STAFF REPORT CONCERNING 

EXAMINATIONS OF 

SELECT PENSION CONSULTANTS 

May 16, 2005 

The Office of Compliance Inspections and Examinations, 

U.S. Securities and Exchange Commission
STAFF REPORT CONCERNING EXAMINATIONS OF 

SELECT PENSION CONSULTANTS1

May 16, 2005

Background

“Pension consultants” provide advice to pension plans and their trustees with respect to such 

matters as: (1) identifying investment objectives and restrictions; (2) allocating plan assets to 

various objectives; (3) selecting money managers to manage plan assets in ways designed to 

achieve objectives; (4) selecting mutual funds that plan participants can choose as their 

funding vehicles; (5) monitoring performance of money managers and mutual funds and 

making recommendations for changes; and (6) selecting other service providers, such as 

custodians, administrators and broker-dealers. Many pension plans rely heavily on the 

expertise and guidance of their pension consultant in helping them to manage pension plan 

assets. 

There are approximately 1,742 SEC-registered investment advisers who indicate that they 

provide pension consulting services.2

 Pension consultants vary considerably in their business 

models and in the consulting services they offer. Some are small one person operations, 

while others are large organizations that employ hundreds of staff. Some of these firms may 

be independent, “pure-play” consultants that offer pension consulting services only. Other 

firms may have started as pension consultants, but then added additional business operations 

such as brokerage and money management, often as affiliates of the pension consultant. In 

addition, broker-dealers and other types of firms have also started to provide pension 

consulting in addition to their other lines of business. Pension consultants that offer such 

other business services frequently seek to sell plan sponsors a “bundled” package of services. 

 

Investment advisers owe their advisory clients a fiduciary duty. The Advisers Act “reflects a 

congressional recognition of the delicate fiduciary nature of an investment advisory 

relationship, as well as a congressional intent to eliminate, or at least expose, all conflicts of 

interest which might incline an investment adviser -- consciously or unconsciously -- to 

render advice which was not disinterested.”3

 An adviser owes its clients a duty of “utmost 

 

1

 This is a report of the Commission’s staff and does not represent findings or conclusions of the 

Commission itself. 

2

 According to the Investment Adviser Registration Depository, as of November 2, 2004, 1,742 SECregistered investment advisers indicated that they provide pension consulting services. The Investment 

Advisers Act of 1940 (“Advisers Act”) ( Section 202(a)(11)) defines an adviser as any person who, for 

compensation, engages in the business of advising others as to the value of securities or the advisability of 

investing in securities, or who promulgates analyses or reports concerning securities. A person that advises 

as to the selection or retention of an investment manager is considered an investment adviser under Section 

202(a)(11). (See Advisers Act Rel. No. 1092 (Oct. 8, 1987).) Rules under the Advisers Act require pension 

consultants to plans having an aggregate value of at least $50,000,000 to register with the Commission 

(Rule 203A-2(b)). 

3 See S.E.C. v. Capital Gains Research Bureau, Inc., 375 U.S. 180, at 191-192 (1963). The Court noted 

concern, whenever advice to a client might result in financial benefit to the adviser – other than the 

adviser’s fee – that advice may in some way be tinged with that pecuniary interest, whether consciously or 

subconsciously motivated. 
 

good faith, and full and fair disclosure of all material facts” as well as an affirmative 

obligation “to employ reasonable care to avoid misleading clients.”4

 Thus, the Advisers Act, 

in recognition of the adviser’s fiduciary duty, requires advisers to provide disinterested 

advice, and to ensure this, requires advisers to disclose material facts.5

 Whether an adviser's 

relationships with other parties create a material conflict of interest depends on the facts and 

circumstances. 

Investment advisers registered with the SEC typically make such disclosures to advisory

clients in their Form ADVs. Part II of Form ADV is typically offered to all advisory clients 

at the beginning of the advisory relationship and once each year thereafter. Relevant 

questions in Part II of Form ADV (Items 8, 9, 12 and 13) ask the adviser to state affiliations, 

participation or interest in client transactions, brokerage transactions, and compensation for

client referrals.6

 Investment advisers may also disclose certain matters in documents other 

than Form ADV.

In addition to the disclosure required by Form ADV, all investment advisers, as fiduciaries, 

are also expected to inform advisory clients of any material conflicts of interest that may be 

specific to the particular client. Clients should have information about the pension 

consultant’s conflicts of interest in order to assess the objectivity of the advice that is or may

be provided by the pension consultant.

