© Copyright 2007
US FlagApril 15, 2007 Edition


BROKER-DEALER EXEMPTION STRUCK DOWN - On March 30, the U.S. Court of Appeals for the District of Columbia struck down the so-called Merrill rule, which exempted brokers from registering as investment advisers if fee-based financial advice is "solely incidental to brokerage services on a customer's account."  The ruling is a big victory for the Financial Planning Association, which sued the SEC in 2004 over the Merrill rule.  This is a potentially big deal and much too complex for us to cover all of the possible ramifications.  There is, however, an article available on Bloomberg.com that does a good job of explaining the issues involved.  This federal appeals court ruling may require stockbrokers to put their clients first. This means not "doing the right thing" may actually be a crime. The Securities Industry and Financial Markets Association is encouraging brokerage firms to comply immediately..."In the wake of this decision, our highest priority must be to our investors, ensuring there is no disruption to our customers while we wait for the SEC to provide interim guidance which conforms to the court's ruling."

ANTITRUST EXEMPTION - It seems that every few years we see activity aimed at eliminating insurers' limited antitrust exemption (McCarran-Ferguson Act).  The current activity, however, seems more serious than in the past.  A federal commission, the Antitrust Modernization Commission, recently recommended that the antitrust exemption be eliminated.  In addition, the Insurance Industry Competition Act (S.618), which would repeal the McCarran-Ferguson antitrust exemption, has been introduced in the Senate.  McCarran's limited antitrust exemption was designed to allow the individual states to regulate the business of insurance, even by authorizing joint insurer conduct.  The Senate bill would end this limited immunity, imposing the requirements of federal antitrust laws on insurers.  For more information on this issue, click here.

STUDENT LOAN WOES - An investigation by NY Attorney General Andrew Cuomo into how the student loan industry does business appears to be bearing fruit.  It looks like student loan companies have been paying colleges and student loan officers in order to be placed on schools' preferred lender lists.  So far, a number of university student loan officers, a top Department of Education official, and several student loan company executives have been placed on leave while the investigations continue.  So much for the best interests of the students!  Also, it's just been announced that, on the heels of a $2 million settlement with NY Attorney General Cuomo, Sallie Mae, the largest of U.S. student loan companies, has agreed to be purchased for $25 billion by two private-investment funds together with JPMorgan Chase and Bank of America. 

FED FEELINGS - Reports are that, based on recent economic reports, the Federal Reserve is "edgy on inflation," making it less likely we'll see a cut in interest rates later this year.  Minutes from a recent Fed Reserve meeting reveal a lingering concern about inflation and the willingness to increase interest rates if necessary. This seems to contradict recent guesses that the Fed may reduce rates due to a slowing economy. On another note, Fed Chief Ben Bernanke indicated that he feels the current system of hedge fund self-regulation seems to be working well.

MANULIFE ON THE PROWL? - Reports are that Manulife, Canada's biggest life insurer, may be looking to make a multibillion-dollar U.S. acquisition.  Manulife's last major purchase was John Hancock in 2004.  Possible targets mentioned include Principal Financial and Ameriprise Financial.

SMALLER CITI - Citigroup has announced plans to eliminate 17,000 jobs, about 5.2% of its workforce, as well as move 9,500 jobs to "lower-cost" locations ("lower-cost" locations mentioned include Buffalo, NY and Poland).  The move is believed to be in reaction to the pressure from investors for Citi to improve its bottom line.

MERGER DELAY - The consolidation of the NASD' and NYSE's regulatory units won't take place at least until June because of a class-action lawsuit filed by a broker-dealer seeking to stop the merger.  The consolidation was originally scheduled to take place this month.

PRINCIPLES-BASED REGULATION – It is predicted that as U.S. self-regulatory organizations consolidate their regulatory systems, they are likely to move toward the type of principles-based regulation used in other countries. Currently the brokerage industry is regulated by a rules-based approach. We certainly would welcome a move from the inane application of rules which, in many cases, have no basis in common sense.

EMERGING RISKS - In Congressional testimony, SEC chairman Christopher Cox said that insider trading, municipal-securities fraud and the security of 401(k) plans are three emerging risks for U.S. capital markets.

