DOL and SEC Advise Plan Fiduciaries on Selection and Monitoring of Plan Investment Consultants 
July 11, 2005

Pension plan sponsors and other plan fiduciaries often engage investment advisers to advise them on matters ranging from tracking a plan's investment performance to selecting money managers and other service providers for the plan. The Department of Labor (the "DOL") and the Securities and Exchange Commission (the "SEC") recently released reports cautioning plan fiduciaries to be aware of undisclosed conflicts of interest that may arise in a relationship with an investment adviser that also provides pension plan consulting services ("investment consultant"). The agencies also provided tools for use by plan fiduciaries in selecting and monitoring investment consultants and evaluating the objectivity of their recommendations.

The SEC staff report specifically probed whether investment consultants recommend certain money managers and other vendors based on the consultant’s relationship with or fees received from the money manager rather than the needs of the plan fiduciary client. Among other things, the staff report found that more than half of the investment advisers it examined had both plan fiduciaries and money managers as clients, and many of those with a dual client base provided their money manager clients with access to their fiduciary clients for a fee. The report also found that a majority of consultants examined had relationships with broker-dealers and corresponding fee arrangements that may or may not be disclosed to the fiduciary clients. Finally, the SEC staff report noted that many investment consultants did not believe they owed a fiduciary duty to their clients, despite such a mandate under the law.

Based on the SEC staff report findings, the DOL and SEC devised a set of questions to assist plan fiduciaries in teasing out potential conflicts of interest when selecting plan investment consultants and evaluating the objectivity of the recommendations they provide. These questions include:

• Is the consultant registered with the SEC or state securities regulator as an investment adviser, and if so, has it disclosed everything required under those laws, including Part II of Form ADV (the part of the form an investment adviser must file to register with the SEC that discloses information about its business practices, fees and potential conflicts of interest)?
• Does the consultant (or a related company) have relationships with money managers that it recommends, and if so, what is the nature of the relationship?
• If the consultant allows plans to pay consulting fees using the plan's brokerage commissions, what steps does the consultant take to ensure that the plan receives best execution for its securities trades?
• Does the consultant consider itself an ERISA fiduciary with respect to the recommendations it provides the plan?

These questions, however, are merely a tool to help plan fiduciaries understand the relationships and practices that may influence an investment consultant's recommendations. In its report, the SEC noted that whether an investment consultant's relationships with other parties creates a material conflict of interest depends on the facts and circumstances. It is important to enter into a dialogue with a prospective or existing investment consultant to make certain it acknowledges and understands its obligations as a fiduciary and to ensure that its other business affiliations do not taint the advice it provides.

You can access the DOL’s report, which includes the complete set of questions, at http://www.dol.gov/ebsa/newsroom/fs053105.html. If you have questions about the fiduciary obligations of an investment consultant or would like additional information about the SEC and DOL reports, please contact Anne Sherman at asherman@poynerspruill.com or 919.783.2806.