Financial Institutions Law Alert

Throughout 2019, we published several alerts advising clients charged with the investment of public funds, whether public pensions or other public monies. The COVID-19 pandemic and reactions thereto have hit the country hard across the board, including in the markets. Both the stock market and municipal bonds took a pounding in the month of March. Although prices have rebounded, the markets are still showing significant volatility.

Of course, like everyone else, the accounts of clients investing public funds have no immunity from this volatility. Public pension funds, in particular, have been hit hard. As liabilities have mounted over the past several years, pension funds have been moving further into stocks in an effort to reduce shortfalls from the long-running decline in bond yields that have reduced returns for fixed-income portfolios. Allocations to stocks have increased to approximately 60% of pension fund assets, a 13-year high, according to Wilshire Trust Universe Comparison Service.1 Though we can’t know for sure at this point, Moody’s Investors Service estimated that state and local pension funds had lost $1 trillion in value during the market decline from mid-February 2020 through March 2020.2

During times of crisis such as this (and in their aftermath)—when resources are strained and clients search for answers—questions will inevitably arise regarding how a particular fund or account was and/or is currently being invested. In certain cases, clients will look to any source that can be found to re-coup value lost during a downturn. If a particular fund was being invested improperly, whether under a particular set of regulations or a fund’s investment policy, the entities advising the client and/or managing its investments could face liability for any losses resulting from those investments.

Therefore, firms advising public entities should be especially vigilant in reviewing the regulations governing a particular fund, as well as the fund’s investment policy, and in verifying that the fund’s investments fit within the required parameters. Diligent monitoring and ensuring compliance with the regulations and policies governing a particular fund is the first step a firm can take to mitigate potential risk in this economic environment.

1See Fragile Retirement Funds Tested by Market Volatility, Bond Yields, by Heather Gillers, Wall Street Journal, March 5, 2020.

2See Coronavirus is Making the Public Pension Crisis Even Worse, Mary Williams Walsh, New York Times, April 2, 2020.


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