EUROPEAN MARKETS EXCEED U.S. – European stock market values rose to $15.72 trillion and thus eclipsed the U.S. in stock market value for the first time since World War I. Some see this as continuing slippage of the U.S. position as the dominant financial marketplace.

HOUSING VS EXPORTS – Many are concerned that the spiraling problems in the subprime-mortgage market will lead to a recession, but other experts see booming U.S. exports as having a dampening effect. They predict a soft landing if people understand the positive effect of growing exports.

HOUSING VS CAPITAL SPENDING – Just so you don't get too bullish because of the boom in exports, many don't feel that the housing problem is the biggest worry for the economy. They see reduced capital spending as a bigger issue. This from Fed Chairman Bernanke, "The magnitude of the slowdown [in capital spending] has been somewhat greater than would be expected given the normal evolution of the business cycle."

OPTIONS TRADING BOOST - In a move to boost its options trading presence, the Nasdaq Stock Market is reported to be in talks to acquire the Philadelphia Stock Exchange, the third-largest options exchange in the U.S.

U-5 IMMUNITY - In a ruling by the New York Court of Appeals, brokerage firms have won absolute legal immunity from defamation suits arising from the information they complete on U-5 termination forms.

PAYROLLS UP, UNEMPLOYMENT DOWN, CONSUMERS GLOOMY - According to the Department of Labor, payrolls added 180,000 jobs in March, resulting in a 4.4% increase for the month, but consumer confidence plummeted to a six-month low amid rising gasoline prices, increased mortgage rates and continuing speculation about a housing correction.

BACKDATING LAWSUIT - In the first of what might be many lawsuits, a shareholder has filed suit against Lehman Brothers Holdings claiming that "the investment bank manipulated stock option grants from 1998 to 2001 to secure a huge financial windfall for Chief Executive Richard Fuld and other top officials."

FIRST PATRIOT ACT VIOLATION – The SEC has brought charges against Park Financial Group for violation of the Patriot Act. This is the first brokerage charged under the Act. The SEC alleges that Park executed trades despite many "red flags" and then failed to report the suspicious transactions.

FRAUD SUIT AGAINST NYSE CEO CONTINUES - A judge has ruled that the fraud and breach of fiduciary duty lawsuit brought by seatholders against NYSE CEO John Thain can proceed. The seat holders claim Thain knowingly lied about the NYSE's pending merger with Archipelago. The judge also ruled that NYSE itself could not be liable for the act.

NO "SAY ON PAY" AT MORGAN STANLEY - The American Federation of State, County and Municipal Employees pension fund wants shareholders to get a say on the pay packages of the executives, but a resolution by Morgan Stanley shareholders failed to win a majority of votes. Expect to see more "say on pay" proposals in the future.

MEXICAN MOGUL – Move over Bill Gates, Carlos Slim Helu is moving up. The Mexican has passed Warren Buffett as the world's second richest man and is expected to pass Gates soon. One reason is apparently Helu doesn't have the same philanthropic attitude as the two Americans. Both Gates and Buffett have given away billions, but Helu seems to have no such inclination.

KATIE COURIC PROVISION - The SEC issued a requirement called the "Katie Couric provision," which would require companies to reveal how much they are paying the celebrities and sports stars who sit on their boards.  An SEC spokeswoman, April Fuhrst, promised that "regular Americans will appreciate the ready access they'll have to this new data" and that the new transparency would "reveal a treasure trove of titillating information."  As you might have guessed by now, this was an April Fool's press release issued by the SEC, which is hardly known for its sense of humor!

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LTC MESS - In our last issue, we reported on a March 26 New York Times front-page article highly critical of LTC insurance ("Aged, Frail and Denied Care by Their Insurers").  An LTC specialist, Peter Gelbwaks, shared with us a rebuttal letter he sent to the NYT editor.  While he does a great job of describing the difference long-term care insurance can make in the lives of families, the NYT article has stirred up regulatory agencies.  State insurance regulators are promising to look into the allegations that LTC claims are not being paid.  In addition, the Government Accountability Office has received a request to investigate LTC insurance and claims-paying practices.

NURSING HOME COSTS - Genworth Financial has released the results of their 2007 long-term care cost survey.  While the costs of home-based LTC have remained fairly level in recent years, nursing home costs have increased almost 5% annually from 2004 through 2007, with private rooms averaging almost $75,000 per year.  More information is available here, with the full survey available at genworth.com.

