Cote {e.g. WorldCom] can be easily distinguished from those in Tittle. . . this Court has cited a number of opinions holding that the exercise of the power to appoint, retain and remove persons for fiduciary positions triggers fiduciary duties to monitor the appointees. Moreover in WorldCom, Worldcom did not appoint anyone as a fiduciary and there apparently were no allegations that Director Defendants functioned as fiduciaries, i.e., actually appointed persons to or removed persons from such positions. In Tittle, on the other hand, Defendants did appoint fiduciaries who, in turn, exercised discretionary authority or control over the plan and allegedly breached their fiduciary duties, while Director Defendants allegedly failed in their duty to monitor those appointed.

Just how far does the DOL go in this assertion that directors must monitor the ERISA fiduciaries who are appointed? The DOL provides some clarification in its Amicus Brief:

[A]ppointing fiduciaries are not charged with directly overseeing the investments and thus duplicating the responsibilities of the investment fiduciaries whom they appoint. At a minimum, however, the duty of prudence requires that they have procedures in place so that on an ongoing basis they may review and evaluate whether investment fiduciaries are doing an adequate job (for example, by requiring periodic reports on their work and the plan’s performance, and by ensuring that they have a prudent process for obtaining the information and resources they need.) In the absence of a sensible process for monitoring their appointees, the appointing fiduciaries would have no basis for prudently concluding that their appointees were faithfully and effectively performing their obligations to plan participants or for deciding whether to retain or remove them. The Secretary does not suggest that the appointing fiduciaries must follow one prescribed set of procedures for monitoring the investment fiduciaries, but that they apply procedures that allow them to assure themselves that those they have entrusted with discretionary authority to invest the plan’s assets are properly discharging their responsibilities.

This is basically the same position declared by the DOL in its Interpretive Bulletin at Reg. section 2509.75-78:

D-4 Q: In the case of a plan established and maintained by an employer, are members of the board of directors of the employer fiduciaries with respect to the plan?

A: Members of the board of directors of an employer which maintains an employee benefit plan will be fiduciaries only to the extent that they have responsibility for the functions described in section 3(21)(A) of the Act. For example, the board of directors may be responsible for the selection and retention of plan fiduciaries. In such a case, members of the board of directors exercise “discretionary authority or discretionary control respecting management of such plan” and are, therefore, fiduciaries with respect to the plan. However, their responsibility, and, consequently, their liability, is limited to the selection and retention of fiduciaries (apart from co-fiduciary liability arising under circumstances described in section 405(a) of the Act). In addition, if the directors are made named fiduciaries of the plan, their liability may be limited pursuant to a procedure provided for in the plan instrument for the allocation of fiduciary responsibilities among named fiduciaries or for the designation of persons other than named fiduciaries to carry out fiduciary responsibilities, as provided in section 405(c)(2).

. . .
FR-17 Q: What are the ongoing responsibilities of a fiduciary who has appointed trustees or other fiduciaries with respect to these appointments?

A: At reasonable intervals the performance of trustees and other fiduciaries should be reviewed by the appointing fiduciary in such manner as may be reasonably expected to ensure that their performance has been in compliance with the terms of the plan and statutory standards, and satisfies the needs of the plan. No single procedure will be appropriate in all cases; the procedure adopted may vary in accordance with the nature of the plan and other facts and circumstances relevant to the choice of the procedure.

It will be interesting to follow the case law’s development with respect to this issue and to see how far the courts are willing to go down this road of holding directors personally liable for failure to monitor appointed fiduciaries under ERISA.

This is good news for e-filers and makes perfect sense: “IRS backs off plan to flag free e-filers — for now.” Read the history behind this in a previous post here.

An interesting article from SFGate.com–“Investing Like Dummies: Cal professor says most of us are playing poorly with our own money“–reports on the peculiar behaviors of the average investor. Here are a few from studies performed by Terrance Odean at UC Berkeley’s Haas School of Business as highlighted in the article:

• “One study Odean did with colleagues found that people are more sensitive to up-front load fees but less sensitive to ongoing fees — meaning people are more likely to avoid funds with front-end fees, even if the ongoing fees could end up costing them more money.”
• “In another study, Odean found that most people hold on to losing stocks and sell winners — except during December, when they’re trying to realize losses for taxes. This is clearly irrational — we simply don’t want to face the loss.”
• “Men, particularly single men, made less money on their stocks than women investors solely because the men were overconfident. Both men and women picked equally so-so stocks, but the women, who were less likely to think they ruled the market, traded 45 percent less, which increased their earnings.”

Some may be wondering how employee-participants have been responding to recent mutual fund scandals. Employees must be outraged, demanding information of plan sponsors, and wanting to know what to do, right? Well, guess again. You can access the surprising results in this press release announcing the results of a survey by the Blue Prairie Group and the 401khelpcenter.com.

