August 2006
At Long Last! Pension Reform Clears Congress; President Expected to Sign Bill
Following a failed attempt to gain enough votes to block an expected
Democratic filibuster of the so-called "trifecta" tax bill
a package containing tax extenders, a minimum wage hike, and further
cuts in the estate tax the Senate GOP leadership finally decided to
allow the slow, painful saga of pension reform to come to an end. The
conference agreement, repackaged by the House the week before as a new
bill, H.R. 4, cleared the Senate by a vote of 93 to 5 late Thursday
evening, August 3rd. The bill contains all of the key provisions sought
by NCTR and other public pension advocates, including EGTRRA permanency
and clarifications to the purchase of service credits. Since the bill
passed in a form identical to that approved by the House, no conference
is required (thank our lucky stars!) and the measure can now be cleared
for the Presidents expected signature.
Specifically, the bill contains Senate-passed language providing important
revisions to IRC Section 415(n) dealing with the purchase of service
credits, specifically permitting their purchase for periods for which
there is no performance of service (e.g. airtime), and in order to qualify
for an increased benefit (e.g. a higher tier/formula in the same plan).
In addition, the language would clarify that (1) trustee-to-trustee
transfers of 403(b) and 457 funds into a governmental defined benefit
plan to purchase service credit does not need to be tested under the
415(n)limits on after-tax contributions to the plan; (2) once 403(b)/457
funds are transferred to a governmental defined benefit plan, they take
on the distribution rules of such a plan (i.e. must be tested under
415(b), etc); and (3) transfers need not be made solely between plans
maintained by the same employer.
The pension provisions of the Economic Growth and Tax Relief Reconciliation
Act (EGTRRA) of 2001 would also be made permanent. This would mean that
such important changes as the EGTRRA increases in the limits on contributions,
benefits, and compensation would not expire in 2011. Other significant
changes that would be protected from expiring include permitting elective
deferrals to not be taken into account for purposes of deduction limits;
the repeal of coordination requirements for deferred compensation plans;
and the catch-up contributions for individuals age 50 and older, to
name a few.
Important relief from the minimum distribution rules is also included,
with directions to the Treasury Department to issue minimum distribution
regulations permitting governmental plans to be able to operate on a
good-faith basis.
In addition, the bill contains the Senate-passed version of the waiver
of the 10% penalty for public safety employees participating in deferred
retirement option plans (DROPs) and similar benefits who retire between
ages 50 and 55. (The original House bill's specific statutory definition
for a DROP that could be problematic for many plans was "dropped"
-- sorry, couldn't resist the pun!)
Finally, the amendment allowing public safety officers who retire or
become disabled to pay for health or long-term care insurance on a pre-tax
basis was also included, but the annual cap was lowered from $5,000
to $3,000.
The one area in which public plans may not have fared as well deals
with the application of ADEA to cash balance/hybrid plans. The bill
amends ADEA in order to clarify the legality of cash-balance and hybrid
plans by permitting the crediting of interest, but does not directly
cross reference ERISA requirements. There is a required market rate
of return as a maximum, but the 3 year vesting requirement appears to
apply only to ERISA plans. A more detailed explanation of this area
of the legislation as well as other areas of interest to public plans
will be provided upon closer examination of the just-released Joint
Committee on Taxation's explanation of the provisions of H.R. 4.
The latest twist in the on-going saga on the pension conference began
late Thursday, July 27th. With agreement on the pension provisions essentially
complete, Senate conferees, led by Senator Grassley (R-IA), tried to
force the House leadership to keep certain so-called tax extenders as
part of the overall pension conference package. These include an extension
of the research and development tax credit, the wind energy credit,
and a tax credit for hiring workers off welfare. This move was in response
to plans by Republican leaders Frist (R-TN) and Boehner (R-OH) to use
these extenders as leverage for passage of estate tax reform that had
previously failed to gain enough votes in the Senate to move forward.
Reportedly, Grassley's plan was to call a public meeting and force the
House leaders to avoid angering business supporters of the credits,
who would be upset if these were stripped from the pension package.
However, House conferees boycotted the meeting. With the pension talks
effectively broken down, a new strategy was developed by the GOP House
and Senate leadership. Instead of a conference report, the House would
take up the agreed-upon pension conference as a new, separate piece
of legislation. The extenders would then be packaged with the estate
tax changes sought by President Bush, and an increase in the minimum
wage that Democrats have been pushing, and passed as a separate bill
(the so-called trifecta). And this is exactly what the House did before
it recessed for the month of August at the end of last week.
