DOL Warns of Further Scrutiny of Investment Advisers and Pension Consultants

The Department of Labor (“DOL”) recently announced the launch of its newest national project, the Consultant/Advisor Program (“CAP”), through its Employee Benefits Security Administration (“EBSA”) enforcement website. According to the release, CAP will focus on the receipt of improper, undisclosed compensation by pension consultants and other investment advisers. EBSA’s investigations will seek to determine whether the receipt of such compensation violates ERISA because the adviser/consultant used its position with a benefit plan to generate additional fees for itself or its affiliates. EBSA expressed its intent to investigate individual plans in order to address such potential violations as failure to adhere to investment guidelines and improper selection or monitoring of the consultant or adviser. The CAP will also seek to identify potential criminal violations, such as kickbacks or fraud.

CAP is the EBSA’s response to a May 16, 2005, SEC study, entitled Staff Report Concerning Examinations of Select Pension Consultants. The SEC Report summarizes an examination sweep into the practices of pension consultants, which focused on any conflicts of interest in their operations, and was initiated as part of the SEC’s program to identify and investigate risks in the securities industry.

The Office of Compliance Inspections and Examinations conducted a study of 24 pension consultants over a 23 month period. The findings revealed that there was indeed cause for concern because over 50 percent of the consultants in the study provided services to both clients and to money managers. Providing such services presents a conflict of interest in which the consultant stands to gain substantially through “brokerage commission recapture programs.” When offering services to both pension clients and to money managers, consultants are obligated under the Advisers Act to fully disclose all potential conflicts of interest to their clients. The SEC Report revealed, however, that most consultants do not fully disclose other business activities and some did not disclose any additional business activities. Of those consultants that engaged in disclosure, most of the disclosure was bogged down with confusing language, such that an individual with common-knowledge could not understand the potential ramifications of the disclosure. The SEC Report, therefore, concluded that consultants must have better policies and procedures in place so that consultants are inline with their fiduciary obligations to their clients.

The SEC Report, CAP and the recent spate of 401(k) lawsuits signal a widespread concern regarding the performance of consultants and a growing anti-consultant sentiment. Consequently, plan sponsors and co-fiduciaries will be expected to further scrutinize the adviser’s performance, conflicts and disclosures thereof in order to meet their duties to prudently select and periodically monitor plan consultants and investment advisers. For more information on fulfilling these duties, please feel free to contact Jason C. Roberts at Edgerton & Weaver, LLP.