Compliance January 3, 2008

Use of Plan Assets for Non-Plan Related Political Issues Violates ERISA

The Department of Labor’s Employee Benefit Security Administration (EBSA) has issued an advisory opinion about plan fiduciaries using plan assets to further policy or political issues through proxy resolutions.
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The opinion says that it is the DoL’s view that the use of pension plan assets by plan fiduciaries to further policy or political issues through proxy resolutions that have no connection to enhancing the value of the plan’s investment in a corporation would violate the Employee Retirement Income Security Act (ERISA).

In its recent advisory opinion, the administration expressed that plan fiduciaries risk violating the “acting for the exclusive purpose of plan participants and beneficiaries’ rule of ERISA when they exercise their fiduciary authority in an attempt to further legislative, regulatory, or public policy issues through the proxy process when there is no clear economic benefit to the plan. In such cases, EBSA said, it would expect fiduciaries to be able to demonstrate in enforcement actions their compliance with the requirements of ERISA.

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“As the Department has indicated in other contexts, plan fiduciaries may not increase expenses, sacrifice investment returns, or reduce the security of plan benefits to support or promote goals not directly related to the plan,” the administration said in the document.

The EBSA pointed out that the advisory opinion further clarifies Interpretive Bulletin 94-2 in which the department set forth its view that the fiduciary duties required by ERISA to act with prudence and for the sole interest of the participant generally dictate that, in voting proxies, the fiduciary must only consider factors that affect the value of the plan’s investment and not unrelated objectives. ERISA also requires that fiduciaries act for the exclusive purpose of paying benefits and defraying reasonable administrative expenses, the EBSA said.

The previous bulletin provides that an investment policy that contemplates activities intended to monitor or influence the management of a corporation in which a plan owns shares complies with a fiduciary’s obligations under ERISA if the fiduciary concludes that there is a reasonable expectation that such activities will enhance the value of the plan’s investment in the corporation sufficient to outweigh the costs involved. Interpretive Bulletin 94-2 makes it clear that plan fiduciaries must first take into account the cost of such action and the role of the investment in the plan’s portfolio, the EBSA stated in its opinion.

EBSA Advisory Opinion 2007-07A can be found here.

Deals & People January 3, 2008

State Street Names New SSgA Chief, Takes $279M Reserve

Facing at least three lawsuits over its handling of investments in mortgage-backed securities, State Street Corp. on Thursday announced a new head of its investment unit and establishment of a $279 million reserve to cover legal costs.
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The Boston-based financial services firm revealed it has tapped James Phalen as the interim president and chief executive officer of State Street Global Advisors (SSgA), replacing William Hunt, whom the company said has stepped down after three years. The company will start searching for a permanent replacement for Hunt, according to the announcement.

State Street said 57-year-old Phalen is currently responsible for its investment services and investment research and trading operations outside of North America.

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In 2000, having overseen the combination of SSgA and Citigroup’s retirement business to form CitiStreet, he became CitiStreet’s CEO. Phelan returned to State Street in 2005 where he was appointed head of State Street’s investment servicing business in North America before assuming his international role in 2007.

The company is facing lawsuits filed by clients who accused it of selling investment strategies as low risk, but which ultimately led to substantial losses because of holdings in mortgage-backed securities (See State Street Faces Two More Lawsuits Over Bond Fund Losses).

State Street said the reserve will actually be $618 million on a pre-tax basis. However, after taking into account the tax effect of the reserve and associated lower incentive compensation cost, the net earnings impact will be $279 million.

“The purpose of the charge is to establish a reserve to address legal exposure and other costs associated with the underperformance of certain active fixed-income strategies managed by State Street Global Advisors (SSgA), the company’s investment management arm, and customer concerns as to whether the execution of these strategies was consistent with the customers’ investment intent,” State Street said in the statement. “As a consequence of the unprecedented events in the credit markets over the past six months, these strategies were adversely impacted by exposure to, and the lack of liquidity in, sub-prime mortgage markets.”

Ronald E. Logue, chairman and chief executive officer of State Street, echoed the company’s earlier insistence that the fixed-income clients who suffered losses had the market to blame and not necessarily his firm’s money management strategy.

“State Street values its reputation as a trusted fiduciary to institutions around the world and recognizes the critical importance of preserving this reputation with its customers,” Logue asserted in the statement. “Some of our customers that were invested in the active fixed-income strategies have raised concerns that we intend to address. Nevertheless, we will continue to defend ourselves vigorously against inappropriate claims, including those that seek recovery of investment losses arising solely from changes in market conditions.“

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