Week in Review
August 20, 2007
General American Settles With SEC for $3.3M
General American Life Insurance, a division of MetLife, has settled with the Securities and Exchange Commission for $3.3 million, on charges it failed to prevent late trading of mutual funds in one of its variable insurance products.
In addition, former Senior Vice President William Thater is paying $163,000 for allegedly allowing a wealthy client to place the 79 late trades in 2002.
"By permitting a wealthy family to late trade, William Thater elevated the interests of a few select individuals over other investors," said Linda Chatman Thomsen, director of the Commission's division of enforcement. "Whether it's late trading of mutual funds directly or those that are part of variable insurance products, the Commission will continue to hold individuals and entities accountable for wrongful practices that unlawfully favor some investors over others."
Campos Leaving SEC Splits Controversial Issue
The departure of Roel Campos from the Securities and Exchange Commission, one of two Democrats on the Commission, could sidetrack a controversial proposal to give shareholders a greater say in electing directors, according to The Wall Street Journal.
Campos, who is leaving the agency next month, voted in favor of the shareholder-friendly proposal, leaving the Commission split on the issue.
The controversial push "went from iffy to negligible with Campos"' exit, said John Olson, a corporate governance lawyer with Gibson, Dunn & Crutcher.
Last month, the SEC approved two strikingly different proposals on the question of proxy access. Both were 3-2 votes with SEC Chairman Christopher Cox as the swing vote. One proposal, backed by the Republican commissioners and business, would allow companies to refuse any election-related shareholders proposals.
The second proposal, supported by Democrats, would permit shareholders with 5% stakes to propose changing company rules in a way that would allow shareholders to nominate directors.
Cox stated that he favors the proposal that would give shareholders access and that he wants the issue finalized by next year.
There are other changes on the horizon at the SEC, as well. Commissioner Annette Nazareth's term expired this year. Under the law, she is able to continue to serve as long as 18 months after her term expires. Commissioner Paul Atkins' term expires next year.
Luis Aguilar, a partner at McKenna Long & Aldridge, is a possible candidate to replace Campos, according to people familiar with the situation. Other senators on the committee are reviewing potential candidates.
Most Firms Risk Fiduciary Liabilities in 401(k) Plans
Most companies that offer retirement plans to their employees risk fiduciary liabilities, according to Fiduciary Risk Management, a new subsidiary that CPA firm Habif, Arogeti & Wynne has launched specifically to address the issue. In fact, of the approximately 10,000 labor-related lawsuits last year, 59% were ERISA-related.
"Most companies are convinced that they have completely complied with the law and are unaware of potential danger," said Jessica R. Flores, managing director of Fiduciary Risk Management. "This is especially the case for Fortune 1000 companies where large assets, combined with unknown noncompliance, make them perfect targets for class-action lawsuits.
"Most companies expect to hear about problems or issues from their investment consultants or plan service providers," she added. "However, their interests are quite different from those of the company's. These organizations are first and foremost in the investment business, and they earn money from investment management fees and products the companies pay for. That means their primary focus is on investment performance, not retirement plan fiduciary complaint."
Fiduciary Risk Management will work with clients to develop complete fiduciary programs inclusive of measurement tools to ensure ongoing compliance and investment education for participants. The company will also define at-risk groups among participants.
Market Concerns Prompt Investors to Flee Funds
Amid the market turmoil and mortgage concerns, investors are fleeing equity and bond funds and moving into money market funds and U.S. Treasuries, The New York Times reports.
While all mutual fund sectors have been hard hit, some of the worst casualties are small-cap value, real estate and high-yield funds. In the past month, small-cap value funds have tumbled 7.5%, real estate investment trusts have fallen 6% and high-yield funds have given up 2.3%.
"It's pretty unusual to see this kind of drop in small-cap value funds," said Russell Kinnell, director of fund research at Morningstar. "In past downturns, those funds have owned stodgy, boring little businesses and stocks that do not have a lot of price risk. But this time, they owned banks, mortgage insurance companies-and that was really the problem."
According to AMG Data Services, in the week ended last Wednesday, $439 million flowed out of high-yield bond funds, the ninth week of outflows, while $36.2 billion went to money market funds, the largest amount since December 2005.
Nasdaq Launches Private Stock Market for Wealthy