This explains how the conference agreement on H.R. 2830 and S. 1783
became H.R. 4. In order to be cleared for the President's signature,
however, it had to be passed by the Senate exactly as it was approved
by the House. Any changes would mean that the bill would have to go
to another conference.
The drama therefore shifted to the Senate, where Senator Grassley was
reported to be furious with the House maneuver and said to be thinking
of adding back the extenders to the pension measure. In addition, Senate
Democrats insisted that they would not swallow the poison pill of an
estate tax exemption in order to get an increase in the minimum wage,
which also increased the likelihood of an effort to strip the popular
extenders from the controversial trifecta in order to put them on the
pension measure. Finally, the disparate treatment of some airlines in
the pension bill began to raise problems with certain Senators, and
there was talk of a possible amendment to the pension measure in that
area even if the tax bill strategy worked.
However, with it clear that Senate Democrats would be successful in
a filibuster against the extenders/minimum wage/estate tax package,
and with the possibility of having to wait until September, when Congress
returned from its summer recess, to return to yet another conference
exercise if the bill were amended, the deal was finally considered done,
and pension reform was finally cleared for the Presidents desk.
* JCT
Technical Explanation of H.R. 4
* H.R.
4 Bill Language
Key Senators Express Concern with Public Plan Funding, Request GAO Study
On July 10, 2006, the leaders of the Senate Finance Committee, Senators
Chuck Grassley (R-IA) and Max Baucus (D-MT), sent a letter to the Government
Accountability Office (GAO) asking for a study of the funding status
of public pension plans. Claiming that the study was needed in order
to "help public employees avoid the benefit losses and reduced
accruals experienced by their private sector counterparts," the
letter's tone is very negative. Its linkage of plans funded status with
the funding of retiree health benefits is also very troublesome. NCTR
immediately responded in a joint letter with NASRA to the two Senators,
strongly questioning some of their statements and urging that the study
be objective and factually accurate. Another letter from 28 national
organizations representing public employers, employees, and pension
plans, including NCTR, has been sent, and NCTR members are sending their
own letters as well.
Although there had been rumors for the last several months that such
a request of GAO was in the works, the letter's timing -- coming as
it did in the midst of intense negotiations over private sector funding
issues in the pension conference and the identity of its authors were
somewhat surprising. However, what was perhaps most disturbing was the
tone of the letter and its willingness to mix pension plan and retiree
health benefits funding issues together.
Due to the final complications surrounding the pension reform conference,
it has been difficult to determine what prompted such a letter from
two Senators who, along with their Finance Committee staff, have typically
been receptive to and understanding of the concerns that NCTR and other
public sector groups have raised with them in the pension area. However,
whatever the source, GAO reports are often used as the precursor to
legislative proposals. Therefore, given increased media attention to
public plan underfunding, the impending disclosures of OPEB liabilities
and their impact on employer spending, and the frustration of private
sector DB sponsors with increasingly complex and costly rules affecting
their plans, there is some concern that the timing may be right for
a major legislative initiative aimed at public sector DB plan funding.
Accordingly, it is most important that this GAO study be conducted with
the utmost care and attention to the facts, and that an unbiased report
is issued. In order for this to be accomplished, NCTR believes it is
critical that, from the very outset, the GAO and the Congress be made
aware that the public pension community intends to follow this study
and its development very closely. This was the motivation behind the
strong letter of response from NCTR and NASRA, and for the call for
individual plans to also write, with copies to their own Senators, protesting
the misstatements and other inaccuracies that the letter to the GAO
contains. Another letter, to which NCTR is also a signatory, is being
sent from a large coalition of national organizations representing the
public sector, demonstrating that this is not an issue which has split
employers and employees, as it has in the private sector.
There is no known timetable for a response to the Senators letter. However,
NCTR and other public plan representatives have requested a meeting
with GAO staff to discuss the studys parameters, the metrics that will
be used, and to ensure that the GAO appreciates the unique characteristics
of governmental plans and their operations as compared to ERISA plans.
Early indications are that the GAO is in the very preliminary stages
of gearing up for the project, and is not expected to begin any initial
work, such as setting the scope of the study, until after Labor Day.
Unless an earlier deadline is requested by Senators Grassley and Baucus,
it could take up to a year for a final report to be completed.
