Presenting at Wednesday Meeting On "Shareholder Terrorism" Union Tactics

I'm presenting this morning at the Wednesday Meeting on a joint letter ASA is organizing to be sent to the Department of Labor.  It has to do with unions hijacking the pension funds they manage in order to play political games.  Needless to say, this doesn't help the people dependent on these pensions, and the shenanigans hurt overall shareholder wealth for the rest of us.

If you belong to an organization that can sign onto this letter, please let me know.

Text after the jump.

To sign on, contact Zach Howe at zhowe@atr.org

The Honorable Elaine Chao
Secretary, U.S. Department of Labor
200 Constitution Ave, NW
Washington, DC 20210

Dear Secretary Chao:

I am writing to ask that you uphold the Employee Retirement Income Security Act (ERISA) without regard to the Department of Labor’s alteration of the rules under Interpretive Bulletins 94-1 and 94-2.  I also request that you issue an advisory opinion within the next 90 days clarifying the criteria for selecting or retaining an investment manager.  The ability of investment advisors to fulfill their fiduciary responsibilities has been inhibited due to a surge in shareholder activism by organized labor.  Many activist efforts directly conflict with ERISA.

ERISA s403 and s404 set forth the prudential and fiduciary duties of plans selecting investments.  Among these are requirements that investments be comparable to alternative options in regard to profitability and risk.  The assets of a plan must also “be held for the exclusive purpose of providing benefits to participants in the plan and their beneficiaries.”  The DOL issued Interpretive Bulletins 94-1 and 94-2 to clarify (not alter) the rules.  However, the Bulletins held that it is possible to consider the economic benefits of a plan apart from its investment return, opening the door for fiduciaries to purchase investments benefitting persons other than the plan’s participants and beneficiaries.

Unions invest in businesses using their general funds, empowering them to introduce shareholder resolutions.  To gain support for these resolutions, they routinely exercise influence over a much larger pool of shares held in their pension funds.  Most pension funds delegate proxy voting authority to investment managers.

The American Federation of Labor and Congress of Industrial Organizations (AFL-CIO) publishes a Key Vote Index on proxy issues and evaluates investment managers based on adherence to the index.  Such an arrangement often requires investment managers to choose between adhering to the index and upholding the “exclusive purpose” clause.  Not surprisingly, many assent to union wishes, damaging members’ pensions in the process.  For example, according to their IRS form 5500, the Service Employees International Union (SEIU) National Industry Pension Fund, the largest union pension fund in the nation, underperformed the S&P 500 by more than 200 basis points from 1996 to 2006.  The result is a loss of $8,500 per worker.

Vulnerable industries are also harmed by shareholder activism.  Investment managers for the American Federation of State, County, and Municipal Employees (AFSCME) have pressured Citigroup and other financial companies to dissolve themselves.  AFSCME also sought to require CA Inc., a software company, to pay “reasonable expenses” to shareholders who elected independent candidates to board seats.  CA’s attorneys opposed the resolution on legal grounds, and the Delaware Supreme Court sided with CA.  Kara Scannell and Judith Burns noted in a Wall Street Journal article that, “[in] cases where dissidents run proxy contests motivated by personal or petty concerns… the board’s hands would be tied.”

In 2005, the DOL wrote to the AFL-CIO regarding Social Security.  The letter stated that “it would be unlawful for a plan fiduciary to review the plan’s service providers based… upon their views on Social Security.”  Despite this guidance, the AFL-CIO published a document entitled “Retirement Security: How Do Investors Stack Up?” on October 18, 2007 to pressure investment advisors to take a particular stand on Social Security.

On December 21, 2007, Robert Doyle, Director of Regulations and Interpretations for the DOL, issued an advisory opinion stating “[the] Department rejects a construction of ERISA that… would permit plan fiduciaries to expend ERISA trust assets [on] public policy preferences.”

Pursuant to this sentiment, I ask that you uphold ERISA without regard to the inappropriate alteration of the rules by Bulletins 94-1 and 94-2.  I also request that you issue an advisory opinion within the next 90 days clarifying the criteria that a pension fund must use in selecting or retaining an investment manager.  Investment managers must be allowed to meet their fiduciary obligations under ERISA, and retirees must know that their pensions are managed in their best interest.