The 2007 Pig Book

In case you missed it, Citizens Against Government Waste (CAGW) released their 2007 Pig Book on March 7. Reminding us all that insane spending of tax dollars DOES occur, a companion report rightly points out that waste likewise diminishes the competitiveness of the U.S. marketplace. Given the work of the Paulson Committee and other advocates of deregulation, excessive outlays should make news beyond CSPAN.

CAGW president Tom Schatz applauded some restraint but urged lawmakers to keep tightening their belts before spending other people's money. Here are a few of the goodies he cites as part of the "2,658 pork projects at a cost of $13.2 billion" included in the Defense and Homeland Security Appropriations Acts for fiscal 2007.

<< 1. $1,190,000,000 for full funding of 20 F-22A fighter jets, which the Government Accountability Office criticized as unnecessary and out of date;

2. $5,500,000 for the Gallo Center to study the effects of alcohol and drug abuse on the brain;

3. $1,650,000 to improve the shelf life of vegetables;

4. $1,350,000 for the Obesity in the Military Research Program; and

5. $1,000,000 for a telescope searching for extra-terrestrial intelligence. >>

Click here to download the 2007 Pig Book in its entirety. As you read, don't forget the words of British historian Lord Acton - "Power tends to corrupt; absolute power corrupts absolutely."

At a time when programs like Social Security and Medicare represent behemoth unfunded liabilities to taxpayers (not to mention more than a few state and municipal pension and health care programs), do we really need a space alien telescope or vegetable research? Decide for yourself next election cycle.

Labels: Economic Conditions, Regulation

posted by Susan Mangiero at 3/08/2007 10:00:00 PM | 0 comments | links to this post   

SEC Alleges Insider Trading - Should Pension Investors Care?

Former U.S. Senator Alan Simpson is said to have claimed "If you have integrity, nothing else matters. If you don't have integrity, nothing else matters."

After reading the SEC's March 1 press release about insider trading, these words ring loud and clear.

If you haven't seen it yet, click here for details about charges against fourteen individuals "in connection with two related insider trading schemes in which Wall Street professionals serially traded on material, nonpublic information tipped, in exchange for cash kickbacks."

Efficient markets are crucial for the pension funds which invest over $10 trillion in global assets. Trust, integrity and internal controls are the lifeblood of a system that works.

If there is a silver lining attached to these allegations, it is to remind fiduciaries of the importance of a due diligence process that goes beyond financial risk management. Credit checks, questions about oversight of traders and continued verification of trades are just the beginning.

Labels: Efficient Markets, Insider Trading, Regulation

posted by Susan Mangiero at 3/02/2007 06:08:00 AM | 0 comments | links to this post   

Et Tu New York? What Deregulation Means to Pension Funds

According to Financial Times reporter David Wighton ("Regulation a threat to New York, report says", January 22, 2007), New York City stands to lose nearly 60,000 jobs over the next five years in the absence of significant regulatory reform. A McKinsey & Company report, commissioned by Mayor Michael Bloomberg and Senator Chuck Schumer, extols the virtues of London and other venues that are considered more user-friendly for derivatives trading and other financial service activities.

Mr. Kevin LaCroix, creator of the informative blog, The D&O Diary, provides a link to the report and some interesting comparisons with the Paulson report that likewise pleads for liberalization of U.S. capital markets.

While free marketeers applaud initiatives that permit capitalism to do its magic of bringing together diverse buyers and sellers, consider some recent statistics from the Conference Board.

1. In 2005, U.S. institutions such as pension funds, insurance companies, banks and foundations controlled $24.1 trillion in assets.

2. In 2005, these institutional giants owned 67.9% of the equity of the largest 1000 corporations versus 61.4% in 2000.

3. In 2005, four companies revealed institutional investor ownership in excess of 70%. In 2004, the number was two and one or none before then.

4. Public pension plans continue to prevail in important corporate matters. Co-author of the 2007 Institutional Investment Report (Report #1400, The Conference Board), Dr. Carolyn Kay Brancato, Senior Fellow and Director Emeritus of The Conference Board Governance Center describes their critical role. "Ten years ago, these funds weren't likely to join in lawsuits or exert pressure in out of court settlements, but now, having been severely burned by the Enron and WorldCom situations, these funds are asserting themselves as never before. In addition, as the election of directors becomes more heated, and as many companies adopt bylaws saying their directors will resign if they don't get a majority of shareholder votes, the voting clout of these activist investors becomes more meaningful."

What does this mean?

As stewards of trillions of dollars of retirement monies, pension fiduciaries must serve as the first line of defense with respect to sniffing out corporate misdeeds or identifying boards that are "oversight challenged." Already tasked with a daunting job, deregulation compels these watchdogs to do an even more rigorous search for red flag issues BEFORE they turn into financial calamities.