If you have not yet done so, please send your own letter to Senators
Grassley and Baucus, providing NCTR with a copy. Also, if you are contacted
by the GAO concerning this study, it is also very important that you
let NCTR know.
* Grassley/Baucus
GAO Letter
* NCTR/NASRA
response
* Public
Pension Coalition Letter
Illinois Congressional Hearing to "Examine" Retirement Security of Public Employees Postponed For Now
n another potential example of increased Congressional attention to
public pension plan funding issues, on July 26th, the House Education
and the Workforces Subcommittee on Employer-Employee Relations announced
a field hearing in Springfield, Illinois, for the purpose of "examining
the retirement security of state and local government employees."
The hearing, set for August 8, 2006, appeared to be more a response
to local politics than part of some orchestrated effort coming out of
Washington to attack public sector DB plans (and was postponed the same
day it was announced). Nevertheless, it still has public sector advocates
worried, coming as it does on the tail of the request for a GAO study
of public pension funding from two key Senators. As the saying goes,
"Even paranoids have enemies!"
According to Subcommittee staff, there is nothing sinister afoot. One
public sector advocate was told that the hearing was driven by the "sincere
desire" of Subcommittee members to be "helpful" in light
of the pension reform bill they've been working on and the recent negative
news on public sector underfunding. Furthermore, the hearing was not
pre-cleared with the Subcommittee's Chairman, Sam Johnson (R-TX), according
to staff reports, which lends credence to it not being part of some
"regular order" effort aimed at public plans in general. Instead,
the real basis for the hearing reportedly is an effort at the highest
Congressional levels to help support local Illinois Republicans in their
attempts to defeat the Democratic candidate for governor by focusing
on state pension funding issues.
The hearing was postponed due to a family illness involving one of the
Subcommittee's Republican members, which does not mean that it has been
cancelled. While this may permit public sector advocates more time in
which to run down the real agenda behind the effort, it also suggests
that the hearing may well go forward. And, as with GAO reports, Congressional
hearings are also often the basis for future legislative action.
There had been no "heads-up" regarding this hearing, or any
advance discussions with public pension representatives as to its scope.
Therefore, NCTR will be working with other national groups to have the
hearing cancelled until the groundwork for an accurate and unbiased
discussion of the subject can be secured, and the interests of the Committee
on Education and the Workforce, which has no direct legislative jurisdiction
over public pension plan funding, can be better identified.
Congressman Pomeroy to Receive NCTR Public Service Award
The NCTR Executive Committee has approved a proposal by NCTR President
Clare Barnett to present Congressman Earl Pomeroy (D-ND) with the first
"National Council on Teacher Retirement Award for Outstanding Service
to Public Pensions." Congressman Pomeroy, who has been a longstanding
supporter of public pension issues, is expected to be presented with
the award during NCTRs annual meeting in Austin, Texas, October 13-18,
2006.
Mr. Pomeroy was first elected to Congress in 1992, and is a member of
the powerful House Ways and Means Committee, where he serves on the
Subcommittee on Social Security. He is also the co-chair of the House
Democratic Social Security Task Force. Mr. Pomeroy's Congressional career
has been distinguished by his interest in retirement policy, especially
the revitalization of the defined benefit plan, and he has been called
a "Champion of pensions on Capitol Hill" by Institutional
Investor.
Congressman Pomeroy has certainly been a good friend to NCTR. In 1998,
following discussions with top NCTR officials, Mr. Pomeroy agreed to
sponsor important portability legislation that would permit amounts
in 403(b) and 457 plans to be used to purchase service credit in defined
benefit plans, and to allow the rollover of distributions between defined
benefit plans and 403(b) or 457 plans. These provisions were added to
his Retirement Account Portability Act that subsequently was included
in the Portman-Cardin legislation that became law as part of EGTRRA
in 2001.
The Congressman continues to be very supportive of public pension issues.
For example, in a speech at the public pension joint legislative conference
in March, Pomeroy criticized the Bush Administrations lack of leadership
in the national retirement debate, and called their "outsourcing
[of] the Treasury Department to Grover Norquist [and the Americans for
Tax Reform]" a mistake. At that time, he also spoke of President
Bushs efforts to nationalize his campaign to alter retirement systems
at every level, and urged the public pension community to "get
your facts together and educate, educate, educate." He said that
the fact that "the vast majority of pension plans are more than
85% funded, with only one fourth of the funds contributed to public
pension plans coming from the taxpayer" is "a story that needs
to be told."
