WASHINGTON -- The chairman of the House Banking Committee urged the nation's governors yesterday to warn state pension funds, universities, school districts, and other public entities about the risks of investing in derivatives.
"Given that our nation's public institutions are sustained by moneys collected from hard-working taxpayers, it is imperative that the managers of the institutions be warned about the risks posed by derivatives investments," Rep. Henry Gonzalez said in a letter sent to Vermont Gov. Howard Dean, chairman of the National Governors' Association.
The Texas Democrat earlier had warned Texas Gov. Ann Richards about the risks of derivatives after learning that Odessa Junior College in Odessa, Tex., had suffered heavy losses from investing in derivatives.
At the same time, Gonzalez expressed concern about the amount of information the Labor Department receives on the derivatives holdings of pension funds.
"Certainly the department and pensioners could more effectively analyze and monitor the derivatives investments of pension funds if they had more detailed information on the amount and types of those investments," Gonzalez said in a separate letter sent yesterday to Labor Secretary Robert Reich. "Pension managers would be more sensitive to the risks if such disclosures were required."
The lawmaker's concerns came after the Labor Secretary had outlined the department's authority and oversight of derivatives investments by pension funds.
In an Oct. 15 letter to the lawmaker, Reich said the department receives annual reports from pension plans that have 100 or more participants.
"While the annual reports do not specifically collect information regarding derivatives, the reports will reflect information regarding large losses or unusual transactions which could indicate serious problems and would likely result in an investigation," Reich said in the letter.
The labor secretary said existing authority under the Employee Retirement Income Securities Act provides a "broad set of fiduciary standards for plan investments."
Reich said current law requires that investments be prudent and solely in the interest of participants and beneficiaries. "Much of the guidance that we provide could indirectly affect derivatives simply because it relates to the investment of pension assets generally," he said.
Reich said the Labor Department has received 13 requests for regulatory relief for swaps transactions, but has not granted the relief.
"Because we have not been satisfied that ERISA's rigorous standards for issuing such exemptions have been met, the Department has not acted to provide the requested relief," Reich said.
