Wednesday, November 20, 2013

Pensions Issues at the SEC – an Update

There are several recent actions involving the Securities and Exchange Commission (SEC) that should be of interest to public pension plans.

New Municipal Securities and Public Pensions Unit Chief Named 

The first item is the announcement, on November 8, 2013, of the appointment of LeeAnn Ghazil Gaunt as chief of the SEC Enforcement Division’s Municipal Securities and Public Pensions Unit. This specialized unit’s purpose is to focus on misconduct in the municipal securities market and in connection with public pension funds including: offering and disclosure fraud; tax or arbitrage-driven fraud; pay-to-play and public corruption violations; public pension accounting and disclosure violations; and valuation and pricing fraud.

Gaunt replaces Elaine Greenberg, who led the unit from the time of its creation in January of 2010 until earlier this year, when Ms. Greenberg left to join the law firm of Orrick, Herrington & Sutcliffe LLP as a partner in its Washington, D.C. office. During her tenure, the SEC brought its first enforcement actions against states, charging New Jersey and Illinois with misleading investors about the funding of their public pensions in the official statements accompanying bond offerings.

Ms. Gaunt worked in this specialized unit since its inception, and supervised the SEC’s first pay-to-play enforcement action for “in-kind” political campaign contributions in September of 2012 when the SEC charged Goldman Sachs and an executive vice president for violations related to contributions to the then-state treasurer of Massachusetts.

Ms. Gaunt has worked in the SEC’s Boston Regional Office for 13 years. Prior to joining the SEC enforcement staff, Ms. Gaunt was in private practice in Boston, first at Skadden, Arps, Slate, Meagher & Flom LLP and later at Goodwin Procter LLP.

John Cross, director of the SEC's Office of Municipal Securities, is reported in the press to have told the National Association of Bond Lawyers' (NABL) annual workshop in September, 2013, that public pension disclosure will be "a continuing and very significant theme of the SEC." He said that "I can't overemphasize the significance and, at least, the need to focus on pension liabilities because of the sheer magnitude of the numbers."

SEC Proposed Rule on CEO Pay Ratio Disclosure 

In other SEC news, the Council of Institutional Investors (CII) has recently expressed support of its membership for the SEC’s proposed CEO pay ratio disclosure rule. This proposal was approved by the SEC in September, and would require publicly-held companies to disclose the ratio of CEO pay to the median of workers' pay.

The rulemaking was mandated as part of the 2010 Dodd-Frank financial markets reform legislation, and is adamantly opposed by the corporate community, including the Chamber of Commerce. The House Financial Services Committee has also approved legislation (H.R. 1135) in June of this year to repeal the requirement.

CII notes in its letter that while its policies recommend that compensation committees consider “the relationship of executive pay to the pay of other employees” as a factor when developing, approving and monitoring their executive pay philosophy, CII’s policies do not advocate for the disclosure of a CEO-to-worker pay ratio. As a result, CII itself has not taken a position on the matter.

However, “in an effort to assist the Commission obtain useful input from investors about the Proposal,” CII staff discussed it with three of its general members from its three main constituencies -- public, corporate and union employee benefit plans. According to CII’s letter, the results of the discussion “revealed broad consensus among the three members in support of the approach” taken in the SEC’s proposal. “The members generally agreed that the Commission has done an admirable job in proposing to implement [the Dodd-Frank provision]in a flexible manner that attempts to strike an appropriate balance between providing potentially useful information to investors and limiting company compliance costs.”

The deadline for public comments on the SEC’s proposed rule is December 2, 2013.

SEC Roundtable on Proxy Advisory Services 

Finally, the SEC has announced a roundtable on December 5, 2013, to discuss the use of proxy advisory firms by institutional investors. CII has previously requested that the SEC "gather empirical data on the proxy voting practices of investment advisers" in order to provide a factual basis for potential consideration of reforms, which the Commission has been contemplating, dealing with potential conflicts of interest and transparency in the proxy advisory industry.

At issue is whether institutional investors routinely “outsource” their proxy voting responsibilities to proxy advisory firms. "Proxy advisory firms have increasingly teamed up with unions, pension funds and other activist shareholders to push a variety of social, political and environmental proposals that are generally immaterial to investors and often reduce shareholder value," House Capital Markets and Government Sponsored Enterprises Subcommittee Chairman Scott Garrett (R-NJ) also claims. However, others would argue that the services of proxy advisory firms are needed by institutional investors because of their large number of holdings.

The Roundtable will be held at the SEC’s headquarters in Washington, DC, and will be webcast on

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