What the Wall Streeters want: looser fiduciary rules and easier conflict-of-interest limits in pension law. Securities firms have long been eager to run pension money with fewer controls by the Employee Retirement Income Security Act. Now they're leaping on pension reform -- a must-pass bill propelled by the latest airline bankruptcies -- to win some relief. The likely result: more pension investments in hedge funds and less protection for workers and retirees. "This is about Wall Street wanting to attract more money without regulatory constraints," says Damon A. Silvers, associate general counsel of the AFL-CIO.
Securities industry lobbyists claim the changes they want won't hurt pension plans. Instead, they say, new rules would actually save money for employers and pensioners. New York Senator Chuck Schumer, a Democrat with strong support on Wall Street, is pushing to add the financiers' wish list to a pension bill the Senate is likely to approve in early October. Some items on the list are already in pension-reform legislation awaiting final House approval.
The Street's biggest potential win: a measure that would let many hedge fund managers avoid ERISA's fiduciary duties. Now, if more than 25% of a hedge fund's assets come from pensions, the manager is required to put workers' interests first, invest prudently, and track assets diligently. Hedge funds want the rule revised so that strict standards wouldn't kick in until pension assets totaled 50%. "Pension plans increasingly are turning to alternative investments, but many hedge funds don't want to take the money because they fear the regulation," says Scott Parsons, executive vice-president of the Managed Funds Assn., a hedge fund trade group.Serving two masters?
Equally contentious is a proposal to let managers swap stocks or other assets between a pension fund and another client without seeking bids on open markets. Such cross-trades, now banned, would cut pensions' costs and create more investment opportunities, argues Elizabeth Varley, vice-president of the Securities Industry Assn.
Pension experts, however, see trouble. Cross-trades could let investment managers arrange swaps that favor one client over another. "A fiduciary can't serve two masters," says Deene Goodlaw, an instructor at the University of California at Berkeley's Law School. And easing fiduciary rules could let hedge funds woo small and midsize pension plans, whose trustees are often less sophisticated.
Despite Wall Street's promises of savings, employers are privately uneasy about such wholesale relaxation of ERISA rules. "My guys worry about the potential for abuse," says one corporate lobbyist. That won't deter the securities folks. With Wall Street bankrolling congressional candidates to the tune of $50 million in 2004, the industry has plenty of clout on Capitol Hill -- even when it's serving tacos instead of steaks. A major battle over foreign investment in the U.S. is heating up. Spurred by the Chinese bid for oil giant Unocal (CVX
), the Senate Banking Committee will lay out the case for putting more teeth into reviews of such deals at a hearing set for Oct. 6. A Government Accountability Office report issued on Sept. 28 concludes that the interagency panel examining foreign bids should broaden its definition of the national security threats that could prompt the President to nix a transaction. A broad business coalition is preparing to protest any changes, saying new rules could crimp acquisitions here and lead to retaliation against U.S. investments overseas. Federal criminal prosecutions have soared 31% since President Bush took office -- but despite all the business scandals, the growth isn't coming from corporate crime. A Syracuse University study released on Sept. 28 finds federal white-collar cases were flat between 2000 and 2003 and have declined about 10% since then. The Bush administration wants to overhaul the Foreign Service to make it as involved in regime change as soldiers in tanks. Philip Zelikow, counselor to Secretary of State Condoleezza Rice, says embassy aides should be more aggressive in pushing reform. He wants diplomats to work with dissidents and nongovernment groups. What if host governments balk? "We don't send diplomats to break the law," Zelikow says.