How to avoid conflicts of interest and to stay on the SEC’s good side.
Consultants advise clients on the improvement and management of business processes, including HR administration. Recently, the Securities and Exchange Commission (SEC) has focused its attention on pension consulting companies. The SEC is interested in pension consultants who: 1) identify investment objectives or restrictions; 2) select money managers to manage plan assets; 3) select mutual funds that plan participants can choose as their funding vehicles; 4) monitor performance of money managers or mutual funds and recommend changes; or 5) select other service providers, such as custodians, administrators, and broker-dealers. According to the SEC, approximately 1,750 consultants (registered ginvestment advisorsh) provide investment management advisory services to pension funds.
In a gperfect storm,h other advisors, managers, and potentially even HRO providers might attract the same regulatory scrutiny. Such independent contractors might include those who select providers that engage in any listed SEC-related advisory functions, or act as providers under an HRO agreement to monitor, evaluate, select, terminate, or otherwise gmanageh such functions. These other pension advisors may wish to consider the impact of emerging SEC interest in pension fund administration.
Under the law governing pension fund administration, persons who make decisions in the investment function are treated as fiduciaries. A fiduciary has a number of special duties that are more stringent than those of an independent contractor. A fiduciary has to avoid placing his or her own interests ahead of the clientfs, warn the client of circumstances that may impair the fiduciaryfs loyalty to the client, and where the fiduciaryfs independence is compromised, warn its client and be subject to termination for breach of fiduciary duty.
Consultants who are investment advisors must register with the SEC under the Investment Advisers Act of 1940, as amended, and comply with its rules governing fiduciary duty. Courts have been eager to apply this standard. Today, the SEC has warned that gpension consultantsh (who may either be managed by HR outsourcers or replaced by HR outsourcers) may be subject to fiduciary duties as investment advisors and under ERISA. Common law, ERISA, and the Investment Advisers Act impose penalties for breach of fiduciary duty.
In May 2005, the SEC released a report that identified a number of conflicts of interest by pension fund advisors. The report concluded that, in some cases, pension fund advisors have exposed themselves to conflicts of interest by supporting the marketing functions of investment managers. Such support may include asking the investment manager to pay money to sponsor an industry conference at which clients can be exposed to business development activities of investment managers. Other ggiftsh might include entertainment, contributions, or donations. Any gpay to playh support function may impair the independent judgment of the pension consultant in the selection and supervision of pension investment managers and thus violate a contractual or fiduciary duty. At the extreme, traditional business relationships involving the promotion of industry conferences might be suspect as a source of a possible conflict of interest.
In June 2005, the SEC released a questionnaire on what plan fiduciaries should identify for SEC-type pension consulting services. The questionnaire helps ERISA fiduciaries identify possible conflicts of interest and facilitates their own exercise of fiduciary duty in the due diligence and management functions. The SECfs report and questionnaire underscore the need for vigilance on conflicts of interest by all parties to any HR outsourcing.
The regulatory and legal landscape is changing. Consultants, ERISA plan administrators, and other ERISA fiduciaries, company executives, and providers of HR or F&A services should be alert to the new environment. A new standard is being set in the area of conflicts of interest. Prudent managers will review this changing landscape and take appropriate compliance action.
BEST PRACTICES FOR PENSION MANAGERS MANAGING CONSULTANTS:
Add conflicts of interest to due diligence checklists, including transparency
of consultantsf or service providersf extended relationships.
Identify policies and procedures that consultants and service
providers use to mitigate conflicts of interest.
Check if there is a Chief Compliance Officer.
Require a written consulting services agreement including confidentiality,
ethical duties, periodic written reports on conflicts of interest,
and continuation of policies and procedures governing conflicts.
Address conflicts of interest in clauses governing scope of work,
termination, and performance metrics.
Evaluate and allocate ERISA fiduciary responsibilities.
Source: Bierce & Kenerson, P.C.
