The Markets March 28, 2008

Mutual Funds Make a Comeback in February

The combined assets of U.S. mutual funds increased by $14.37 billion, or 0.1%, to $11.742 trillion in February, according to data from the Investment Company Institute (ICI).
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Long-term funds – stock, bond, and hybrid funds – made a comeback from January’s net outflow of $22.12 billion to post a net inflow of $27.64 billion in February, ICI said.

Investors played it safe though, as money market funds posted the highest net inflow of $92.16 billion in February. Funds offered primarily to institutions had an inflow of $70.05 billion, while funds offered primarily to individuals had an inflow of $22.11 billion.

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Bond funds had an inflow of $14.87 billion in February, compared with an inflow of $24.23 billion in January. Taxable bond funds had an inflow of $13.66 billion and municipal bond funds had an inflow of $1.21 billion for the month.

Stock funds posted an inflow of $9.51 billion in February, compared with an outflow of $44.87 billion in January. Among stock funds, world equity funds (U.S. funds that invest primarily overseas) posted an inflow of $5.89 billion, while funds that invest primarily in the U.S. had an inflow of $3.62 billion in February.

Hybrid funds posted an inflow of $3.26 billion in February, compared with an outflow of $1.48 billion in January.

The ICI data is here.

Compliance March 28, 2008

NJ Court Hears Challenge to Smith Barney Company Stock Forfeiture Policy

New Jersey Supreme Court justices are considering whether a Smith Barney company stock policy in which brokers who leave the firm before two years forfeit their rights to company stock runs afoul of the public policy interest underlying the state’s wage-and-hour law.
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The case, in which the Garden State’s high court heard oral arguments earlier this week, involves two former brokers, Melvin Rosen and James Fox, who challenged the Smith Barney company stock share forfeiture policy, the New Jersey Law Journal reported.

The disputed policy, instituted in 1989 to combat stockbroker turnover, allowed brokers to have part of their compensation diverted to purchase restricted shares of stock in Smith Barney’s parent company, Citigroup Inc., at 25% below market price. Employees could not sell the shares during a two-year vesting period (they could receive dividends and vote their shares), and anyone who left Smith Barney or was fired lost their interest in the unvested stock.

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A trial judge ruled for Rosen and Fox finding the forfeiture of earned wages invested in the plan “contradicts public policy, which requires that employees receive their earned compensation,” the Law Journal said. A divided Appellate Division last year reversed, finding the plan had passed muster in other states and did not offend New Jersey’s Wage and Hour Law, because the contract is in writing, all terms are fully disclosed prior to enrollment, participation is optional, risk of forfeiture is disclosed unambiguously, and the plan investment provides immediate beneficial tax treatment and stock ownership benefits, the news report said.

During the Supreme Court oral argument, plaintiffs’ lawyer Bruce Nagel said Smith Barney’s plan violates the spirit and purpose of the statute, which is to guarantee that employees receive the fruits of their labor. “Earnings are sacrosanct,” he said in the news report. “A risk of forfeiture is not something that should be tied to continued employment. Smith Barney has required its employees to earn their money twice. To get what they invested in, they must perform another two years of service.”

Nagel said that departing Smith Barney employees forfeited $102 million in 2000 and $100 million in 2001.

Smith Barney lawyer Robert Del Tufo argued that the New Jersey court should follow the lead of 15 other courts around the country that have already upheld the plan. Smith Barney workers have received 144,000 shares of Citigroup stock since inception, he said.

The Appellate Division decision is here.

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