* Congressman
Earl Pomeroy
Health IT Legislation Passes House, Hopefully Heads to Conference with Senate
H.R. 4157, the Health Information Technology (IT) legislation which
had been delayed by jurisdictional differences between the House Ways
and Means Committee and the Energy and Commerce Committee since June,
finally broke free and was passed by the House of Representatives on
July 27. The legislation now goes to conference with its companion,
S. 1418, which passed the Senate unanimously last year. Unfortunately,
what had originally been viewed as bi-partisan "low-hanging fruit"
in the area of healthcare became highly contentious in the House and
was adopted on a largely party-line vote of 270-148. Nevertheless, many
observers are still hopeful that a compromise bill can be worked out
that will be signed into law before the 109th Congress leaves town for
good later in the year.
Health IT refers to the technology used to collect, store, retrieve,
and transfer clinical, administrative, and financial health information
electronically. Unfortunately, much of today's health care system is
one where patient records and prescription needs remain predominantly
maintained in paper files, with little or no data standardization among
providers. According to some studies, the widespread adoption of health
information technology could save more than $81 billion a year in healthcare
costs as well as greatly improve the overall quality of patient care.
The House bill would codify (thereby making permanent) the sub-cabinet
position of National Coordinator for Health Information Technology,
which was created by President Bush in 2004 by executive order to oversee
the creation of a national electronic infrastructure for interoperable
digital health records. However, the issues that had delayed action
on the bill centered around modifications to the Health Insurance Portability
and Accountability Act (HIPAA) to preempt state privacy laws within
three years (contained in the Ways and Means bill but dropped by Energy
and Commerce), and the update of the International Classification of
Diseases codes from ICD-9, with its 24,000 codes, to ICD-10, with about
200,000. The Ways and Means version would have required the update to
be completed by October, 2009; the Energy and Commerce Committee's bill
deleted this provision also.
In the end, a compromise was reached whereby the Department of Health
and Human Services (HHS) will study State privacy laws in an attempt
to "harmonize" those regulations deemed to be too much of
an imposition on the planned new system. The House legislation would
also require moving to the new ICD-10 codes, but with a deadline of
2010. While this compromise satisfied most GOP supporters, House Democrats
complained bitterly that the bill provided inadequate protections for
privacy and would do little to ensure interoperability among the various
parties in the health system.
Since the House has already recessed for the month of August, it is
not clear when a conference committee can be convened to begin work
on finding a compromise between the House and Senate bills. Many Democrats
and consumer organizations remain very upset with the House versions
lack of strong improvements in privacy protection, and others believe
that a failure to provide significant resources to address the costs
of IT conversions is a major flaw. "This bill does little other
than bestow gifts on the insurance companies and big businesses,"
California Democrat Lois Capps told her colleagues. But Congresswoman
Nancy Johnson (R-CT) argued that "Realistically, the government's
not going to pay for this. The system's going to do it...because it
creates system efficiencies that pays the system back." Whether
this partisan divide in the House can be bridged and agreement reached
to go to conference with the Senate remains unclear.
* Democratic
View in Letter from Charles Rangel (D-NY) and John Dingell (D-MI)
Deloitte Study Calls for Shift from
DB to DC in Public Sector; In the Meantime, Raise Employee Contributions
A Deloitte study entitled "Paying for Tomorrow" has raised
eyebrows and blood pressures with its harsh rhetoric and dismal view
of public defined benefit plans, and its calls for the establishment
of two-tier pension programs that shift newly hired workers into lower-cost
defined contribution plans. While correctly noting that much of the
current funding challenges have their roots in the stock market boom/bust
of the last decade and the use of revenues that should have gone into
pension funds to finance other government priorities, the study uses
questionable statistics that fail to acknowledge that the funding situation
is improving overall. Instead, in full crisis mode that echoes other
extremist reports of late from the Reason Foundation and other opponents
of DB plans, the Deloitte report calls for short term solutions and
medium and long-term reforms that, in reality, are likely do little
to address real funding issues confronting DB plans.
The consulting company's report estimates that public plans are only
80% funded, in contrast to the recent estimate of 87% found by Wilshire
Associates. "How can governments escape the fiscal black hole many
already have entered and others are on the verge of falling into,"
the report asks? In response, Deloitte recommends short-term solutions
such as looking at selling or leasing the state tollway systems, or
reducing administrative costs by combining multiple pension plans. For
the longer term, Deloitte likes ideas such as restricting COLAs to the
actual rate of inflation in addition to their proposal to create DC
plans for new hires.
