TIMOTHY H. BUCHMAN
crefwatch@att.net

 

March 28, 2005                                               (Six (6) paper copies + Floppy Disk)

 

W… J. K…, Esq., Assistant Director

Division of Investment Management

Securities and Exchange Commission

450 5th Street NW

Washington DC 20549

 

Re:  College Retirement Equities Fund’s Omission of Shareholder Proposal of Timothy H. Buchman (College Retirement Equities Fund (“CREF”)’s “Omission Letter” of March 23, 2005 to the Security and Exchange Commission (the “Commission")

 

Dear Mr. K…:

 

            I believe that the CREF’s statements in excluding my 2005 Proposal (the “Proposal”, Appendix A of the Omission Letter and of this document) are false and/or misleading.  In the discussion below, I refer to the Omission Letter by its Section (Roman) numbers.  I then paraphrase the arguments of the Omission Letter for reference to my rebuttals below each paraphrase, using my own (Arabic) numbers.

 

            I respectfully request that the Commission’s Staff not confirm to CREF that it will not recommend that enforcement action be taken, if CREF omits the Proposal from its 2005 Proxy Materials.  I further respectfully request that the Staff advise CREF that it cannot rely on Rule 14a-8 if they exclude the Proposal.

 

Background

 

            CREF represented, in a 1989 Settlement Agreement (the “Settlement”) that

 

…it has no current intention to reorganize as a Massachusetts Business Trust or other form of business organization whose governance and voting provisions would permit CREF to dispense with the Participant voting procedures it now contemplates for the election of its trustees. CREF further agrees not to change its form of organization in a manner that would affect these voting procedures in any adverse way for a period of at least five (5) years from the date of Final Agency Action. …[1]

 

            CREF reported to shareholders (in common CREF usage, “participants”) in 1990 , that in connection with a recent SEC Order[2] ,

 

… CREF will implement a new procedure whereby CREF will hold annual meetings at which Participants, either in person, or by proxy, generally will elect CREF’s Trustees … and may vote annually to ratify the Trustee’s selection of CREF’s independent auditors … In connection with the annual meetings, Participants may submit appropriate proposals for action by CREF. …[3]

 

            At the CREF 2004 Annual Meeting, I asked Mr. Herbert Allison, CREF (and TIAA) President and Chief Executive Officer, for “… a pledge not to change CREF’s form of incorporation without an affirmative vote of Participants.”  He replied that Participants would vote on such a change.[4]

 

            At the 2003 Annual Meeting, CREF listed a goal of “Ensuring an economically vibrant TIAA-CREF, with unsurpassed staying power, that will be there to meet their needs over the long term.”[5]  Because TIAA-CREF is currently facing vigorous competition in its traditional markets, I felt there was a potential parallel with the not-for-profit health insurers and mutual insurance companies who cited capital access and competitive pressures in reorganization plans.  Because the topics of New York State budget shortfalls, and of those business conversions have been so prominent in news, legislative and regulatory affairs lately (discussed in my section IV, 3 below), I decided this topic needed further information made available to the participants.  The Proposal is the second proxy proposal I have ever submitted.

 

Discussion of the Omission Letter

 

I.          The Proposal is not a proper subject for shareholder action. (Rule 14a-8(i)(1))

 

1) The Proposal allegedly mandates an action by CREF.

 

            In actual fact, the Proposal states, in the active sentence of the RESOLVED clause, “…should CREF present a reorganization plan, CREF should exert its best efforts to…” This is clearly a conditional or subjunctive voice.  In normal spoken and written English (presumed to be the usage of the readers of a contemporary “plain-language” proxy statement), the word “should” indicates such shades of meaning as “ought to” or “if things were done right”.  It does not convey obligation, as do the auxiliaries “shall” or “will” or “must”.

 

            In the December 15, 2003 (rescheduled) Notice of Annual Meting (the “2003 Proxy Statement”), Participant Proposal IV used the auxiliary “should” in its “Resolved” clause, and was not excluded.  In the same 2003 Proxy Statement, Participant Proposal V used the auxiliary “shall not be” in its “Resolved” clause, and was not excluded.

 

            In the June 15, 2004 Notice of Annual Meeting (the “2004 Proxy Statement”), Participant Proposal II used the auxiliary “shall” in its Resolved clause, and was not excluded.

 

            These previously included proposals indicate that my use of the weaker term “should” is acceptable to CREF, and CREF cannot now assert that the word is not precatory.  I have not, therefore, attached a revision of the Proposal, which substitutes for that word.  I respectfully request that the Commission, (I refer to the Commission’s Staff Legal Bulletin No. 14B (CF)), indicate to me whether such a substitution is both necessary, and sufficient, to preclude the issuance of an unqualified no-action letter.

