Administration September 4, 2006

Two Morgan Stanley Fund Firms Settle Litigation

April 21, 2005 (PLANSPONSOR.com) - Two mutual fund companies operated by Morgan Stanley and one of its subsidiaries have settled class action suits alleging that the funds defrauded investors by overvaluing assets and have agreed to a total $41.5 million fine.
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Van Kampen Prime Rate Income Trust, a Morgan Stanley subsidiary, agreed to the larger of the two pacts, for $31.5 million that disposed of a 2001 investor class action suit filed in US District Court in Chicago, involving the Van Kampen Senior Loan Fund, the Daily Business Review reported. The second agreement called for a $10-million payment, involved the Morgan Stanley Senior Loan Fund.

Each settlement sum represents the difference between what investors paid for their shares and what they would have paid if the shares had been fairly priced, said attorney Paul Geller.Geller and his colleagues examined the way share price is determined for a specific type of mutual fund called a senior loan fund. Senior loan funds are generally marketed as conservative investments that are similar to money markets or Treasury bills in their low level of risk.

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The suits claimed that the net asset value of the funds was vastly overstated in two ways. According to the Daily Business Review report, in violation of Securities and Exchange Commission (SEC) rules, the funds allegedly failed to use market data that accurately valued the fund’s senior loans. Second, the fund assumed, without a reasonable basis that the senior loans were worth face value, rather than their current fair value. That’s the amount the loan would sell for. In some instances, the funds assumed face value for loans even when the underlying debtor corporation was bankrupt.

Administration September 3, 2006

Federal Employee Groups Strongly Against REIT in TSP

March 9, 2006 (PLANSPONSOR.com) - Representatives from 15 major federal employee groups have passed a resolution to formally oppose the addition of a Real Estate Investment Trust (REIT) as a fund option in the federal Thrift Savings Plan (TSP).
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Govexec.com reports that special interest groups have been lobbying hard to get a fund that invests in real estate into the TSP, and a House bill to add a REIT fund option has 148 co-sponsors.

TSP administrators, however, have delayed requesting plan changes from Congress for fear of the unwelcome addition of a REIT fund (See  TSP Board Wants Plan Changes ).   They have hired an outside consultant to review possible fund choices (See  Federal Government on the Mark with Plan Investment Indices).

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The resolution adopted by the Employee Thrift Advisory Council says that “any development of a new fund should come from an independent process developed by the plan’s fiduciary that promotes the integrity of investments of federal employee retirement funds,” according to Govexec.com.  

Council members condemned the lobbyists’ approach of going to Congress instead of letting the TSP board decide on the fund addition.   They said the ad hoc addition of numerous funds in this manner would create confusion among employees, which could cause participation rates to drop. They said simplicity in the TSP contributes to its strong participation rates.

The resolution has no formal weight.   Congress can approve the addition of the fund, but it would be against the will of employee stakeholders.

The Employee Thrift Advisory Council is composed of representatives from federal employee unions including the American Federation of Government Employees, the National Treasury Employees Union and the American Postal Workers Union, and non-bargaining employee groups such as the National Association of Retired Federal Employees, Federally Employed Women, the Federal Managers Association and the Senior Executives Association.

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