BRADENTON, Fla. - Florida's State Board of Administration Tuesday said it hired a law firm to assess if the SBA should pursue legal action against broker-dealers who sold certain investment-grade securities to SBA-managed funds that were subsequently downgraded below investment grade.
Berman DeValerio Pease Tabacco Burt & Pucillo, headquartered in West Palm Beach, was hired to ensure that "objective securities law experts look carefully at all facets of this issue before we proceed," said SBA interim executive director Bob Milligan in a release.
"The issue crosses a number of SBA portfolios, including the local government investment pool," Milligan said. "We will vigorously explore all avenues in pursuing the interests of our stakeholders."
The SBA, a constitutional entity of state government, manages 30 investment funds that also include the Florida Retirement System Investment Plan, other pooled funds, and the Florida Hurricane Catastrophe Fund. The SBA is overseen by a board of trustees consisting of the governor, the chief financial officer, and attorney general.
Problems within the SBA came to light when cities, counties, and other governmental entities began withdrawing huge amounts from the $27 billion local government investment pool last fall after some rapid rating downgrades on investments feared to be exposed to subprime mortgages.
While the pool had no direct exposure to such investments, it did have investments in asset-backed commercial paper with subprime exposure.
Since the SBA problems made headlines last fall, the agency said it has been deluged with public records requests, including requests from the Financial Industry Regulatory Authority and the Securities and Exchange Commission.
Agency spokesman Mike McCauley said the SEC requested documents, reports, and other information related to the local government pool.
To preserve the dwindling pool in December, it was divided into Fund A and Fund B. Distressed and defaulted securities were placed into Fund B. Withdrawal restrictions remain in place. However, separating the securities enabled Fund A to qualify for a stable, AAAm rating from Standard & Poor's.
As of yesterday, $8.38 billion was under management in Fund A and $1.27 billion was in Fund B.
Milligan said a review of potential legal issues does not involve subprime holdings.
"The SBA made no purchases of securities that were not top-tier investment-grade paper," he said. "The uncomfortable aspect is how quickly some of this paper was downgraded subsequent to purchase."
The decision to potentially pursue legal action comes on the heels of an April 14 performance audit of the SBA that revealed some investments were improper because funds were not qualified for institutional buyers, and some trades were made by unapproved broker-dealers.
"We found deficiencies in the design of the investment fund oversight and a significant level of noncompliance with investment guidelines and policies," the audit by Clifton Gunderson LLP summarized.
Milligan said earlier this week that the agency is seeking consultants to help the SBA revamp its compliance program.
"We are taking strong action to evaluate our compliance procedures from the ground up," said Milligan. "We expect to build into the SBA a solid compliance monitoring and risk management program that reflects best-in-class institutional practices."