Compliance January 22, 2008

Fiduciary Breach Suit over ‘Transfer Adjustment’ Fee Allowed to Proceed

A federal judge in Indiana is allowing a Merrillville, Indiana law firm to continue with its lawsuit against its 401(k) investment managers and recordkeeper over the amount of a “transfer adjustment″ charge levied when the firm withdrew the plan’s assets.
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U.S. District Judge Philip R. Simon of the U.S. District Court for the Northern District of Indiana ruled that the parties had not yet put forward enough information for him to make a preliminary judgment about whether John Hancock and the BISYS Group functioned as fiduciaries under the Employee Retirement Income Security Act (ERISA). “The documents placed in the record thus far do not shed light on the various parties’ responsibilities with respect to the establishment and application of the transfer adjustment factor. BISYS cannot be dismissed before those facts get sorted out through the discovery process,” Simon wrote.

The Bowman, Heintz, Boscia & Vician law firm filed the suit alleging the ERISA fiduciary breaches after it was charged the “transfer adjustment” fee that was almost 30 times the amount executives were first told they would have to pay when moving plan assets from trusts maintained by John Hancock to other investments.

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According to the ruling, BISYS, then the plan’s recordkeeper, told the firm in July 2005 that the total expense for moving the plan’s assets would be $1,500. The plan transferred its $1 million in investments out of the John Hancock trusts in October 2005 and was charged a “transfer adjustment factor” of over $45,000, the court document said.

Hancock argued that it was not an ERISA fiduciary because its calculation of the transfer adjustment factor was not discretionary and because it used a specific formula for calculating that charge. Simon responded by saying the plaintiffs should be allowed to prove that the formula left John Hancock enough leeway to be considered a fiduciary.

Likewise, Simon asserted that BISYS may ultimately be judged to be an ERISA fiduciary if it unilaterally charged the plan more than $45,000 in fees, exercising discretionary authority or control.

Simon granted John Hancock’s motion for a more definite statement on the plan’s claim that John Hancock had a fiduciary duty and contractual obligation to pay interest on the plan’s contributions and that it failed to do so.

The ruling in Bodnar v. John Hancock Funds Inc., N.D. Ind., No. 2:06-CV-87 PS, 1/15/08, can be viewed here.

The Markets January 22, 2008

S&P Launches Arbitrage Indexes

Standard&Poor’s has launched a family of indices designed to model common arbitrage strategies in the financial markets.
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The three indices – the S&P 500 Volatility Arbitrage Index, the S&P Currency Arbitrage Index and the S&P Long Only Merger Arbitrage Index – are the first in what will be a series of arbitrage indices launched by Standard & Poor’s in 2008, according to a press release.

According to the firm:

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  • The S&P 500 Volatility Arbitrage Index seeks to model a common strategy that takes advantage of the difference between implied volatility and realized volatility. The index consists of receiving implied variance and paying realized variance of the S&P 500. Volatility arbitrage strategies are based on the tendency for implied volatility of an asset to be higher than realized volatility.
  • The S&P Currency Arbitrage Index seeks to model a carry trade strategy based on G10 currencies. It takes a long position in currencies that have a higher interest rate than the U.S. Dollar and a short position in currencies that have a lower interest rate than the U.S. Dollar. The weight of each currency is directly proportional to its interest rate spread and inversely proportional to its volatility.
  • The S&P Long Only Merger Arbitrage Index seeks to model a risk arbitrage strategy that exploits commonly observed price changes associated with mergers. The index is comprised of long positions in a maximum of 40 large and liquid stocks that are active targets in pending merger deals. A target company is considered for inclusion if at least 25% of the compensation to be paid for the target’s shares is in cash. Deals are screened on the basis of size, liquidity, premium, and exchange listing to ensure that the underlying positions are tradable and offer upside potential if the deal does close.

For more information about Standard & Poor’s family of arbitrage indices, visit http://www.standardandpoors.com/indices and click on “strategy indices” in the left navigation tab.

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