What actions have pension consultants taken after the SEC's release last year of its "Staff Report Concerning Examinations of Select Pension Consultants” as well as its "Tips for Plan Fiduciaries"? Lori Richards, Director, Office of Compliance Inspections and Examinations, for the SEC gave a speech December 5, 2005 (access it here) in which she provided some insight into how pension consultants have responded. Excerpt:
Since we issued our examination Report and the “Tips for Plan Fiduciaries” in May, we’ve sought to determine how pension consultants were reacting to the recommendations in the Report — we wanted to see what steps they had taken to address the conflicts of interest and the disclosure issues we had raised. We asked a number of the firms we had examined what steps they were taking in response to the Report.In general, we found that most pension consulting firms we examined have taken positive steps to reevaluate, revise, and implement changes to their policies and procedures. . . .
Here’s what many pension consultants said that they were doing in light of our three recommendations, which were:
- To insulate the consultant’s advisory activities from its other business activities to eliminate or mitigate conflicts of interest;
- To disclose all conflicts of interest to prospective and existing clients to fulfill fiduciary duties; and
- To implement policies and procedures to prevent conflicts of interest or disclose material conflicts of interest, especially concerning brokerage, gifts, donations, contributions and other financial benefits.
Richards then goes through a laundry-list of specific actions pension consultants have taken in implementing these three goals. While the speech is preceded by the disclaimer that the "speaker’s views are her own, and do not necessarily reflect those of the Commission, the Commissioners, or other members of the staff," it does provide some insight into what actions the SEC might deem acceptable in addressing the concerns in the Staff Report. Plan fiduciaries will likely find this information somewhat useful in selecting, monitoring, and evaluating the pension consultants who assist them.
For instance on the obligation of disclosing conflicts, here are some of the "positive" actions being taken by pension consultants that she listed in her speech:
In regards to the implementation of policies and procedures to prevent conflicts of interest, Richards gave the following advice to plan fiduciaries:
On a less encouraging note, it did not appear to us that all pension consultants had implemented policies governing the payment of their fees with directed brokerage. And, more than a handful of consultants failed to offer to provide a copy of the firm’s Code of Ethics to clients in Part II of Form ADV, as required. Plan trustees may find that reviewing a pension consultant’s Code of Ethics may help in answering some of the questions outlined in the SEC/DOL “Tips for Plan Fiduciaries.”
Read previous posts about the SEC/DOL focus on pension consultants here.
Yesterday, the SEC and DOL published Tips for Plan Fiduciaries related to examining practices of pension consultants. The DOL has also provided a Fact Sheet entitled "Tips for Selecting and Monitoring Service Providers for your Employee Benefit Plan.." DOL states that the tips are designed for fiduciaries of 401(k) plans and other types of pension plans to assist them in "carrying out their responsibilities under ERISA to prudently select and monitor plan service providers."
In response to the SEC's recent release of a “Staff Report Concerning Examinations of Select Pension Consultants” (read about it here and here), the SEC and the DOL have collaborated and developed a set of questions to assist plan fiduciaries in evaluating the objectivity of the recommendations provided by pension consultants. You can access the Tips for Plan Fiduciaries here as well as the press release here. The DOL warns plan fiduciaries that the Staff Report raises "serious questions concerning whether some pension consultants are fully disclosing potential conflicts of interest that may affect the objectivity of the advice they are providing to their pension plan clients." Thus, plan fiduciaries are urged to use the questions provided in order to gather and analyze information about pension consultant practices in order to help plan fiduciaries prudently select and monitor their pension consultants so as to fulfill their fiduciary duties and obligation under ERISA.
The SEC provides the same Tips for Plan Fiduciaries on their website as well as an announcement here.
John Wasik for Bloomberg.com has an op-ed--"Darkest Side of Pension Consultants Still Unseen"--discussing the SEC's findings reported in a recently released "Staff Report Concerning Examinations of Select Pension Consultants" (discussed here in a previous post).
Also, the Foundation for Fiduciary Studies has provided comments on the Staff Report here. (Source: 401kHelpCenter.com)
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."