Chattanooga Probing UBS, Morgan Pension Consulting

April 23, 2004 ( - Chattanooga, Tennessee officials are investigating the performance of UBS Financial Services and Morgan Stanley as consultants to its $180-million pension fund amid a larger federal probe into possible pension consulting conflicts of interest.

David Eichenthal, Chattanooga city finance director and chairman of the pension fund board, said the city has retained former U.S. Securities and Exchange Commission (SEC) attorney Edward Siedle to look into the firms’ activities, Dow Jones reported.

Eichenthal declined to comment on the exact nature of the review, but said Siedle’s work with a nearby pension fund convinced Chattanooga to hire him. Specifically, Siedle had a hand in winning one of the few known settlements related to conflicts of interest in the pension consulting arena, a $10.3 million payment by UBS to the Metropolitan Government of Nashville and Davidson County in 2002 (See  Conflict Of Interest—Or Politics As Usual? ). UBS was a consultant to Nashville’s pension fund.

“We were aware of his work in Nashville and with some other funds, and we thought he would be appropriate for the type of review we were looking for,” Eichenthal told Dow Jones.

The city’s probe began several months ago and is expected to wrap up end of the year. UBS Financial, then known as UBS PaineWebber, worked with the Chattanooga fund between 1996 and 2000, while Morgan Stanley held the position from 2000 to 2003. “The purpose of the review is to go back and look at the plan’s prior performance as part of an overall effort of the board to take stock,” Eichenthal said.

Siedle started the Nashville probe after KPMG raised a number of concerns about possible conflicts of interest. For example, it noted that UBS was paid by Nashville in brokerage commissions, and had “provided the board with misleading information, resulting in Board decisions that generated higher commissions.”

Alleged conflicts by consultants can take several forms, but they all center on the powerful influence consultants wield over investment officials at pension funds. These officials – mostly at public funds – rely heavily on their consultants to tell them which money managers to hire. In turn, the argument goes, money managers feel pressure to “pay to play,” or give kickbacks of various forms to consultants in return for the new business.

A big concern is that some consultants may direct above-market brokerage trades to their affiliates, collecting so-called “soft dollar” payments that can add up to huge sums that go unreported as revenue.

The SEC kicked off its pension consulting industry probe with a December 12 letter to many investment advisory firms, seeking a wide range of information on their activities during the period between January 1, 2002, and November 30, 2003 (See   SEC Looks At Consultant, Pension Fund Relationship ). The SEC explained it is “examining the practices, compensation arrangements and disclosures of consultants that provide services to sponsors of defined benefit and defined contribution pension plans or other market participants.”

Of particular interest to the SEC are “practices with respect to advice regarding the selection of investment advisers to manage plan assets; selection of other service providers such as administrators, custodians, investment research firms and broker-dealers; and services other than investment consulting provided to plan sponsors, investment advisors and mutual funds.”