Alerts

SEC Exposes Investment Consultant Conflicts of Interest Resulting From Undisclosed and Improper Compensation Arrangements

July 8, 2005

The United States Securities and Exchange Commission (the "SEC") recently issued its "Staff Report Concerning Examination of Select Pension Consultants" (the "SEC Report") discussing conflicts of interest resulting from undisclosed and improper compensation arrangements between investment consultants and money managers/mutual funds. Employee benefit fund trustees or committees, including those associated with multiemployer funds, routinely retain an investment consultant to advise them on identifying investment objectives, asset allocation, selection of money managers/mutual funds, investment performance monitoring and other investment matters.

Concerned about the independence of the advice that investment consultants provide in light of their relationships with money managers, the SEC conducted focused examinations of 24 investment consultants who are investment advisors registered under the Investments Advisers Act of 1940 (the "Advisers Act").  Approximately half of the consultants examined are among the largest consulting firms, measured in terms of the assets of the plans they advise.  In the course of its examinations, the SEC sought information regarding the consultants' practices pertaining to (a) the products and services provided to plans and provided to money managers, (b) the method of payment for the consultants and (c) the level of disclosure provided to clients.  Based on the findings of the SEC, plan fiduciaries have reason to worry that undisclosed compensation arrangements between investment consultants and money managers/mutual funds adversely impact investment performance and result in unnecessary costs.