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SEC & DOL Jointly Issue Suggested Questions for Retirement Plan Sponsors to Ask their Investment Consultants

June 2005


SEC & DOL Jointly Issue Suggested Questions for Retirement Plan Sponsors to Ask their Investment Consultants

June 2005

Last week we announced that the Staff of the U.S. Securities and Exchange Commission had released a report criticizing various practices of investment advisers who serve as pension consutants. This week the SEC and the U.S. Department of Labor have jointly published tips to assist fiduciaries of employee benefit plans in reviewing conflicts of interest of pension consutants.

The tips take the form primarily of ten questions that the SEC and DOL suggest that plan sponsors and other plan fiduciaries ask their pension consutants. We do not know how many plan fiduciaries will in fact raise these questions with their pension advisers, but we think that every investment advisory firm that provides pension consuting services shoud review the list and prepare their answers in case the questions are raised.

Where practical, a pension consutant may wish to prepare a fact sheet that sets out the answers to the questions so that the consutant can provide quick, consistent, and accurate answers if the questions are asked by a client or potential client. An even more proactive approach, assuming an adviser is well situated to address the questions, woud be to prepare a letter to clients pointing out that the SEC and DOL have recommended that these questions be asked and providing the answers, without waiting for a client or potential client to ask. In any case, inaccurate or incomplete responses to the questions coud jeopardize client relations and, possibly, resut in enforcement proceedings by reguators.

We also think that plan sponsors and other plan fiduciaries shoud review the list and determine if any of the questions are appropriate to ask their pension consutants. The DOL may feel that, in providing the tips , it has guided fiduciaries toward what the DOL considers an appropriate level of inquiry by a plan fiduciary.

The ten questions and the SEC/DOL commentary on them are set out below. The ful release is available on the SEC website at


1. Are you registered with the SEC or a state securities reguator as an investment adviser? If so, have you provided me with all the disclosures required under those laws (including Part II of Form ADV)?

SEC/DOL Comment: You can check yourself and view Part I of the firm s Form ADV by searching the SEC s Investment Adviser Public Disclosure website. Your investment adviser must furnish you with a copy of Part II of Form ADV. At present, the IAPD database contains Forms ADV only for investment adviser firms that register electronically using the Investment Adviser Registration Depository. In the future, the database will expand to encompass all registered investment advisers individuals as well as firms in every state. If you can t locate an investment adviser in IAPD, be sure to contact your state securities reguator or the SEC s Public Reference Branch.

2. Do you or a related company have relationships with money managers that you recommend, consider for recommendation, or otherwise mention to the plan for our consideration? If so, describe those relationships?

SEC/DOL Comment: When pension consutants have alliances or financial or other relationships with money managers or other service providers, the potential for material conflicts of interest increases, depending on the extent of the relationships. Knowing what relationships, if any, your pension consutant has with money managers may help you assess the objectivity of the advice the consutant provides.

3. Do you or a related company receive any payments from money managers you recommend, consider for recommendation, or otherwise mention to the plan for our consideration? If so, what is the extent of these payments in relation to your other income (revenue)?

SEC/DOL Comment: Payments from money managers to pension consutants coud create material conflicts of interests. You may wish to assess the extent of potential conflicts.

4. Do you have any policies or procedures to address conflicts of interest or to prevent these payments or relationships from being considered when you provide advice to your clients? SEC/DOL Comment: Probing how the consutant addresses these potential conflicts may help you determine whether the consutant is right for your plan.

5. If you allow plans to pay your consuting fees using the plan s brokerage commissions, do you monitor the amount of commissions paid and alert plans when consuting fees have been paid in ful? If not, how can a plan make sure it does not over-pay its consuting fees?

SEC/DOL Comment: You may wish to avoid any payment arrangements that coud cause the plan to pay more than it shoud in pension consutant fees.

6. If you allow plans to pay your consuting fees using the plan s brokerage commissions, what steps do you take to ensure that the plan receives best execution for its securities trades? SEC Comment: Where and how brokerage orders are executed can impact the overall costs of the transaction, including the price the plan pays for the securities it purchases.

7. Do you have any arrangements with brokerdealers under which you or a related company will benefit if money managers place trades for their clients with such broker-dealers?

SEC/DOL Comment: As noted above, you may wish to explore the consutant s relationships with other service providers to weigh the extent of any potential conflicts of interest.

8. If you are hired, will you acknowledge in writing that you have a fiduciary obligation as an investment adviser to the plan while providing the consuting services we are seeking?

SEC/DOL Comment: All investment advisers (whether registered with the SEC or not) owe their advisory clients a fiduciary duty. Among other things, this means that advisers must disclose to their clients information about material conflicts of interest.

9. Do you consider yourself a fiduciary under ERISA with respect to the recommendations you provide the plan?

SEC/DOL Comment: If the consutant is a fiduciary under ERISA and receives fees from third parties as a resut of their recommendations, a prohibited transaction under ERISA occurs unless the fees are used for the benefit of the plan (e.g., offset against the consuting fees charged the plan) or there is a relevant statutory or class exemption permitting the receipt of such fees.

10. What percentage of your plan clients utilize money managers, investment funds, brokerage services or other service providers from whom you receive fees?

SEC/DOL Comment: The answer may help in evaluating the objectivity of the recommendations or the fiduciary status of the consutant under ERISA.


If you have any questions concerning the tips or their possible application to your firm, please contact your reguar Tucker Ellis & West LLP attorney or any of the following:

Glenn E. Morrical 216-696-3431
Michael F. Harris 216-696-3738
David S. Lu 216-696-5590
Craig T. Gretter 216-696-2879