Quote of Note: “Just over 45% of plan sponsors reported that they had received no questions from their employees about the mutual fund scandal and 40.1% of plan sponsors indicated that they had received questions from fewer than 10 employees. One survey respondent commented, “I have been surprised by the fact that not one participant has called to discuss the scandal, especially since we have over 4,000 participants in our plan.” As a result, more than half (53%) of plan sponsors have not communicated with their employees about the scandal.”

You can access the Executive summary of the survey here.

You would think that a major high-tech company would have the foresight to buy up every domain name that is a misspelling of the company name or is similar in any way. And yet, this company missed one such name which you can read about here. Now the company is going to battle with the teen who thought of it. You can see why the company is concerned here–even Google thinks it is confusing. A better course than legal battle, in my opinion, would be to pay Mike for his costs and establish a college scholarship in his name for teens exhibiting ingenuity and creativity.

Some other teens that have gotten creative can be found here and here.

“The “Bagle” or “Beagle” worm arrives as an attachment to an e-mail with the subject line “Hi” and “test : )” in the body text. The worm is activated when a user clicks on the attached file.” Beware and read about it in this article from the Washington Post.

Mutual funds have been the focus of the news over the past couple of days. You can access information about the open meeting of the Securities and Exchange Commission held yesterday here as well as the SEC Chairman William H. Donaldson’s opening statement at the meeting here. The SEC proposed three regulatory initiatives:

• Investment Company Governance. The Commission voted to propose amendments to its rules to enhance fund boards’ independence and effectiveness. The proposal includes requirements for (1) the independent composition of the Board, (2) an independent Chairman of the Board, (3) an annual self-assessment of the Board, (4) separate sessions for the independent Board members (providing Board members with “opportunity for candor”), and (5) the enabling of independent members of the Board to hire their own staff.
• Codes of Ethics for Investment Advisers. The Commission voted to propose new rule 204A 1 and related rule amendments under the Investment Advisers Act of 1940. New rule 204A 1 would require registered investment advisers to adopt and enforce codes of ethics applicable to their supervised persons and would seek to prevent fraud by reinforcing the fiduciary principles that must govern the conduct of advisory firms and their personnel. The code of ethics would have certain minimum provisions governing (1) standards of business conduct that would govern the conduct of an adviser’s supervised persons so that it reflects the adviser’s fiduciary duties, (2) compliance with Federal securities laws, (3) safeguards for nonpublic information, (4) reporting of personal securities holdings and transactions, (5) pre-approval of certain transactions by supervised person, and (6) required reporting of code of ethics violations.

• Confirmation Requirements and Point of Sale Disclosure Requirements for Transactions in Certain Mutual Funds and Other Securities, and Other Confirmation Requirement Amendments, and Amendments to the Registration Form for Mutual Funds. The Commission voted to propose two new rules and rule amendments that require broker-dealers to provide certain information to their customers in connection with transactions in certain types of securities. The two new rules would require broker-dealers to provide their customers with targeted information, at the point of sale and in transaction confirmations. The required information would include costs and conflicts of interest that arise from the distribution of mutual fund shares, unit investment trust (UIT) interests (including insurance company separate accounts that offer variable annuity contracts and variable life insurance policies), and municipal fund securities used for education savings (commonly called 529 plans). The SEC states in its press release that these initiatives are intended to give investors “news they can use.”

Comments on the “Investment Company Governance” and the “Codes of Ethics for Investment Advisers” proposals must be received by the SEC within 45 days of being published in the Federal Register. Comments on the Disclosure requirements must be received within 60 days of being published in the Federal Register. (I discussed where to go to make comments online in this post.) View the press release for further information.

News articles on the proposals:

• The New York Times: S.E.C. Plan Would Force Fund Boards to Change”
• The Associated Press via the Washington Times: “Regulators eye ethics of mutual fund sales”
• CNNMoney.com: “SEC proposes fund ethics requirement: Group votes unanimously to propose new ethics rules for fund advisers and employee disclosure”
• The Wall Street Journal: “SEC Unveils Mutual-Fund Rules.” (No link available.)

Also, the Foundation for Fiduciary Studies has issued the following press releases regarding the proposals:

• Guide to SEC Probe of Mutual Fund and Brokerage Scandals
• Guide to SEC Probe of Consultant Pay-to-Play Schemes
• Guide to SEC Proposal for Required Code of Ethics

Finally, some less current mutual fund articles of interest:

• USAToday.com: “More charges ‘almost inevitable’” (an interview with New York Attorney General Eliot Spitzer)
• The Philadelphia Inquirer: “Funds boards could get teeth to fight fraud”
• The WashingtonPost.com: “State of the Mutual Fund Industry“