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Using Leverage to Chase Returns

"It is not surprising then that the reaction to news accounts about what sounds like a material use of leverage by the San Diego County Employees Retirement Association (SDCERA) is drawing criticism.... Although not an ERISA plan, SDCERA trustees are tasked with a duty to 'act with skill, care and diligence' and 'follow the prudent person rule' and to 'act in good faith and in the best interest of members, beneficiaries and the fund as a whole.' It is therefore critical to know whether the intention to add more investment risk, in anticipation of greater returns, is something that SDCERA is allowed to do and whether a structural foundation has been created to support procedural prudence."

Puerto Rico: Pensioners Versus Bondholders

"[One article reported] nearly zero percent funding ratio for the Puerto Rico Employees Retirement System as of June 2014 with 'just 0.7% of the assets needed to pay all the benefits that had been promised, a level unheard of among U.S. states.'... The problem in taking from Paul to pay Peter ...is that a large number of bondholders of Puerto Rico's $72 billion debt are themselves retirees or saving for retirement.... [One reporter] wrote that '30% of the debt is held by middle class Puerto Ricans ... Another 15% is held by other 'average Joe' Americans who invested in bond funds.' "

Automated Investment Management and Fiduciary Liability

"Setting up an algorithm and then expecting things to run smoothly on autopilot could fast lead to disappointment.... [T]here are at least ten things that need to be done as part of mitigating model risk. One key task is to assess the conditions under which a model will implode or, worse yet, generate wholly inappropriate predictions that in turn are used to give bad recommendations."

Pension Fund Investment Transparency Now Required in Rhode Island

"[General Treasurer Seth Magaziner said,] 'Rhode Island will only invest with fund managers that agree to public disclosure of performance, fees, expenses and liquidity.' Other initiatives include the creation of a website for public access, the signing of an 'Investor Code of Conduct Pledge' by every investment manager and the debut of 'full governance reviews of the State Investment Commission and the Retirement Board' by late 2015.' "

Fiduciary Aspects of Using Expert Networks

"[An] individual with a fiduciary duty to trust beneficiaries (such as a pension plan investment committee member) should be asking [a hedge fund into which the trust is considering an investment] about how it uses expert networks. One might even assert that it would be bad business to avoid experts if the compliance and governance boxes have been checked off and there is a robust infrastructure in place about appropriate knowledge-sharing."

Excessive Fee Litigation and Public Pension Plans

"[T]his type of dispute between plan participants and sponsors (and their service providers) is likely to show up with increased frequency and extend to other types of employers such as cities and states that provide retirement benefits to their workers. Although municipal plans have not yet squared off in the courtroom against unhappy employees who assert that they are paying too much in fees, recent headlines portend change."

Breach of Fiduciary Duty Tops FINRA Disputes Again

"According to dispute resolution statistics, published by the Financial Industry Regulatory Authority ('FINRA'), breach of fiduciary duty continues to lead the list of 'controversy types in customer arbitrations.' Negligence, failure to supervise, misrepresentation, breach of contract, suitability and omission of facts follow.... That breach of fiduciary duty allegations feature so prominently in FINRA customer disputes is notable since ERISA litigation patterns reflect a similar focus on how decisions are made by stewards of other people's money."

Electronic RFP Process and Fiduciary Duty

"It can be difficult for investment committees to put together a list of questions that will help them to effectively compare firms and service offerings, especially for small and mid-sized committees. Poorly crafted, irrelevant, or repetitive questions will lead to a weak due diligence process and leave the committee confused and frustrated. Worse yet, it could mean the selection of an inadequate vendor."

Foreign Corrupt Practices Act (FCPA) and Institutional Investors

"[I]nstitutional investors likewise have a need to know whether a company in which they plan to invest or have already invested is exposed to potentially expensive FCPA liabilities that could destroy shareholder value.... This section addresses the core elements of the FCPA and offers action steps for any organization that does business outside the United States."

Compensation Committees: Quiet Before the Storm?

"[W]hen a company’s performance eventually softens, ... criticism from proxy advisors and shareholders is more likely to surface. So when things are quiet, that’s precisely the time when committees want to challenge management and themselves to ensure they have a sound pay program in place that incents the right behavior, supports the business strategy and has good governance practices in place to minimize risk."