 

2) The Proposal is related to matters that fall within the powers of a company’s board of directors under state law.

 

            In fact, the action requested (solicitation of a report from the Commission) is normally one available to the shareholders of the corporation, as expressed in Section 25 [“Section 25”] of The Investment Company Act of 1940 [the “Act”].

 

II.        The Proposal is so vague and indefinite as to be misleading. (Rule 14a-8(i)(3))

 

1) The company cannot determine with “reasonable certainty” what actions or measures the Proposal requires.

 

            There is no doubt about the action recommended by the Proposal.  The Proposal quotes the language of the Act:

 

… exert its best efforts to solicit the requests of 25 per centum of any class of its outstanding securities for, or otherwise submit a request to the Securities and Exchange Commission, “… to render an advisory report in respect of the fairness of any such plan and its effect upon any class or classes of security holders”, as described in Section 25 of The Investment Company Act of 1940, as subsequently amended.

 

2) The meaning or application of terms or the standards under the proposal may be subject to differing interpretations.

 

            I quoted the standards of Section 25 of the Act to avoid questions of interpretation.  CREF cites CBRL Group, H.J. Heinz, and Travelers Corporation proposals, but fails to connect the offenses in those proposals to the present Proposal.  Those CREF-cited proposals all involve requested actions that do not refer to external, existing, explicit descriptions of the actions, as does the Proposal.

 

            Although CREF does not cite my failure to name a single class of outstanding securities as specifically “vague and indefinite”, that language was echoed verbatim from the Act.  My intent was to permit CREF to select a class which would either minimize the costs of such solicitation, or even to select the class which, in CREF’s judgment, was most likely to fail to produce a qualifying request for the request for a report!  After all, I (and the other participants) would bear the costs of the recommended solicitation.

 

3) The proposal fails to define critical terms because no such “reorganization plan” has been set forth as of the date of the Proposal.

 

            It is not necessary for me to define the term “reorganization plan”, because I intend to refer only to such reorganization plans as are included in the meaning of the Act, as amended.  The specificity of the language in the Settlement[6] could lead one to believe that changes in CREF’s form of incorporation have been at least, contemplated internally, in the past.

 

III.       The Proposal may be excluded pursuant to Rule 14a-8(i)(6).

 

1) CREF lacks the power or authority to implement the Proposal.

 

            The Omission Letter states that “CREF has not publicly announced any ‘reorganization plan’ and it is unclear precisely what sort of ‘reorganization plan’ is referred to in the proposal.”  In fact, the Proposal does not refer to an existing, or announced reorganization plan.  The Proposal asks for an action upon the possible future event of such a plan’s creation.  The term “reorganization plan” is used in the Proposal exclusively in the same sentence which refers explicitly to Section 25 of the Act.  In the 2004 Proxy Statement, Participant Proposal II requested responses to prospective future events, and was not excluded.

 

2) The Proposal depends on the mistaken presumption that CREF is a mutual insurance company.  The Proposal confuses TIAA and CREF.

 

            The Proposal’s “several substantial mutual insurance companies have converted to stock companies, with small payments to policyholder-owners” is a simple statement of fact.  It is intended to present an additional example (following the most apposite example, of Blue Cross-Blue Shield for-profit conversions) of company reorganizations.  I acknowledge that there is an implied (but not explicit) comparison with a potential CREF reorganization, but in fact:

 

            CREF has frequently chosen to explicitly compare itself with insurance companies when it serves CREF’s interests to do so.  CREF also often finds it appropriate to consider the two companies together.

 

            For example, “An Overview of T.I.A.A.’s Executive Compensation Policy”[7] comments that “TIAA and CREF’s combined assets would make the organization the third largest U.S. life insurance company” (emphasis mine.)  In fact, the two companies have always been formally tied together.  In the historical booklet, “governing TIAA-CREF” the creation of CREF is described with,

 

…To ensure that the new company’s [CREF’s] mission would be consistent with those of TIAA, the law establishing CREF required its members to be the same seven individuals as the Trustees of T.I.A.A. Stock—now TIAA Board of Overseers. In 1989, in a name change parallel to that of the TIAA Overseers, CREF’s members also became known as Overseers.[8]

 

            There is a minor error in the Omission Letter, which bears indirectly on the frequent pairing of the two companies.  While the TIAA Board of Overseers has seven slots, it does not currently have seven members (as stated on page 2 of the Omission Letter), due to the resignation of Franklin W. Raines.  The Press Release announcing his resignation conflates the two Boards of Overseers, consisting of the same persons, cited above.  “TIAA-CREF said today that Franklin D. Raines resigned from its Board of Overseers.”[9]

 

            CREF’s Constitution and Bylaws make repeated reference to “the insurance law”, “Superintendent of Insurance of the State of New York”, and to “the Insurance Law of the State of New York.”[10]  But I do not argue that CREF is an insurance company.  The factual reference to insurance company demutualizations simply provides an additional example of a reorganization initiated by a company, in which the shareholders might benefit from receiving additional information from an outside party regarding the effects of the reorganization.