This goes back to a recurring theme of this pension blog. Do pension fiduciaries have what it takes? On what basis are they selected? How are they trained? Is there a pension fiduciary who can serve as a Sarbanes-Oxley type "financial expert," someone who understands how to go beyond financial statements to detect possible trouble? Are the right mechanisms in place for pension fiduciaries to gather adequate information about corporate policies, procedures and internal controls AND then evaluate the data in a meaningful way? Are fiduciaries compensated in such a way that encourages their active participation, before the fact? How has the role of lead plaintiff changed in the aftermath of the Private Securities Litigation Reform Act of 1995 and can litigation replace regulation?

I'm not saying that statutory regulation is a panacea. In fact, there is great comfort in being part of a system that permits a vigorous debate about the numerous merits of industry self-review.

As patriot Thomas Paine declared: "Those who expect to reap the blessings of freedom, must, like men, undergo the fatigue of supporting it."

Labels: Governance, Regulation

posted by Susan Mangiero at 1/24/2007 06:00:00 AM | 0 comments | links to this post   

Pension Regulation - Driving Under the Influence of a Muffin

I live in a lovely town of about 18,000 people. Thankfully, there is little crime other than an occasional act of mailbox vandalism or the theft of holiday inflatables. Credit good-hearted people and a vigilant police force, especially it seems, when it comes to driving. I know this firsthand because I was pulled over the other day for DUIM (driving under the influence of a muffin, blueberry in this case). Apparently, I was swerving slightly to the right even as I drove a cautious twenty-five miles per hour. When I rolled down my window to say hello, the police officer saw the muffin, gave me a warning not to eat while driving and said he was on the lookout for DUI's (driving under the influence). After I thanked him, a bit shaken for the experience, I got to thinking.

Can rules be too rigid and what happens when you cross the line ever so slightly?

These thoughts are not unique to me. The topic du jour in financial policy circles is whether regulation is too heavy-handed and thereby impedes capital market innovation. Just last week, wonk wizard and New York Times columnist Ben Stein queried the wisdom of the so-called Paulson Committee in seeking to redress the "onerous" audit standards attached to Sarbanes-Oxley. (See "So Many Millions, So Little Body Armor", January 7, 2007)

Citing a plethora of option problems on Corporate Boulevard, he asks: "Isn't backdating precisely an example of a failure of internal controls? Haven't we just found out that internal controls are far too lax, not too strict?"

The same question, applied to benefit plan governance, is apt. At a whopping 908 pages, the Pension Protection Act of 2006 has spawned a new industry to decipher the nooks and crannies of this far from simple regulation. Too soon to assess the fallout, one ponders. Could it be too much? If so, what can take its place?

I'm a big believer in industry self-regulation but that begs yet another question. Who represents the "pension industry" and do the players speak with one voice? Arguably, HR has a different perspective than Audit or Treasury. Without a unified world view about what pension governance means, it's hard to imagine a system without mandatory regulation.

Free marketeers will say this is troublesome. The regulatory burden is far from trivial. Real dollars are redirected to activities that may not reap rewards. Perverse incentives arise and the law of unintended consequences results. Look what happened in the UK. In the aftermath of FRS 17, a large number of companies terminated defined benefit plans as quickly as possible.

Then there is the issue of compliance. Many suggest that pension regulatory changes are outpacing the industry's ability to keep up. Does this put a fiduciary in harm's way (the equivalent of swerving slightly while eating a muffin)? You think you're doing the right thing but get "pulled over" nonetheless. How can a decision-maker protect herself (himself) from mounting personal and professional liability?

Here's to pension governance solutions - the sooner the better!

Labels: Regulation, Solutions

posted by Susan Mangiero at 1/11/2007 12:02:00 AM | 0 comments | links to this post   

Angelina Jolie, Christopher Cox and Pension Funds

Strange bedfellows? Maybe not. Here's why.

1. Angelina Jolie has agreed to play the role of Dagney Taggart in the film verson of Ayn Rand's best-selling book, Atlas Shrugged.

2. Christopher Cox wrote a review of Letters of Ayn Rand.

3. Christopher Cox heads the SEC.

4. The SEC just proposed several major changes that potentially impact pension funds' investments in hedge funds, securities issued by companies that comply with the Sarbanes-Oxley Act of 2002 and non-U.S. issuers of equity, respectively.

