The SEC today announced the release of the “Staff Report Concerning Examinations of Select Pension Consultants.” The Report comes on the heels of an examination by the SEC of 24 pension consultants who are registered with the SEC as investment advisers. The examinations focused on (i) the products and services provided by the pension consultants; (ii) the method of payment for such services; and (iii) the disclosure provided to their clients. The examinations were initiated “as part of the SEC´s program to identify and investigate risks in the securities industry.”
The SEC states that the Report is intended to provide “recommendations to enhance pension consultants’ compliance programs” to help ensure that advisers are fulfilling their fiduciary obligations to their clients. However, the SEC also states that the Report raises “important issues for plan fiduciaries who often rely on the advice and recommendations of pension consultants in operating their plans.” Accordingly, the SEC has promised to work with the Department of Labor to educate pension fund trustees and other plan fiduciaries about the issues raised by the findings in the Report, and has stated that it “will continue to work closely with the Department of Labor on issues of mutual interest.”
The SEC concluded in the Report that pension consultants that are registered investment advisers (1,742 registered investment advisers list that they provide pension consulting services, according to the SEC) should be:
(1) Formalizing “policies and procedures” to address their fiduciary and regulatory obligations under the Advisers Act.
(2) Identifying conflicts of interest and other compliance factors creating risk exposure for the firm and its clients in light of the firm’s particular operations, and then designing policies and procedures that address those risks.
The SEC noted that such policies and procedures should ensure that the firm’s advisory activities are insulated from its other business activities, to eliminate or mitigate conflicts of interest in its advisory activities, and that all disclosures required to fulfill fiduciary obligations are provided to prospective and existing clients, particularly regarding “material” conflicts of interest. The SEC also noted that policies and procedures should be designed to ensure adequate disclosure concerning the consultant’s compensation, including when the pension consultant receives compensation from brokerage transactions from advisory clients or money managers.
After the Report was issued, the DOL commended the SEC here for the Report stating:
While the SEC is responsible for regulating the conduct of investment advisers, including advisers that provide pension consulting services to employee benefit plans, the Labor Department is responsible for the conduct of the plan fiduciaries. This includes, among other things, selecting the providers of pension consulting and other services for plans. The Employee Retirement Income Security Act (ERISA) requires that plan fiduciaries must act prudently in selecting and monitoring service providers. Disclosure of a service provider’s potential conflicts of interests would be an important part of the selection and monitoring process.
The SEC warns in its announcement of the Report that “[a]lthough investment advisers owe their clients a fiduciary obligation — including to adequately disclose all material conflicts of interest — some pension consultants appear to have erroneously concluded that they are not fiduciaries to their clients.”
In light of all of this, plan fiduciaries should make sure that their pension consultants have the policies and procedures in place that the SEC has recommended, as the Report provides a sort of “roadmap” for plan fiduciaries in examining their relationships with pension consultants to make sure that such relationships continue to meet the statutory standards under ERISA.
This quote from Lori Richards, Director of the SEC’s Office of Compliance Inspections and Exminations, in an article from CNN here:
[Pension consultants] sell themselves as being objective or unbiased and independent. Those are important words and they have meaning, and they have meaning to the clients who are deciding to hire the pension consultant, so if a pension consultant says that it is any one of those things: independent, objective, unbiased, it must make sure that it is so.
Article by Mary Williams Walsh for the New York Times: “SEC Investigating Pension Consultants? Disclosure.”
Also, from the Wall Street Journal: “SEC Finds Retirement-Fund Issues.”