 

            The Proposal requests an action of CREF only.

 

4) CREF cannot give any assurance that the Commission would render an advisory report.

 

            The proposal does not request that CREF “obtain” an advisory report.  The proposal suggests that CREF facilitate the making of a “request” for an advisory report.  No penalty or remedy is suggested for the result (or any failure to obtain some result) of such a request.  The fact that CREF has no power to assure the production of any such advisory report is not relevant to the Proposal.  In fact, CREF has no power to predict the outcome of the requested solicitation of requests from Participants.  Just as it is used in the Settlement, the Proposal uses the term “its best efforts” to modify the request for a solicitation.  I selected that term to protect CREF from any possible criticism or penalties for any failure to achieve any particular result.

 

5) CREF cannot bind the action of a successor company.

 

            The Proposal does not ask such a duty.  It requests an action of the current CREF company, to be executed upon the proposition of a reorganization, not after its execution.  Section 25 of the Act is clearly premised upon the request for a report preceding the subject reorganization.

 

IV.       The Proposal may be excluded pursuant to Rule 14a-8(i)(7).

 

1) Whether CREF should continue its business operations as presently conducted, or institute changes deals with a matter relating to the company’s ordinary business operations.

 

            I do not have the legal library resources to cite previous requests for no-action letters regarding reorganizations.  But the creation of Section 25 in the Act suggests that a reorganization is a singular event in the life of a company.  This magnitude alone raises a reorganization above the level of “ordinary business.”  While the details of a reorganization may well relate to the company’s “ordinary business operations”, the Proposal does not attempt to “micromanage”, manage, or otherwise concern itself with the details of any prospective reorganization.  The Proposal merely asks for assistance in requesting an outside report describing the merit and effects of such reorganization, after such time as one is proposed by CREF.  Since CREF notes that such Commission reports have been rare, it is entirely possible that there are no precedents marking a request for a Section 25 report as relating to “ordinary business operations.”

 

2) The decision to directly solicit the Commission’s views on the fairness of a hypothetical reorganization is a matter within the ambit of CREF’s management or the CREF Board.

 

            Section 25 of the Act makes it clear that the decision to directly solicit the Commission’s views on the fairness of a reorganization is a matter within the purview of the shareholders.  The Proposal asks for the assistance of CREF in obtaining the required quantity of requests from shareholders to solicit the Commission.

 

            Assistance of CREF is requested because the Act requires a proportion of a class of shareholders (25%), which far exceeds the entire quorum currently required by CREF to decide director (“trustee”) elections, or to decide participant proposals.  (The quorum required is 10% of eligible participants, and a simple majority, or just over 5% of the participants can determine the outcome of those two election types.[11])

 

3) The Proposal does not raise any issues that engender widespread debate, media attention, and legislative and regulatory initiatives.

 

            The subject of non-profit conversions to stock companies does in fact engender all of the above noted activities.  A search of ProQuest’s National Newspaper database, for “health insurance conversion”, for only 9 newspapers, and only after January 1, 1998, generates 66 hits.  The most recent of these relates directly to the last paragraph of the Proposal’s supporting statement, and concerns the state in which CREF is chartered:

 

The planned conversion of HIP, one of New York's largest heath insurers, has already set off a scramble, with city, state and union officials jockeying to receive large chunks of the potential new revenue source either to pay for health coverage for public employees and public health programs or to help reduce large deficits.[12]

 

            Shortly after the current President and CEO of CREF began his duties, he was interviewed by Business Week.  One of the questions asked was “Can you imagine a day when TIAA-CREF might go public?”[13]  Apparently, the premise of the Proposal is not so far-fetched after all.

 

            Indeed, there is no doubt that action of the New York State Legislature would be necessary for any CREF reorganization that would parallel the many Blue Cross-Blue Shield conversions that have already taken place.  In 2002, The New York Times reported (a single quotation spanning debate, media, legislation, and regulation) that,

 

The New York State Insurance and Health Departments gave final regulatory approval yesterday to the latest plan by Empire Blue Cross and Blue Shield, a nonprofit insurer, to turn itself into a profit-making company. …

 

…Mark Scherzer, a lawyer for the consumer groups, said they would consider whether to challenge the regulatory approval. He said it did not address ''the fundamental flaw'' in the plan, which he said was the state's failure to transfer the bulk of the assets of the nonprofit Blue Cross plan to a foundation that would be devoted to health coverage.