Perhaps people in glass houses shouldnt throw stones. As one national
public pension advocate points out, the DB plan Deloitte maintains for
its own employees is funded at less than 70%.
* Deloitte
Study: "Paying for Tomorrow"
Senate Aging Committee Focuses Spotlight
on Generic Drug Issues
The Senate Special Committee on Aging heard testimony in July on ways
in which to increase the availability of generic drugs. Both the process
of gaining approval of generics from the Food and Drug Administration
(FDA), as well as competitive barriers to generics entry into the marketplace
that the Federal Trade Commission (FTC) has been examining, were discussed.
As healthcare costs continue to spiral ever upwards, with much of the
increase attributable to brand name prescription drugs, enhanced access
to generics in a timely manner is becoming increasingly important. While
this special committee has no legislative authority, it can be an important
forum to address issues important to seniors that are then taken up
more formally in other committees. Generic drug access is a prime example.
The July 20, 2006, hearing, entitled "The Generic Drug Maze: Speeding
Access to Affordable, Life Saving Drugs," heard testimony from
a variety of witnesses, including FTC Commissioner Jon Leibowitz and
FDA Director of the Office of Generic Drugs Gary Buehler. Among other
things, Commissioner Leibowitz addressed how certain settlements of
patent litigation between branded pharmaceutical manufacturers and generics
companies can delay generic entry. Referring to settlements that include
so-called "exclusion payments," he warned that "these
settlements restrict competition at the expense of consumers, whose
access to lower-priced generic drugs may be deferred for years."
Such settlements occur when a branded company effectively shares a portion
of its future profits with a potential generic entrant in the form of
a settlement payment, in exchange for the generic's agreement not to
market its product until the branded company's patent has been allowed
to run its course. The FTC had been aggressively policing such settlements
until several court cases blocked its efforts; a recent attempt by the
FTC to appeal these rulings to the Supreme Court, which was opposed
by the Bush Administration, did not succeed.
Given that seven of ten settlements made this year between generic and
brand name makers included a payoff provision for the generic company
to delay the entry of its version of the brand name drug, costing billions
of dollars annually to consumers as well as State and local governments,
Commissioner Leibowitz called for legislation to address this problem.
Recognizing that crafting a bill that prevents anticompetitive practices
while also steering clear of unwarranted barriers to the legitimate
settlement of suits is a challenge, he went on to say that the FTC "strongly
support[s] the intent behind S. 3582," bipartisan legislation introduced
by Senators Kohl (D-WI), the ranking Democrat on the Aging Committee,
Leahy (D-VT), Grassley (R-IA), and Schumer (D-NY).
Director Buehler also reiterated the importance of generics in his testimony,
which focused on his office's workload and backlog. He attributed the
recent tough going at FDA to the increased number of 1990's era patents
that are set to expire soon, as well as the fast-growing number of new
generic firms entering the market, and not to any lack of funding.
Other topics discussed included the use of "branded" or authorized
generics, which involves the sale of a branded pharmaceutical product
in a new "generic" form as soon as the first true generic
begins to enjoy its 180 days of statutory exclusivity. By effectively
eliminating the financial benefit of the market exclusivity for the
first generic filer, this practice is very harmful to the generics producers
and significantly decreases their incentives to pursue market entry
prior to patent expiration, especially for "non-blockbuster"
drugs. The FTC intends to study the competitive implications of this
practice.
Another subject receiving attention was the use of "citizen petitions,"
which are permitted to be filed by any interested person requesting
the FDA to refrain from taking any form of administrative action, including
the approval of a generic. These are often allegedly used solely to
delay the approval of generic drugs by those with an interest in preserving
the current patent holder's rights, since they virtually guarantee up
to a 180-day delay in the approval of the generic. The FDA's Buehler
conceded that "very few of these petitions on generic drug matters
have presented data or analysis that significantly altered FDAs policies,"
and admitted that a large majority are not granted.
Legislation (S. 2300) has been introduced in the Senate earlier this
year by Senators Trent Lott (R-MS) and Debbie Stabenow (D-MI) to address
several of these problems. In addition, Congressman Henry Waxman (D-CA)
has also introduced new legislation (H.R. 6022) just before the House
left town for their August recess that would also deal with similar
issues involving generics. However, with less than 20 days of actual
legislative session left before the Congress is expected to adjourn
for the November elections, there is little likelihood that action on
either measure will be taken this year.