IGNORING REALITY - The 17th annual Retirement Confidence Survey has been released by the Employee Benefit Research Institute and the news is that while a large percentage of Americans understand that the U.S. retirement system is going through major changes, many are not taking the necessary steps to ensure themselves a comfortable retirement.  Many workers are counting on benefits that won't be available, others realize that they won't be receiving pension benefits but have done nothing to react to that change and there is a general underestimation of the amount of money that will be needed to pay for health care costs in retirement.  More information on the survey is available at www.ebri.org.

NASD WARNING - Concerned about the amount of debt being used to purchase securities (a record high of $321 billion in February), the NASD has issued a warning to investors.  "We are concerned too many investors are unaware they could suffer substantial financial losses by using debt to purchase securities," said Mary Schapiro, NASD CEO.  Click here to view "Investing with Borrowed Funds: No "Margin" for Error."

MEDICARE ADVANTAGE SUBSIDY - It seems that rather than saving money, reimbursements to Medicare Advantage plans are 12% more than reimbursements to Medicare's traditional fee-for-service program.  AARP has come out against this "subsidy," calling for traditional Medicare and Medicare Advantage to compete on a level playing field.  America's Health Insurance Plans (AHIP) has come out in favor of the subsidy, claiming that Medicare Advantage plans do more to help low-income seniors.  The House seems inclined to tinker with the Medicare Advantage program, but the Senate doesn't, so changes are unlikely in the shorter term.

VA SUITABILITY – For the fourth time in two years the NASD is said to be tinkering with variable annuity suitability rules. Best course of action is to be very sure that the VA you sell is in the best interest of the client. The major problems we have seen relate to overselling and, in particular, selling to senior investors.

QUOTAS AND BENEFITS – While the NSAD bans quotas and steering clients to certain products, many insurers are taking away their advisers' group health insurance and other employment benefits if proprietary-product quotas aren't met. Producers call making their quotas "validating their contract." "Minimum production" standards and "trips" for the sale of propriety products have long been the norm in the industry, but you can expect challenges and legal actions in the future.

TOP HONORS - According to Dalbar, New York Life's website is the best in the U.S. among insurance and annuity companies.  The others in the top five are Lincoln National, Northwestern Mutual, AXA and Mass Mutual.  Additional rankings are available at www.dalbarinc.com.

RECORD HIGH - The Securities Industry and Financial Markets Association (SIFMA) reports that the brokerage industry hit record highs last year with profits of $33.1 billion in 2006, 4.7% above the previous record of $31.6 billion in 2000.

MILITARY SALES MODEL - The NAIC is proposing new standards for the sale of life insurance on military bases, imposing new suitability standards, prohibiting certain product features and limiting solicitation activities.  The organization also has a portion of its website devoted to "Insurance Issues for Military Personnel."

MARKET CONCENTRATION - The Senate Judiciary Committee is holding hearings on competition levels in the health insurance industry.

KIDDIE TAX - Predictions are that Congress will tighten the kiddie tax retroactive to the beginning of this year.  Dependents over the age of 18 will not be able to use the special 5% rate on capital gains but, instead, will have to use the 15% rate.  This change becomes even more significant when you consider that the 5% rate is scheduled to drop to 0% for 2008, 2009 and 2010.

MEDICARE DRUG PRICES - The Senate Finance Committee has approved a bill that would permit the government to negotiate prescription drug prices with the pharmaceutical industry.  The House passed a tougher version of the bill back in January.  The House legislation would require that the government negotiate drug prices, while the Senate version merely gives the government the authority to negotiate.

SMALL CAP CONCERN – Some big investors are betting that as the economy slows, big-company stocks will outperform small-cap firms. In fact, many are starting to sell short on many smaller U.S. companies.

LOOSE CREDIT FOR STARTUPS – Many U.S. Banks are relaxing their rules and extending credit to startup businesses. This has sparked concern that a slowdown in the economy could result in significant defaults.

GOLDEN RULES FOR KIDS – Here are five quick lessons for your children and, for that matter, adults also!
A penny saved is a penny earned.
Stick to the budget.
Learn the power of interest.
Stay out of debt.
Giving back is the best gift.