Fiduciary Expert Applauds SEC Pension Consultant Probe Report

Donald Trone, president of the Foundation for Fiduciary Studies, a Pittsburgh, Pennsylvania-based fiduciary study organization, predicted that the report will prompt needed change in the way pension consultants disclose potential conflicts in their business activities. The report concluded that the pension consultant industry was rife with potential conflicts of interest – arising in part from consultants’ relationship with money managers – and that many consultants were doing an insufficient job disclosing those potential conflicts to their clients. (See  SEC Calls for Pension Consultant Disclosure Reforms).

“I think it’s an excellent report that is going to have far more impact on the industry than what people are getting as a first impression,” Trone told PLANSPONSOR.com. “We’ve known about these problems for years, but the industry wasn’t ready to take corrective action. This will be the catalyst for things to get fixed.”

Trone gave the SEC particularly enthusiastic kudos for its observation of the need for money managers to also be expected to disclose potential conflicts of interest. Calling the SEC observation “very bold,” Trone commented in an analysis of the report released Tuesday: “The disclosure by money managers of the potential conflict of interest probably will be one of the best deterrents to the continuance of pay-to-play schemes,” Trone wrote. “Money managers are a better line of defense against pay-to-play practices than trustees. Many money managers resent the pressure put on them by certain consultants to purchase ‘services.’ Now, with this report, money managers will be empowered to ‘Just say no.'”

One problem with the SEC inquiry was that it only covered January 2002 to November 2003, Trone said, when it really needed to examine 10 years worth of operations to get more of an idea about whether conflicts of interest were not only affecting money manager hiring but manager retention as well. Trone called for securities regulations to be changed to require that records be retained for 10 years instead of the current five.

Trone said the SEC inquiry also suffered because investigators only focused on 24 pension consultants who are also registered investment advisors (RIAs). In reality, Trone asserted in his written analysis, there are more than 1,742 firms providing investment consulting services to pensions. Consultants are actually regulated by a variety of federal and state agencies, he pointed out.

“This examination underscores the need to have all pension and investment consultants (and persons using like-sounding terms: wealth manager, financial advisor, estate planner, financial consultant, and private banker) to be required to register under one regulatory scheme,” Trone said in his analysis. “How else can a critical profession, such as investment consulting, be properly regulated? “

Finally, Trone said the SEC needs to develop a replacement for Form ADV Part II – the document used by both money managers and investment consultants to disclose conflicts to the SEC. Wrote Trone:   “It is highly recommended that the SEC create a new form exclusively for pension/investment consultants, so that the unique attributes of the consultant’s services can be more clearly disclosed.”