Regulators Put Out Consultant Conflict of Interest Guidance

June 1, 2005 ( - In the wake of a Securities and Exchange Commission (SEC) warning about potential conflicts of interest among investment consultants, federal regulators have released a series of suggestions on how plan sponsors can deal with the conflict issue.

The US Department of Labor (DoL) and the SEC put out the  10 suggestions in an effort to help plan fiduciaries better review consultants’ conflicts of interest. Officials said in  a news release from both agencies that the tips address issues raised in  the SEC report . The SEC asserted in the document that the investment consultant industry is rife with potential conflicts of interest – many of which are never properly disclosed to clients (See  SEC Calls for Pension Consultant Disclosure Reforms ).

“The tips we are releasing today will help plan fiduciaries evaluate the objectivity of advice and recommendations furnished by their pension consultants,” said Ann Combs, assistant DoL secretary of labor for employee benefits security. “Fiduciaries must be provided the information necessary to ensure that advice is objective and not influenced by revenue sharing and other arrangements pension consultants may have with other service providers.”

The questions regulators suggest plan sponsors ask their consultants include:

  • Are you registered with the SEC or a state securities regulator as an investment adviser? If so, have you provided me with all the disclosures required under those laws?
  • Do you or a related company have relationships with money managers that you recommend, consider for recommendation, or otherwise mention to the plan for our consideration? If so, describe those relationships?
    “When pension consultants have alliances or financial or other relationships with money managers or other service providers, the potential for material conflicts of interest increases, depending on the extent of the relationships,” regulators wrote. “Knowing what relationships, if any, your pension consultant has with money managers may help you assess the objectivity of the advice the consultant provides.”
  • Do you or a related company receive any payments from money managers you recommend, consider for recommendation, or otherwise mention to the plan for our consideration? If so, what is the extent of these payments in relation to your other income (revenue)?
  • Do you have any policies or procedures to address conflicts of interest or to prevent these payments or relationships from being considered when you provide advice to your clients?  “Probing how the consultant addresses these potential conflicts may help you determine whether the consultant is right for your plan,” the regulators wrote.
  • If you allow plans to pay your consulting fees using the plan’s brokerage commissions, do you monitor the amount of commissions paid and alert plans when consulting fees have been paid in full? If not, how can a plan make sure it does not over-pay its consulting fees?
  • If you allow plans to pay your consulting fees using the plan’s brokerage commissions, what steps do you take to ensure that the plan receives best execution for its securities trades? “Where and how brokerage orders are executed can impact the overall costs of the transaction, including the price the plan pays for the securities it purchases,” regulators commented.
  • Do you have any arrangements with broker-dealers under which you or a related company will benefit if money managers place trades for their clients with such broker-dealers?
  • If you are hired, will you acknowledge in writing that you have a fiduciary obligation as an investment adviser to the plan while providing the consulting services we are seeking?
  • Do you consider yourself a fiduciary under ERISA with respect to the recommendations you provide the plan?
  • What percentage of your plan clients utilize money managers, investment funds, brokerage services or other service providers from whom you receive fees?