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January 13, 1997

TO: NCTR Members

FROM: Cindie Moore, NCTR Washington Counsel

RE: Latest Version of Management of Public Employees Retirement Systems Act (MPERSA)

The latest draft of MPERSA has been released. (You should have received a copy from Bruce Hineman; please contact him if you have not.) It contains the changes made by the committee of the National Conference of Commissioners on Uniform State Laws (NCCUSL) at its meeting in November. I described those changes to you in my memo of November 25. (Please contact me if you'd like another copy of it.)

Rather than repeat the information I previously provided you, I would like to concentrate on one issue that continues to generate great interest: the standard that governs liability for a breach of fiduciary duty.

Two schools of thought have emerged. Under the first, the standard of liability would be personal liability regardless of whether the breach was intentional or simply inadvertent. This strict liability standard is in the current version of MPERSA and it is similar to that in ERISA. The standard would apply to retirement system board members and administrators as well as money managers. Proponents argue that this standard provides protection for the retirement system even for inadvertent breaches of fiduciary duty. Any lesser standard, they argue, would result in a loss to the system that could not be recouped from the violator. They also believe that the possibility of such strict liability will focus the attention of fiduciaries and trustees on their responsibilities.

Under the second school of thought, the strict standard of liability would still apply to money managers, but a knowing and willful standard would apply to members of retirement system boards. Thus, board members would be liable only for acts or omissions in which they had some intent, not for acts or omissions that are inadvertent. Proponents argue that public scrutiny and legislative oversight ensure the lawful conduct of board members. They also believe that individuals might be reluctant to serve on the board, for which no compensation is generally paid, if they know they will be personally liable for unintentional acts or omissions.

A question has arisen about whether retirement system administrators should be subject to the strict liability standard or the knowing or willful standard. I would like some feedback from you on this question before the next committee meeting, which is in early March. Please call me at 703-243-3494 with your comments.