* The
Generic Drug Maze: Speeding Access to Affordable, Life Saving Drugs
SEC Approves New Executive Compensation
Rules
The Securities and Exchange Commission (SEC) unanimously adopted new
executive compensation disclosure rules on July 26, 2006. The new rules
require disclosure of executive and director compensation, related person
transactions, director independence and other corporate governance matters,
and security ownership of officers and directors. The changes would
apply to proxy statements, annual reports and registration statements,
as well as the current reporting of compensation arrangements, and require
that most of the disclosures be provided in plain English. The new rules
are to become effective for filings on or after December 15, 2006, for
fiscal years ending on or after December 15, 2006, meaning that the
new rules will apply to the 2007 Form 10-K and proxy season.
The SEC's new requirements will result in one number for total annual
compensation for the principal executive officer, principal financial
officer, the three other highest paid executive officers and the directors.
The Commission release notes that "the clarity and comparability
of this one number will be complemented by the principles-based narrative
disclosures in our new Compensation Discussion and Analysis (CD&A)
section." The new CD&A will have to be "filed," which
means that, under Sarbanes-Oxley, it must be certified by the chief
executive officer and chief financial officer. The related person transaction
disclosure requirements will increase the dollar threshold for transactions
required to be disclosed from $60,000 to $120,000.
The new rules also include a requirement that the price of stock option
grants are to be reported, as well as the corporations plans and practices
related to the granting of such, although the details of this requirement
remain to be spelled out in the SEC's final release on the new rules
(the date of which is currently unclear). In addition, the timing of
option grants in coordination with the release of material nonpublic
information and the selection of exercise prices that differ from the
underlying stock's price on the grant date are also expected to be covered
in this additional guidance. According to SEC Chairman Christopher Cox,
"It is my earnest hope that the serious problems that we have seen
with options and backdating will be in our past and that investors can
have confidence that these problems won't recur" thanks to these
new requirements.
One significant variation from the original proposal had to do with
the so-called "Katie Couric" rule, which would have required
disclosure for up to three employees who were not executive officers
during the last completed fiscal year, but whose total compensation
was greater than that of any of the named executive officers identified
by job description, but not their name. Although there was great pressure
on the Commission to delete the requirement, it has decided instead
to propose revisions for additional public comment.
While the Business Roundtable "fully supports" the new rule,
according to a statement from Steve Odland, chairman and chief executive
officer of Office Depot Inc. and chairman of the BRT's Corporate Governance
Task Force, others are not quite as satisfied. For example, Congressman
Barney Frank (D-MA), the ranking Democrat on the House Financial Services
Committee, believes that Congress must now provide shareholders with
a means to act on this new information. "The SEC has now taken
this issue as far as they believe is legally allowed," he is reported
as saying. Mr. Frank is the author of H.R. 4291, the "Protection
Against Executive Compensation Abuse Act," that would permit shareholders
to vote on executive compensation plans. However, with no support from
Financial Services Committee Republicans, Congressman Frank has been
unable to move his measure beyond the hearing stage.
According to Chairman Cox, "no issue in the 72 years of the Commission's
history has generated such interest." If Congressman Frank has
his way, interest in the issue will certainly continue.
* SEC
Executive Compensation Rule
Securities Litigation Filings Lowest
in Decade
A review of filings by the Stanford Law School Securities Class Action
Clearinghouse found that the first part of 2006 saw the lowest number
of securities litigation suits since 1996, and with less money at stake.
The results could be significant in light of recent Congressional calls
for securities litigation reform.
Both the number of filings and the dollar values involved have dropped,
with filings at 61 (123 annualized) for 2006 versus the rolling average
of 194 established from 1986 to 2005. The group's Disclosure Dollar
Loss metric showed a 55% decline on an annualized basis from $100 billion
in 2005 to $22 billion ($45 billion on an annualized basis) in the first
half of 2006.
The report does not offer a firm explanation for the phenomenon but
cites a theory offered last year when suits also slowed. This would
suggest that the "Wild West" era of Internet startups and
other volatile companies that drew numerous lawsuits has largely passed;
the markets as a whole are perhaps not coincidentally the least volatile
that they have been in 10 years; and changes in corporate governance,
such as Sarbanes-Oxley, combined with front-page stories on WorldCom
and Enron, may "have influenced the number of filings." The
report does not weight these factors.