 

Under pressure from consumer groups, California and a number of other states financed large foundations using stock in Blue Cross and Blue Shield plans that had converted to profit-making companies. But in New York, the money is to go primarily to the union's workers in the form of wage increases.

 

The Insurance Department also moved yesterday to keep Empire's employees from profiting immediately from the stock sale. The new company, which will be called WellChoice, was prohibited from issuing stock or stock options to its employees and directors for one year.[14]

 

Respectfully submitted,

 

 

 

 

Timothy H. Buchman

 

 

cc:        Mr. G… D…, Esq., CREF

            Ms. E. L… J…, CREF

Appendix A

Timothy H. Buchman, … Avenue, Wyckoff, NJ … (http://crefwatch.home.att.net/), owning 610.2620 accumulation units in the CREF Stock Account, and 612.6310 accumulation units in the CREF Inflation-Linked Bond Account intends to present the following resolution at the 2005 annual meeting.

Whereas, over 25 not-for-profit Blue Cross/Blue Shield plans have obtained state permission and converted to for-profit status, and;

Whereas, several substantial mutual insurance companies have converted to stock companies, with small payments to policyholder-owners, and;

Whereas, competitive pressures, and access to capital were typical reasons given for these conversions, and;

Whereas, the opportunity to issue options, stock grants, change-of-control payments, and to escape not-for-profit salary limits may have been factors some such conversions;

THEREFORE BE IT RESOLVED that, should CREF present a reorganization plan, CREF should exert its best efforts to solicit the requests of 25 per centum of any class of its outstanding securities for, or otherwise submit a request to the Securities and Exchange Commission, “… to render an advisory report in respect of the fairness of any such plan and its effect upon any class or classes of security holders”, as described in Section 25 of The Investment Company Act of 1940, as subsequently amended.

Participant's Supporting Statement:

This remedy is intended for use by aggrieved owners. But the fact that our trustee and proposal elections can currently be decided with a quorum of only 10% of the electorate testifies to the difficulty of a participant assembling the requests of 25 percent of any class of CREF securities, or of paying the costs of doing so.

CREF agreed, in a 1989 settlement with the ACE, the NEA, the AAUP, and other entities, ([1989 SEC LEXIS 1606] and [1989 SEC LEXIS 1605]), that it had no current intentions to reorganize as a Massachusetts Business Trust, and not to change what are now its voting procedures "in any adverse way for a period of at least five years".

We earnestly hope that current marketing strategies and product improvements will advance TIAA-CREF’s position in the financial services marketplace.  However, if these efforts fail, another reorganization plan could be considered.

One reason states have embraced these conversions (and enacted the necessary legislation) has been the financial windfalls they have extracted, towards their hard-pressed budgets.  The president of a NY State teachers' union commented, “Everybody has probably spent the HIP conversion money 25 times over before HIP has even decided … to convert.”


After reading a footnote, you can return to the text by clicking on the number beside that footnote.

[1] Settlement Agreement, dated August 22, 1989, Admin. Proc. File No. 3-6954, Securities And Exchange Commission (File No. 812-6208) [1989 SEC LEXIS 1606])

[2] Investment Company Act Release No. 17116, Order Granting Exemptions and Approving Certain Transactions (Aug. 22, 1989) [1989 SEC LEXIS 1605]

[3] College Retirement Equities Fund “Prospectus” March 1, 1990.

[4] The audience at CREF’s Annual Meeting is prohibited from recording the proceedings, and the Question and Answer session is not transcribed for public viewing, so I can only cite my personal notes of the meeting I attended.

[5] “Decisions 2003” 2003 CREF Annual Meeting handout.  (Emphasis CREF’s.)

[6] Quoted in “Background”, this document’s page 1.

[7] A pamphlet, also available at http://www.tiaa-cref.org/newsroom/exec_comp_policy.pdf .

[8] A pamphlet, also available at http://www.tiaa-cref.org/pubs/pdf/governance.pdf .  See also the CREF Charter, Chapter 124, New York State Legislature, March 18, 1952.

[9] http://www.tiaa-cref.org/newsroom/overseers.html

[10] CREF Constitution and Bylaws, available on EDGAR, within this document: http://www.sec.gov/Archives/edgar/data/777535/000093041304002311/0000930413-04-002311.txt

[11] CREF Constitution, Article III, Section 6

[12] New York Times. (Late Edition (East Coast)). New York, N.Y.: Feb 22, 2005.  pg. B.1

[13] Business Week Online, October 13, 2003, http://www.businessweek.com/magazine/content/03_41/b3853121_mz020.htm .

[14] New York Times. (Late Edition (East Coast)). New York, N.Y.: Oct 9, 2002.  pg. B.2