The State Insurance Department Finally Wakes Up!

On Monday, July 29, 2013, the NYS Department of Financial Services (DFS) finally woke up.

In June of 2012, I had pointed out the agency's failure to do its job. And, again in March of this year I detailed continuing delay in its statutory obligation.

DFS is now initiating audits of the seven NYS retirement systems.

For the record, DFS has not released a report since the 2000-2002 audit for NYCERS.

I am absolutely certain that NYCERS needs a rigorous top to bottom audit of everything that it is supposed to be doing. Maybe DFS now has the hard focus it will need to get this job done.

How boring our lives would be without politicians.

NYS Insurance Department - Strange Delay

Since 1937, the NY State Insurance Department (“Department”) has had supervisory authority over NYCERS. See Section 13-183 (NYC Administrative Code) below:

§ 13-183 State supervision. The retirement system shall be subject to the supervision of the department of insurance in accordance with the provisions of sections three hundred seven, three hundred eight, three hundred nine, three hundred ten, three hundred eleven and three hundred twelve of the insurance law, so far as the same are applicable thereto, and are not inconsistent with the provisions of this chapter.

This statute requires NYCERS, as of March 1 of each year, to file an annual report with the Department. The Department controls the format of this report and requires a great deal of detail about NYCERS assets and operations. In some ways, it is comparable to fillings that the SEC requires public corporations to make.

The statute also requires the Department to conduct a periodic audit (“examination”) of NYCERS.

Over the years, the Department has conducted this examination of NYCERS on a five year cycle. The last full five year examination was 1995-1999.

In 2004 the Department began what I thought was going to be the 2000-2004 examination. By law, NYCERS is required to pay the cost of the examination. By July 2005, a draft of the examination was completed according to the Department. I was forced out as NYCERS executive director in March, 2005. During 2004, there was an ongoing conflict between the Department and the NYC Comptroller over investment issues at NYCERS.

As a point of interest, there was also conflict between the Department and the NYS Comptroller over the examination of the NYSLERS. In retrospect, there probably was a lot to have conflict over.

For an unknown reason the Department did not release the final NYCERS examination until June 25, 2009. In addition, the examination only covered 2000-2002, a three year period as opposed to the standard five year period. No reason was given.

This report highlighted 4 key findings:

1. NYCERS should make a greater effort to facilitate the examiner’s request for information on future examinations.
2. NYCERS did not have a comprehensive Investment Policy Statement that governed, controlled, and monitored its investment activities.
3. The NYCERS Board’s interactions with the Comptroller (BAM) and legal counsel (NYC Corp Counsel) indicate that the trustees need to be diligent regarding the inherent potential institutional conflict of counsel.
4. With regards to loaned securities, the Board and the Comptroller’s office did not give clear guidance to Citibank (custodial bank for city pension assets) on how to deal with downgraded securities in the portfolio.

The first item reflects the Comptroller’s reluctance to turn over documents to the Department.

The second item motivated the trustee to prepare an investment policy statement.

The third item is an ongoing dilemma. Legal advice given by NYC Corp Counsel to NYCERS is always subservient to Corp Counsel’s commitment to the mayor. The trustees, however, should require the Corp Counsel to include a declaration on all written legal advice that there is no conflict between the interests of NYCERS and the mayor with respect to the given advice. If there is, Corp Counsel should recuse itself.

The fourth item involves securities lending and the risk of default on securities held in the multi billion dollar leveraged portfolio that the custodian bank maintains for NYCERS. NYCERS is very shy about publicly reporting on the assets in this portfolio. Securities lending is a very complex process. General details are not readily available. Securities lending, however, is one of the biggest operations on Wall Street.

In FY-2009 NYCERS began paying the Department for a new examination. The normal pattern would be an examination for the 2005-2009 time frame. The 2003-2004 period, however, is still unreported and may be picked up in the current examination.

Liu, the Pension Trustees, Transparency, and the NYS Freedom of Information Law

Recently the NY Post made a request of the NYC Comptroller, John Liu, for copies of the contracts, invoices, and payment authorizations for the 10 highest paid investment managers for real estate, private equity and hedge funds working for the five city pension funds.

Liu has tried to build a reputation for pushing transparency in city finances.

However, in response to the request Liu refused to disclose these documents. His reason was as follows:

“such records are exempt from disclosure under New York State Public Officers Law Section 87(2)(d) as trade secrets or are submitted to an agency by a commercial enterprise or derived from information obtained from a commercial enterprise, which if disclosed would cause substantial injury to the competitive position of the subject enterprise”.

Liu did not specify whether he was invoking the trade secret or competitive injury exclusion.

This position is absurd on its face. What organization would put a trade secret or information that was competitively damaging into a commercial contract, a document that in the future could possibly be at the heart of a nasty court fight? There is nothing in these contracts that qualify as a trade secret or would injure the competitive position of the investment managers.

The idea that this specious excuse would apply to invoices and payment vouchers is delusional.

There is of course the real possibility that the public disclosure of these contracts, invoices and payment vouchers might be politically embarrassing. That is assuming that they actually exist.

In addition, Liu threw in the truly inane excuse that “such disclosure would breach the confidentiality provisions in our contracts with the funds, be contrary to industry practice and standards and potentially cause the flight of top performing funds who want to guard their confidential information”.

I do suspect that there are confidentiality provisions in the contracts. These provisions, however, are in violation of the above referenced NYS Freedom of Information Law (NYS Public Officers Law Section 87(2)). This makes them null and void.

The idea of adhering to this industry’s practice and standards is laughable.

The possibility of top preforming funds fleeing a potential customer is not credible. First of all, what makes Liu think that the pension funds have hired the top performing funds. Second, no one walks away from “2 and 20” fees. Third, the pension funds should be so lucky to escape these piranhas.

As per the city’s FY-2012 financial statement, the five city pension funds incurred $340M worth of investment expenses in 2012.

The bottom line is that if the NY Post doesn’t drag Liu into court and get a judge to force him disclose the these documents, he can continue to hide behind this garbage. While Liu is the point man here, the trustees of the five city pension funds are all equally culpable for this deception.

NYS Department of Financial Services - British Banks or NYS Public Pension Funds

I guess British banks are more important to the NYS Department of Financial Services than in-state public pension funds.

It's been ten years since the NYS DFS has done a meaningful and mandated audit of NYS pension funds but they have time for foreign affairs.