* Stanford
Law School Securities Class Action Clearinghouse Announcement:
* Stanford
Law School Securities Class Action Clearinghouse Report:
SEC Chairman Announces Plans for New
Hedge Fund Rules
Securities and Exchange Commission (SEC) Chairman Christopher Cox told
the Senate Banking Committee on July 25th that, in the wake of the June
23, 2006, D.C. Court of Appeals decision in the Goldstein case that
voided the SEC's registration scheme for hedge fund advisers, "I
intend to recommend to the full Commission that the SEC take formal
steps to further limit the marketing and availability of hedge funds
to unsophisticated retail investors." Cox would do so by raising
income requirements for individual investors in hedge funds. He also
said that he would seek a new anti-fraud rule to respond to the court's
ruling. Finally, he announced a number of emergency rulemakings and
Commission actions that he intended to pursue, primarily aimed at ensuring
that hedge fund advisers who were relying on the now-invalidated SEC
rule are not suddenly in violation of regulatory requirements once the
court's order is final, in the hopes that those who had registered under
the now-vacated rule would voluntarily stay in compliance. The SEC Chairman
also offered to work with the Congress to fashion legislation should
it be necessary to plug "the gaping hole" that he said had
been created by the Goldstein decision.
The Senate Banking Committee hearing was called in part to assert that
Committee's jurisdiction over the issue. As previously reported, the
Senate Judiciary Committee had held a hearing in late June that focused
on hedge funds shortly after the Goldstein ruling was announced. However,
as Banking Committee Chairman Richard Shelby (R-AL) made clear: "As
the Senate panel with exclusive jurisdiction of hedge funds, the Banking
Committee intends to continue its active role in overseeing the industry's
activities and regulatory structure."
Not everyone appeared as anxious to regulate the hedge fund industry
as Chairman Cox, despite growing concerns with the explosive growth
of these high-risk pools of money. For example, Senator Shelby himself
sounded somewhat tentative in stating that it was "appropriate
to once again consider whether there is a prudent basis for increased
regulation of a dynamic industry that has delivered considerable returns
for its investors and important liquidity benefits to the markets,"
while, he also conceded, at the same time "avoid[ing] a comprehensive
regulatory scheme on the theory that its sophisticated investor base
can fend for itself."
Furthermore, Randal K. Quarles, Treasury Under Secretary for Domestic
Finance, in describing the position of the President's Working Group
on Financial Markets (PWG), also noted that, in determining what appropriate
policy responses might be, the PWG "will seek to be forward looking
and to think about these changes not in a fragmented fashion, but in
a comprehensive way. At the moment it is too soon to say what initiatives
will result from this focus, but this is the lens through which we will
filter the various ideas and efforts with which we will all be grappling
over the next few years." Hardly a call to arms.
On the other hand, Senator Debbie Stabenow (D-MI) was clear as to her
worries: "What concerns me even more[than knowing too little about
the hedge fund industry]- is that pension funds, charities, and university
endowments are investing in hedge funds despite the lack of information.
The problem is that when something goes wrong, no one is able to obtain
any information about the funds assets or activities." She went
on to say, "Unfortunately, in Michigan, we know about pension failures."
She argued in her opening statement that Congress needs "to make
sure that everyone understands what is at stake with hedge fund investments.
As a committee, I believe we should not be guessing about what would
happen if something went wrong with a $2.4 trillion industry."
* Banking
Committee Hearing on Hedge Funds
Congress Moves to Reform Credit Reporting
Industry
The House of Representatives has passed legislation that would create
a new regulatory scheme for assessing the creditworthiness of companies
and municipalities which issue stocks and bonds. H.R. 2990 would remove
the authority of the Securities and Exchange Commission (SEC) to independently
designate rating agencies as "nationally recognized statistical
rating organizations" (NRSRO). Instead, any rating agency that
meets certain standards, such as three years experience in corporate
credit assessments, could register with the SEC as an NRSRO. The bill
also authorizes the SEC to adopt rules that prohibit unfair, coercive,
or abusive practices relating to the issuance of credit ratings by an
NRSRO. The Senate Banking Committee has also promptly cleared the measure
for Senate consideration, and the White House has indicated that it
supports H.R. 2990, saying it would improve competition and transparency
in ratings to the benefit of investors.
