Warning shot to consultants
May’s report by the Securities and Exchange Commission (SEC) into the activities of US pension consulting firms could see the industry enter a period of regulatory uncertainty.
The SEC said that “some pension consultants appear to have erroneously concluded that they are not fiduciaries to their clients”.
After all, why should pension consultants be immune when regulators have already turned their attention to the investment banks (equity research) and money managers (market timing)? The SEC and New York Attorney General Eliot Spitzer seem locked in a battle to demonstrate how tough they can be with finance firms. The losers in that contest could be the newly exposed consultants.
“Its clear from our examinations that many pension consultants must do more to identify conflicts of interest in their activities, and to take steps to mitigate or eliminate those conflicts,” said Lori Richards, director of the SEC’s Office of Compliance Inspections and Examinations.
“We are releasing this report to alert the pension consultant community to these findings and, based on what we found, we urge pension consultants to take a hard look at their disclosure and make improvements. And, when a consultant holds itself out as providing unbiased, objective advice, that obligation must be met.”
The eight-page report makes pretty damning reading and is a signal that the powers that be - at least in the US - have woken up to some of the questionable practices that have been standard practice for too long. There has long been anecdotal talk of conflicts of interest and pay-to-play arrangements. But it’s never really been out in the open, not really a polite topic of conversation.
Now the august SEC has lifted the lid and found, well, a lot of things going on that are not always necessarily in the best interests of pension fund beneficiaries. Indeed one of the worst criticisms the SEC has is that advisers don’t seem to think they have a fiduciary duty to scheme members.
It’s important to note that the report was a factual assessment by staff of the SEC’s Office of Compliance Inspections and Examinations and does not represent findings or conclusions of the commission itself. It does not recommend any further actions, just describes the situation as they found it. It’s assumed that this is a shot across the bows of the consultants, to give them a warning to clean up their act.
Reaction to the report was distinctly muted in the consultant community. While not exactly a crisis, the industry is under scrutiny as never before. And the consultants - all of whom would no doubt list ‘communication’ as a vital element of business success - seem unsure of how to proceed.
The only firm that has acted in response to the report seems to be Russell, which said it would now provide US consulting clients with a document that addresses potential conflicts of interest.
The worrying aspect to this is that the firms could be looking at this as a reputational issue to be managed and not as an opportunity to re-assess their practices to benefit clients. The response shouldn’t be: ‘Oh no, we’ve got the SEC on our backs, how do we deal with this?’ Rather: ‘OK, they’ve made some good points, let’s sort this out.’
One of the problems may be that the SEC report lacks a specific focus. No names are mentioned as wrong doers, for example and it is very wide-ranging. There has been talk of fines being imposed, but nothing concrete has emerged.
All this injects a sense of uncertainty into proceedings. In an industry with enough problems as it is, this element alone is unwelcome.
As Watson Wyatt pointed out, it was not in a position to say more than that supported of the SEC’s goal of more disclosure. It said: “At this point, however, we are not in a position to say more, as we have not yet received final word from the SEC about the status of their examination.” So US consultants could be entering a period of ‘planning blight’.
There is no suggestion in the SEC report of any conflicts of interest in the UK and Europe. Industry figures contacted by IPE have rejected the idea and there is no evidence whatsoever of such issues in Europe.
But some observers suggest that such conflicts could well exist in Europe – especially considering that some of the dominant players are indeed owned by US firms.
Europe does not yet have a continent-wide enforcer like the SEC. And no regulator or supervisor in Europe has ever reviewed the pension consulting market in the same depth as the SEC. The question is – if you looked in Europe, what would you find?