The U.S. Securities and Exchange Commission (SEC) recently released the results of a study of 24 investment consultants. The study uncovered numerous instances of undisclosed or poorly disclosed conflicts of interest among the nation’s largest pension consulting firms. Although the study doesn’t name any of the implicated consultants, SEC officials have confirmed that many of the consulting firms examined face legal actions, fines and “deficiency letters”. SCLC first discussed this issue in a June 2004 Fiduciary Forum article.

Specifically, the SEC’s sweeps found:

• More than half of the consultants or their affiliates examined regularly provided services and products to both pension funds and money managers/ mutual funds, and many earned a “significant part of their annual revenue” from dealings with the latter.

• More than half host investment conferences where money managers and their clients are both present. The money managers typically pay thousands of dollars for such conferences, while plan sponsors attend for free.

• Ten consultants sell performance analysis software to money managers for fees as high as $70,000 annually.

• Most of the consulting firms have affiliations with brokerage houses or relationships with outside broker-dealers that have raised concerns about whether clients are getting best execution on trades, whether pension plans are paying too much in fees, and whether the pension plans’ assets are being traded more frequently than they should.

• Two consulting firms also had relationships with unaffiliated brokerage firms that they did not disclose to their clients. These relationships might provide a way for money managers to indirectly reward consultants for recommending their services.

• Some consultants recommended money managers that purchased products and services from them more frequently than they recommended those that did not.

• Many of the consulting firms have affiliates that provide services, such as investment management, performance analysis or transition management, to pension plans. Pension fund executives aren’t always told about these relationships or about the fees consultants earn as a result.

• Many consultants failed to maintain policies and procedures that enable them to prevent or manage conflicts of interest.

Read a Forbes article on the topic.

Download the SEC Report in pdf form.