The Markets December 24, 2008

ETF Values Down 0.9% in November

The combined assets of the nation's exchange-traded funds (ETFs) were $478.06 billion in November, down 0.9% from the prior month, according to the Investment Company Institute (ICI).
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Over the past 12 months, ETF assets decreased $94.07 billion, or 16.4%, according to ICI. Assets in domestic equity ETFs have decreased $36.68 billion since November 2007, and global equity ETFs assets fell $75.74 billion during this period. Assets of bond funds were $51.27 billion and hybrid funds were $132 million, according to the report.

However, during November, the value of all ETF shares issued exceeded that of shares redeemed by $23.73 billion. In November 2007, ETFs experienced a net issuance of $8.74 billion. As of the end of November 2008, there were 721 ETFs in the ICI report, compared with 698 in October, and 613 a year ago.

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Statistics contained in the Institute’s monthly ETF report are obtained from information provided to ICI by exchange-traded funds and commodity funds.

A detailed breakdown of the monthly ETF data is available here (click for Microsoft Excel file).

Compliance December 24, 2008

Federal Judge Allows Ford ESOP Suit to Move Forward

The U.S. District Court for the Eastern District of Michigan has denied a motion to dismiss a case brought by participants of Ford Motor Co.’s employee stock ownership plans claiming the plans’ investment in Ford company stock was imprudent.
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According to the opinion, Ford moved to dismiss the case on the grounds that the participants did not state a viable claim for relief. Ford argued that it committed no breach of fiduciary duties under the Employee Retirement Income Security Act (ERISA) because the plan documents required the plans be invested in Ford company stock.

However, U.S. District Judge Stephen J. Murphy, III, noted in his opinion that while ERISA does provide an exemption from diversification rules for ESOPs, it does so while still requiring that the plan sponsor act with prudence when investing in company stock.

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Using previous case history Ford argued that it did not commit a fiduciary breach by continuing to invest in Ford stock because, during the class period, it was not facing “imminent collapse.” Also looking to prior case history and the statutory language of ERISA, Murphy rejected this argument, saying that the “presumption of prudence means that [the law] requires fiduciaries to divest their plans of company stock when holding it becomes so risky—that is, so imprudent—that the problem could not be fixed by diversifying into other assets.’

Finally, Ford argued that a magistrate judge that refused to dismiss the case previously erred by not considering the ESOPs company stock investments together with other investments in other retirement plans offered to employees. Ford said that because its employees were free to diversity their retirement savings across all plans offered to them, they were greatly exaggerating the risk the stock plans presented to their retirement savings.

However, the court agreed with the participants who contended that Ford had a fiduciary duty to ensure that each of the investments it offered for retirement savings was a prudent one.

The district court’s opinion is here.

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