In addition, U.S. Treasury Secretary Henry Paulson is busy advocating improved regulations in order to promote U.S. competitiveness. His remarks to the Economic Club of New York referenced a forthcoming Conference on Capital Markets and Economic Competitiveness early next year that will address regulatory, accounting and legal issues. He added that the strength of the U.S. economy can be a springboard to reform entitlement programs and "focus on economic and educational policies that will add jobs, improve productivity, and result in tangible income growth for all Americans."

With a new Congress and talk of regulatory investigations and oversight hearings, school's still out on how pension sponsors are likely to fare. At the same time, given the clear and significant link between regulation and pension finance, we all have a vested interest in monitoring what's happening in Washington.

Angelina may do a terrific job at entertaining us as capitalist heroine but it's the lawmakers and chief regulators who are getting the big reviews in pension land. No popcorn but lots of action.

Labels: Economic Conditions, Investing, Regulation

posted by Susan Mangiero at 12/14/2006 12:12:00 AM | 0 comments | links to this post   

Life of a Benefits Manager Heading Into 2007?

An homage to Norwegian painter Edvard Munch (born on December 12, 1863) Google's same day banner is reprinted herein. A reminder perhaps that 2007 is sure to create some agita for more than a few benefits managers and other related decision-makers?

Here are a few reasons for upset:

1. New pension accounting rules for companies

2. New OPEB (other post-employment benefit) accounting rules for municipalities

3. Forthcoming derivative accounting rules for public funds, similar to FAS 133 for companies (Remember that derivatives are getting more attention as possible elements of a liability-driven investment strategy.)

4. Anticipated Congressional oversight hearings about pension funds, 401(k) fees and hedge funds

5. Stated SEC consideration of rule changes as they apply to alternative investments (and possible impact on pension funds investing in hedge funds)

6. Proposed Form 5500 disclosure rule changes regarding service providers, fees and other elements of pension investing

7. Continued taxpayer upset regarding the cost of municipal benefits and a desire for lower property and state income taxes

8. Continued escalation in pension litigation

9. Continued focus on plan design and expected impact on an organization's cash flow

10. Continued focus on the Sarbanes Oxley - ERISA (corporate governance-pension governance) link

11. Anticipated guidance about default options for defined contribution plans (and related fiduciary impact)

12. The remaining 900+ pages of the Pension Protection Act of 2006

13. Projected worsening of the Social Security situation and likely impact on financing of the "three-legged" stool

14. Continued longevity patterns (good for retirees but expensive for employers)

15. Projected lower interest rates that increase liabilities

16. Anticipated pressure on asset returns

17. International pension woes and possible contagion for the U.S.

18. Predicted health care benefit cost increases that make pensions pale in comparison

19. Continued need to attract and retain scarce pool of talented workers with good benefits while keeping costs low

20. Continued scrutiny from ERISA and D&O liability insurance underwriters (and related impact on coverage and cost of coverage)

The good news is that there are lots of possible solutions but make no mistake. The new year will definitely entail major changes and challenges for all.

Labels: Challenges, Fiduciary Responsibility, Regulation

posted by Susan Mangiero at 12/13/2006 12:30:00 AM | 0 comments | links to this post   

Hedge Funds, SEC and Sunshine

In compliance with the provisions of the Government in the Sunshine Act, the SEC will hold a meeting today to discuss a variety of things, including the proposal of new rules to determine whether to (1.) "revise the criteria for natural persons to be considered 'accredited investors' for purposes of investing in certain privately offered investment vehicles" and (2.) "prohibit advisers from making false or misleading statements to investors in certain pooled investment vehicles they manage, including hedge funds."

Click here for the meeting announcement and here to access the webcast.

While both items merit discussion, the issue of accredited investor qualifications got people talking over lunch a few days ago. The current definition, pursuant to the General Rules and Regulations promulgated under the Securities Act of 1933, Rule 501, Definitions and Terms Used in Regulation D, applies various criteria including whether someone's individual net worth, "or joint net worth with that person's spouse, at the time of his purchase exceeds $1,000,000."

In the event that the SEC applies more rigor to the definition of accredited investor, how will they proceed? Will they increase the minimum net worth number and if so, why? Is the implication that wealthier investors are smarter or just that their losses don't count as much in proportionate terms? While accredited investors are excluded for purposes of calculating the number of purchasers under relevant securities rules, why is a "non-contributory employee benefit plan within the meaning of Title I of the Employee Retirement Income Security Act of 1974" counted as one purchaser when the "trustee makes all investment decisions for the plan?"

Hopefully a detailed explanation will accompany any decisions made in the aftermath of this meeting. Better understanding what responsibilities regulators want each hedge fund investor to shoulder by virtue of changing the rules can only be a good thing.

Labels: Hedge Funds, Regulation

posted by Susan Mangiero at 12/04/2006 12:02:00 AM | 0 comments | links to this post