Administration September 11, 2010

Principal R/E Fund Reports a Gain, Makes Another Payment

September 11, 2010 (PLANSPONSOR.com) – The Principal has made another distribution from its frozen real estate fund – and a significant one at that. 
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In an email to impacted participants, the Principal noted that on Friday, September 10, 2010, available payments were announced to partially satisfy approximately 67% of the value of transaction requests subject to the limitation on withdrawals imposed nearly two years ago.  The most recent payment was being applied to transaction requests made prior to 3 p.m. (CT) on Thursday, September 9, 2010.

As has been the case with previous distributions, payments are being made on a pro-rata basis and will be determined based on unit values at the time of payment.  As has also been the case in prior distributions, if total transactions requested for a participant were valued less than $300 on Thursday, September 9, 2010, they were satisfied in full.

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As with previous announcements, the Principal noted that in the best interest of all Separate Account participants distributions were generally made on a pro-rata basis, rather than a first-in first-out basis.

Quarterly Returns

In its “Quarterly Flash Report”, Principal noted that the Principal U.S. Property Separate Account generated a total pre-fee return of 4.86% during the second quarter, with appreciation contributing 3.11% to the total return.  Moreover, Principal noted that this marked the first quarter of portfolio level appreciation in the fund since the fourth quarter of 2007.

Principal also noted that during the quarter, two payments were made available to investors whose redemption requests are subject to the fund’s Withdrawal Limitation, which the Principal has previously noted was the only time in the 28-year history of the fund that a contractual “Withdrawal Limitation” has been applied.  It was put in place on September 26, 2008 after “market turmoil, compounded by an already challenging real estate market, resulted in a marked slowdown in the sale of commercial real estate assets,” according to the Principal. 

The firm noted that, when combined with investor rescissions of previous withdrawal requests during the quarter of over $256 million, the Withdrawal Limitation dropped from a March 31 balance of $1,045 million to a June 30 balance of $502 million. Further, Principal said that the Separate Account received several additional contributions and commitments from institutional investors for additional deposits in 2010.

Of course, the fund has made another payment since then, constituting about 41% of the value of the remaining transactions, in July (see Principal Real Estate Fund Queues Up Another Payment).

Current Payment

Regarding the most recent distribution, the Principal noted that the proportion of the liquidity that the participant will receive is determined using the unit value on Thursday, September 9, 2010, and that the payments will be made effective on Friday, September 10, 2010.  Values may differ due to the one-day change in unit value.

As to the timing of this payment, similar to previous partial payments, the announcement noted that “the Principal U.S. Property Separate Account has sufficient liquidity available to make a distribution to investors whose withdrawal requests are subject to the Limitation, while maintaining compliance with covenants and Investment Policy Statement guidelines,” and that “Principal Life has determined it is in the best interest of all investors to fund a partial payment at this time”.

Principal noted that, prior to beginning distributions (and since the inception of the withdrawal limitation), all sources of cash, including proceeds from sales of properties, rents from tenants and investor contributions, were first used to satisfy cash requirements at the properties, meet debt maturities, maintain compliance with debt covenants and meet upcoming Separate Account obligations.

“As such, the Separate Account eliminated debt, significantly reduced near-term debt maturities and reduced the outstanding balance on its line of credit. The combined result enabled the Separate Account to have liquidity available to pay a portion of requests subject to the Withdrawal Limitation while maintaining adequate cash and access to debt to continue to manage the Separate Account”.

Investing September 10, 2010

SEC Approves, Extends New Circuit Breakers

September 10, 2010 (PLANSPONSOR.com) - The Securities and Exchange Commission has approved the adoption and extension of new stock trading circuit-breakers.   

 

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The new rules, which had been submitted by the national securities exchanges and FINRA in the wake of the so-called May 6 “flash crash”, extend to all stocks in the Russell 1000 Index and certain exchange-traded funds (ETFs). The SEC also approved new exchange and FINRA rules that clarify the process for breaking erroneous trades.  Nearly 21,000 trades were broken during that market plunge, the largest chunk of which was in exchange-traded funds, according to an SEC preliminary report released earlier this year.  On May 6 the Dow Jones Industrial Average dropped nearly 1,000 points before recovering to a 348-point loss.   

The circuit breaker pilot program was approved in June, and currently applies to stocks listed in the S&P 500 Index. In announcing the change, the SEC notes that trading in a security included in the program is paused for a five-minute period if the security experiences a 10% price change over the preceding five minutes. The SEC said this pause “gives the markets an opportunity to attract new trading interest in an affected stock, establish a reasonable market price, and resume trading in a fair and orderly fashion”. That circuit breaker program is still in effect on a pilot basis through December 10, 2010, and the new rules will also be in effect on a pilot basis through that date.

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“These circuit breakers and this more objective guidance on breaking erroneous trades will help our markets retain the confidence of investors and companies,” said SEC Chairman Mary L. Schapiro. “We have worked quickly with the exchanges to take these steps, and we will continue to be very focused on addressing weaknesses exposed on May 6.”

The SEC noted that on May 6 the markets only broke trades that were more than 60% away from the reference price “in a process that was not transparent to market participants”.  The SEC went on to note that “by establishing clear and transparent standards for breaking erroneous trades, the new rules should help provide certainty in advance as to which trades will be broken, and allow market participants to better manage their risks”.

The SEC said that it anticipates that the exchanges and FINRA will begin implementing the expanded circuit breaker program early next week, and that the markets will “continue to use the pilot period to make appropriate adjustments to the parameters or operation of the circuit breakers as warranted based on their experience”.

The list of exchange-traded products included in the pilot is available on the SEC’s website.

http://www.sec.gov/rules/sro/nysearca/2010/34-62413-ex3.pdf

The rules outlined were:

  • For stocks that are subject to the circuit breaker program, trades will be broken at specified levels depending on the stock price:
  • For stocks priced $25 or less, trades will be broken if the trades are at least 10 percent away from the circuit breaker trigger price.
  • For stocks priced more than $25 to $50, trades will be broken if they are 5 percent away from the circuit breaker trigger price.
  • For stocks priced more than $50, the trades will be broken if they are 3 percent away from the circuit breaker trigger price.

Where circuit breakers are not applicable, the exchanges and FINRA will break trades at specified levels for events involving multiple stocks depending on how many stocks are involved:

  • For events involving between five and 20 stocks, trades will be broken that are at least 10 percent away from the "reference price," typically the last sale before pricing was disrupted.
  • For events involving more than 20 stocks, trades will be broken that are at least 30 percent away from the reference price.

At Chairman Schapiro's request, the SEC staff is also:

  • Considering whether market makers should be subject to more meaningful obligations to promote fair and orderly markets.
  • Working with the exchanges to prohibit the use by market makers of "stub" quotes that are not intended to indicate actual trading interest.
  • Studying the impact of multiple trading protocols at the exchanges, including the use of trading pauses and self-help rules. 

According to the announcement, the SEC staff also intends to work with the markets and CFTC staff to consider recalibrating market-wide circuit breakers currently on the books — none of which was triggered on May 6. These circuit breakers apply across all equity trading venues and the futures markets.

 

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