The new “Chief Compliance Officer” rule (Rule 206(4)-7 under the Advisers Act), effective 

on October 5, 2004, requires advisers registered with the SEC to designate a Chief 

Compliance Officer and to adopt and maintain written policies and procedures designed to

assure compliance with the Advisers Act. The release adopting the rule states that 

investment advisers should consider their fiduciary and regulatory obligations and formalize 

policies and procedures to address them.

7

 The rule requires that the policies and procedures 

 4 See Id. 

5 See Id. See also, In the Matter of Arleen W. Hughes, Exchange Act Rel. No. 4048 (Feb. 18, 1948) 

(adviser has “an affirmative obligation to disclose all material facts to her clients in a manner which is clear 

enough so that a client is fully apprised of the facts and is in a position to give his informed consent. And 

this disclosure, if it is to be meaningful and effective, must be timely. It must be provided before the 

completion of the transaction so that the client will know all the facts at the time that he is asked to give his 

consent.”). See also, In the Matter of Feeley and Wilcox Asset Management Corp., Advisers Act Rel. No. 

2143 (July 10, 2003) (“A loyal investment adviser must give disinterested advice. But... an adviser who 

has a pecuniary interest in a client’s transaction other than the agreed fee cannot give disinterested advice. 

The adviser must disclose that interest to clients or be liable under the antifraud provisions ... of the 

Advisers Act”).

6

 The Commission has proposed extensive amendments to Part II of Form ADV, including improved

disclosure of conflicts of interest relating to financial industry activities and affiliations. Proposed Item 

9.D. of Part 2, Form ADV would require an adviser to describe the practice and discuss the conflicts of

interest created when it recommends or selects other investment advisers and receives compensation 

directly or indirectly from the advisers it recommends or has other business relationships with those 

advisers. See Electronic Filing by Investment Advisers; Proposed Amendments to Form ADV, Advisers

Act Rel. No. 1862 (Apr. 5, 2000) [65 FR 20524 (Apr. 17, 2000]. 

7 Compliance Programs of Investment Companies and Investment Advisers, Advisers Act Rel. No. 2204 

(Dec. 17, 2003) [68 FR 74714 (Dec. 24, 2003]. 

2
 

be reasonably designed to prevent violations of the Advisers Act, and encompass compliance 

considerations relevant to the adviser’s business. 

Examinations

Questions have been raised regarding the independence of the advice that pension consultants 

provide in light of the fact that many pension consulting firms provide services both to 

pension plans who are their advisory clients and to money managers. This duality in many

pension consultants’ customer base may create a conflict of interest, which has the potential 

to cloud the objectivity of a pension consultant’s recommendations to advisory clients. 

Concerns exist that pension consultants may steer clients to hire certain money managers and 

other vendors based on the pension consultant’s (or an affiliate’s) other business relationships 

and receipt of fees from these firms, rather than because the money manager is best-suited to 

the clients’ needs. Such a conflict of interest can compromise the fiduciary duty that 

investment advisers owe their clients. 

Questions have also been raised regarding the extent to which pension consultants disclose 

these conflicts of interest to their clients, particularly when the pension consultant has other 

business relationships with money management firms that may compromise its ability to 

provide objective recommendations with respect to money managers.8

 

To explore the risk areas relating to pension consulting, the Office of Compliance Inspections 

and Examinations (“OCIE”) conducted focused examinations of 24 pension consultants who 

are registered investment advisers. The pension consultants examined represented a crosssection of the pension consultant community, and ranged in size (measured in terms of the 

number and size of their pension plan clients), and the type of products and services they 

offer. About half of the pension consultants examined are among the largest pension 

consulting firms, measured in terms of the assets of the plans they advise. We sought 

information regarding pension consultants’ practices with respect to: (1) the products and 

services they provide to pension plan clients and any products/services provided to money

managers or mutual funds; (2) the method of payment for the pension consultant’s services; 

and (3) the disclosure provided to the pension consultants’ clients. The period covered by the 

examinations was from January 1, 2002 to November 30, 2003. We also examined several 

money managers, as a means to view pension consultants from a distinct vantage point – that 

of those being employed based on the recommendation of a pension consultant. 

This report provides a factual summary of these examinations. 

Summary 

Our findings, based on our examinations of 24 pension consulting firms, are summarized 

below. 

 8

 Plan trustees themselves may face significant conflicts of interest. Plan trustees may have allegiance both 

to the plan and its beneficiaries, and to the plan sponsor that appoints them. Plan trustees may receive 

economic benefits directly or indirectly from plan service providers. Plan trustees may also seek to reduce

costs borne by the plan or plan sponsor by using directed brokerage commissions to pay plan service 

provider fees. 

3
 

 More than half of the pension consultants or affiliates reviewed (13) provided 

products and services to both pension plan advisory clients and money managers 

and mutual funds on an ongoing basis.9

 For some of these consulting firms, the 

compensation received from money managers comprised a significant part of their 

annual revenue. 

