SEC looking at pension consulting firms

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SEC looking at pension consulting firms

Seattle Post-Intelligencer

January 12, 2004

Opening a new avenue in examining the financial-services industry, the Securities and Exchange Commission has requested information from a number of major investment consulting firms about their dealings with pension fund clients.

The SEC is concerned about possible conflicts of interest between pension consultants and money management firms they work with, according to Lori A. Richards, director of the SEC's office of compliance inspections and examinations.

Critics of the pension consulting industry have long complained about such problems, with much criticism aimed at alleged schemes known as "pay-to-play." Theoretically, one such scenario could involve a money management firm paying a consultant through various hidden means, in return for a recommendation to a pension fund.

"Allegations of pay-to-play are very serious and really triggered our interest," Richards said.

The Department of Labor unsuccessfully proposed rules in the late 1990s intended to stop pay-to-play activities, but the issue hasn't been widely investigated by the federal government, according to Donald B. Trone, president and founder of the Foundation for Fiduciary Services, a Sewickley, Pa., organization that develops fiduciary standards for trustees, investment committees and advisers.

The conflicts can be tricky to spot. While not all consultants have relationships with firms they recommend, some receive substantial fees for various services from money managers they recommend to pension fund clients.

Consultants take in money from asset managers for services ranging from conferences to software programs. Such relationships aren't against the law, as long as they're reported. But the fees are often exorbitant, and in some cases much larger than disclosed, according to Trone.

"It's one thing to tell an investment committee member or trustee that you're receiving money for providing services to a money manager, and it's something entirely different to disclose to that same person that you're collecting tens of millions of dollars for providing those services," said Trone.

On Monday, Watson Wyatt Worldwide, Frank Russell Co., Tacoma, Wash., Mercer Investment Consulting of New York, and Wilshire Associates of Santa Monica, Calif., Segal Advisors of New York confirmed that they had received the letters.

Pension consultants who received the recent SEC letter stressed the industry wide nature of the initiative. Wilshire Associates, for example, said that "like all firms in our industry, we have received a request from the SEC and are cooperating fully."