For the last 30 years, the SEC has followed an informal process of designating
NRSROs, which the bill, if enacted, would shut down. In its place, the
SEC would be required to establish a formal registration process, which
does not currently exist, for credit rating agencies that seek to be
designated by the SEC as NRSRO. The SEC would impose disclosure and
filing requirements on credit rating agencies seeking such registration,
and would be required to issue regulations prohibiting certain activities
of registered credit rating agencies, including seeking payment for
unsolicited ratings and issuing or modifying ratings on the condition
of the customer purchasing other services from the credit rating agency.
Currently, information on the creditworthiness of public companies comes
mainly from Standard & Poor's and Moody's, which dominate the industry
so completely that the House entitled its bill "The Credit Rating
Agency Duopoly Act." In the wake of Enron and other accounting
scandals, critics accused these companies of being too close to those
they monitor, a charge similar to that leveled against the accounting
and consulting industries. In addition, the bill's chief sponsor, Congressman
Michael Fitzpatrick (R-PA), believes that the SEC's current practices
have effectively created an artificial barrier for businesses that wanted
to enter the credit rating industry, and that the bill will increase
competition.
However, opponents, including many Democrats, worry that the legislation
would permit unqualified businesses to lower the quality of credit ratings.
According to Congresswoman Doris Matsui (D-CA), the bill "will
sacrifice quality" through "its pursuit of quantity."
"This legislation," she warned her colleagues, "will
allow virtually any firm to be considered a nationally recognized credit
rating agency."
* H.R.
2990
GASB Explains How to Account for Medicare
Part D Retiree Drug Subsidy Payments in Plain English
For the sake of all of us dummies, the Governmental Accounting Standards
Board (GASB) has published a plain-language supplement to their new
GASB Technical Bulletin 2006-1, which explains to governments and other
postemployment benefit (OPEB) plans how to account for and report the
retiree drug subsidy payments from Medicare Part D.
Intended for the benefit of individuals lacking an accounting background,
the supplement explains how payments made to a government should be
reported by the government as revenue, rather than being netted against
the government's prescription drug coverage costs. NCTR and other public
sector advocates had protested this interpretation by GASB, but to no
avail.
* GASB
Technical Bulletin 2006-1 in Plain English
EBRI Releases New Issue Brief on Health
Savings Needs in Retirement
According to a new study by the Employee Benefits Research Institute
(EBRI), a couple age 65 retiring today and living to average life expectancy
would need $295,000 to cover premiums for health insurance and out-of-pocket
expenses during retirement.
The new Issue Brief, "Savings Needed to Fund Health Insurance and
Health Care Expenses in Retirement," examines recent trends in
private- and public-sector retiree health benefits and the impact of
these trends on current and future retirees. The Issue Brief states
that if Medicare benefits are reduced in the future, as expected for
budgetary reasons, a couple age 65 today may need significantly more
than $300,000 for health care expenses in retirement. EBRI also looks
at several options for retirees to supplement the Medicare program,
along with cost estimates for these.
* EBRI
Issue Brief, "Savings Needed to Fund Health Insurance and Health
Care Expenses in Retirement"
PCAOB Advises Stock Option Wariness
The Public Company Accounting Oversight Board (PCAOB) issued an alert
on July 28th to emphasize its concerns about methods used to determine
the value of stock option grants made as part of employee compensation.
The release from the watchdog agency aims to alert auditors to aspects
of options that may be problematic from an accounting standpoint and
comes on the heels of various new reports about companies sometimes
backdating option grants to maximize value for the recipient.
From the PCAOB's perspective, option awards made when the contracts
are already in-the-money or when the company backdates the grants can
cause the cost of compensation to be misstated to the investing public.
The PCAOBs main concerns include option plans that incorporate features
allowing use of a strike price based on a market prices found before
the date of the grant, options based on picking the lower of two target
prices at different times, and doctoring documents which retroactively
change the conditions of the option grant. The release states that it
has no intention of covering every permutation on gaming the options
rules or issuing exhaustive guidance on the topic at this time.
Options granting practices can indicate weakness in the control environment,
the appraisal of which is a new responsibility for independent auditors
under the Sarbanes-Oxley Act. The PCAOB release notes "Auditors
should be alert to the risk that the issuer may not have properly accounted
for stock option grants and, as a result, may have materially misstated
its financial statements or may have deficiencies in its ICFR"
(Internal Controls of Financial Reporting). The release reviews several
relevant tax and accounting standards relating to options and directs
the auditor to appraise the risk presented by the companys option granting
practices.
* PCAOB
Announcement:
* PCAOB
Release:
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