3⁄4 Thirteen consultants host conferences for their pension plan advisory 

clients, who are typically invited to attend without charge. Of these 13, 

eight also allow money managers to attend these conferences for a fee. 

Fees paid by money managers to attend these conferences go towards either 

the cost of producing the conference or the travel costs of the pension plan 

trustees attending the conference. Some pension consultants also operate 

recurring training courses for plan sponsor clients and staff of money

managers. Typically, money manager employees are charged tuition or an 

annual membership fee, and trustees and other employees of pension plan 

clients are allowed to participate without charge. 

3⁄4 Ten consultants sell software programs to money managers, which 

analyze the performance of clients’ accounts. The cost of such software 

products can run as high as $70,000 per year depending on the function of the 

product. 

 A majority of the pension consultants examined (14, or 58%) have affiliated 

broker-dealers or relationships with unaffiliated broker-dealers. 

3⁄4 Having an affiliated broker-dealer allows the pension consultant to 

obtain payment for its services with brokerage “commission recapture”

programs. Recapture programs allow pension plan advisory clients to direct 

that a portion of the brokerage commissions paid by the plan be rebated to the 

plan, or be used to pay the pension consultant’s fee. Pension plans may

desire to pay the consultant’s fees in this way because the fees may not be 

itemized and are included in the overall brokerage commissions paid by the 

plan. These arrangements are not well-documented, and raise many issues,

including the extent to which plan assets may not be receiving “best 

execution” because their trades are directed to the broker that provides these

rebates. Concerns also exist that, by paying for the consultant’s fees with the

plan’s brokerage, plans may overpay for the pension consultant’s services 

because the directed brokerage arrangements may not be capped to terminate 

when fees due a pension consultant have been paid in full. In addition, 

concerns exist that these arrangements may provide an incentive for a pension 

consultant to recommend an active trading strategy, because the pension 

consultant or its affiliated broker may receive more money in commission 

payments.

 9

 Thirteen pension consultants actively provided products and services to money managers and mutual

funds on an ongoing basis, and six others had one-time only, or very limited, business

relationships/arrangements with money managers during the inspection period. 

4
 

3⁄4 Two pension consultants have brokerage referral arrangements with 

unaffiliated broker-dealers that do not appear to be disclosed. In these 

arrangements, the pension consultant refers its pension plan clients to the 

broker-dealer to execute brokerage transactions, and the broker-dealer then 

provides payment to the pension consultant in amounts based on the amount 

of commission dollars the broker-dealer receives from the referred plans. It 

does not appear that these pension consultants disclose to clients that they

receive payment from the broker-dealer contingent on the amount of 

transactions referred.

3⁄4 These relationships with broker-dealers also provide a mechanism for 

money managers to compensate pension consultants, perhaps as a way to 

curry favor with the pension consultant. The staff’s concern is that money 

managers may direct trades for clients with no relationship to the pension 

consultant to the pension consultant’s affiliated broker-dealer. 

 We could not fully analyze whether pension consultants “skewed” their 

recommendations to favor certain money managers. Most consultants did not 

maintain information in a format that would allow us to correlate total payments 

made by money managers to the pension consultant or its affiliates, and the number 

of times money managers were recommended to clients. 

3⁄4 Of the six consultants where data allowed for this analysis, we found 

indications that three had recommended money managers who purchased 

products and/or services from the pension consultant more frequently than 

money managers that did not purchase products from the pension consultant.

 Many pension consultants have affiliates that also provide services to pension 

plan clients. These relationships create disclosure and conflict of interest issues 

that have not been addressed by pension consultants.

3⁄4 More than a third of the pension consultants examined (9, or 38%)

employ advisory representatives that are also registered representatives 

of a broker-dealer. These “dual-hatted” employees act both as a pension 

adviser and as a broker-dealer representative. They are typically

compensated with commissions paid on trades placed by the client through 

the pension consultant’s affiliated broker-dealer firm. In these cases, not all 

pension consultants disclose that that their employees may receive 

compensation based on the volume of securities transactions executed by the 

client. 

3⁄4 Based on the recommendation of their pension consultant, many pension 

plan clients choose to utilize an affiliate of the pension consultant to 

provide various services, including investment management, brokerage 

execution, and transition management. Where the pension consultant is 

making recommendations that are not disinterested (i.e., that the client utilize

a service provided by an affiliate of the pension consultant), the pension 

consultant has a duty to disclose its conflicts to the client. 

5
 

 Of the 19 consultants or their affiliates that provided products/services to money 

managers, three (or 16%) provided no disclosure of these other services, and 16 

(or 84%) provided limited disclosure.

10 

3⁄4 With respect to the pension consultants that do provide disclosure, it 

does not clearly indicate that providing products/services to money 

managers may create a conflict of interest for the consultant, or it is not 

specific enough for a reasonable person to discern the potential harm of 

the conflict of interest. That is, some pension consultants disclose 

generically that various services are provided to money managers (e.g., “the 

firm also provides performance measurement and investment product review

to money manager clients”), and require the advisory client to infer that the 

consultant receives compensation from money managers. Pension 

consultants typically do not disclose to current and prospective pension plan 

clients that they receive compensation in various forms from the same money 

managers that the consultant may recommend to the client. Only one pension 

consultant made client-specific disclosure that it had provided products and 

services to the same money managers it was recommending to a client (there 

was no disclosure suggesting the dollar amounts involved in these 

arrangements, which might indicate the magnitude of the conflict to a pension 

plan advisory client). 

 Many pension consultants do not consider themselves to be fiduciaries to their 

clients. Many pension consultants believe they have taken appropriate actions to 

insulate themselves from being considered a "Fiduciary" under ERISA. As a result, it 

appears that many consultants believe they do not have any fiduciary relationships 

with their advisory clients and ignore or are not aware of their fiduciary obligations 

under the Advisers Act.

 Many pension consultants did not maintain policies and procedures that were 

tailored to the nature of their business. Specifically, consultants did not maintain 

procedures concerning how they prevent or manage conflicts of interest in their 

activities or governing disclosure of conflicts to clients. Since this examination 

sweep was initiated however, several pension consultants have indicated that they

have taken steps to eliminate or mitigate conflicts of interest, including by closing or 

selling business lines that provided services to money managers, or creating 

information barriers between consulting and other business lines.11 We are aware of 

only one pension consultant that has altered its disclosure to clients to include clientspecific disclosure of the payments received by the pension consultant or its affiliates 

from the money managers it is recommending. 

 10 As noted, thirteen consultants had ongoing conflicts of interest, and six consultants had one-time-only or

very limited business relationships with money managers during the inspection period. 

11 Because these information barriers may have been imposed after our examinations, we did not evaluate

whether they were effective. 

6
 

 Money managers appear to have relationships with multiple consultants, appear 

to purchase overlapping products from more than one consultant, and are 

recommended by those consultants to plan sponsors. It appears that many money

managers do not disclose their relationships with consultants to their pension plan 

clients to whom they are recommended by those consultants. 

Given the examination findings, we conclude that consultants should enhance their 

compliance policies and procedures to include those policies and procedures that will ensure 

that the adviser is fulfilling its fiduciary obligations to its advisory clients. As noted, pension 

consultants that are registered investment advisers are now subject to the new “Chief 

Compliance Officer Rule” (Rule 206(4)-7 under the Advisers Act) that requires advisers to 

consider their fiduciary and regulatory obligations under the Advisers Act and to formalize 

policies and procedures to address them.

12 In adopting the rule, the Commission stated that 

“[e]ach adviser, in designing its policies and procedures, should first identify conflicts and 

other compliance factors creating risk exposure for the firm and its clients in light of the 

firm’s particular operations, and then design policies and procedures that address those 

risks.”13 Given the activities of pension consultants, such policies/procedures might include, 

for example: 

 Policies and procedures to ensure that the firm's advisory activities are insulated 

from its other business activities, to eliminate or mitigate conflicts of interest in 

its advisory activities. Such policies and procedures would include those governing 

the process used to identify and/or monitor money managers or mutual funds for an 

advisory client, to prevent considerations of a money manager’s or mutual fund’s

other business relationships with the consultant or its affiliates; 

 Policies and procedures to ensure that all disclosures required to fulfill fiduciary 

obligations are provided to prospective and existing advisory clients, particularly

regarding material conflicts of interest arising from arrangements between the 

consultant and its affiliates and the money managers and mutual funds that the 

consultant recommends to a client during a manager search or for whom the 

consultant is providing ongoing monitoring services. Policies/procedures should be 

designed to ensure adequate disclosure concerning the consultant’s compensation, 

including when the pension consultant receives compensation from brokerage 

transactions from advisory clients or money managers; and 

 Policies and procedures to prevent conflicts of interest or disclose material 

conflicts of interest with respect to the use of brokerage commissions, gifts,

gratuities, entertainment, contributions, donations and other emoluments provided to 

clients or received from money managers. 

 

* * * * * * * *

 12 Compliance Programs of Investment Companies and Investment Advisers, Advisers Act Rel. No. 2204 

(Dec. 17, 2003) [68 FR 74714 (Dec. 24, 2003]. 

13 See Id.

7