SEC Issues Warning About Pension Consultants With Undisclosed Financial Ties

By Webster Hubbell

On May 16, 2005 the Securities and Exchange Commission issued a study finding that many firms that provide advise to pension plans appear to have undisclosed financial ties. Lori Richards, Director of the agency’s Office of Compliance and Examinations, said, “ We do think these findings are quite serious.” A copy of this study can be obtained by going to the SEC’s website http://www.sec.gov/.

Over a year ago The McLaughlin Company warned that Pension Funds should be wary of consultants, advisors, and actuaries who were “wearing multiple hats.”[1] The SEC goes much further raising concerns that only a few consultants informed pension-plan clients of their financial relationships. Ms. Richards described disclosure information as ranging from “none to very poor.” She said the SEC’s aim is to prompt fuller disclosure by consultants and more and better questions by pension plan sponsors and trustees.

The report on 24 pension consultants primarily dealt with ties the consultants had with money managers, but the principles of disclosure and conflicts of interest apply to all pension advisors and consultants. Ms. Richards did not reveal any of the names of the 24 consulting firms but acknowledged that a “large number of the firms have been referred to the SEC’s enforcement division for investigation and possible legal action. Ms Richards said, “ It is my hope and expectation that these firms will be dealt with in the enforcement context.” Two firms that have acknowledged that they are part of the study and report are Segal Advisors and Mercer Investment Consulting, Inc, the pension-advising unit of Marsh & McClellan Cos.


The study states that Pension Funds should have information about the Fund’s consultant’s real or potential conflict of interest in order to assess the objectivity of the advice that is or may be provided by the consultant. In The McLaughlin Company’s warning we used as an example of a clear conflict of interest an actuary, charged with evaluating the financial health of the fund, helping broker the fund’s fiduciary insurance thus “advocating” the financial health of the fund. The study raises additional concerns that consultants may steer clients based on other business relationships stating, “Such a conflict of interest can compromise the fiduciary duty that the … advisors owe their client.”

The study also raises concerns about the extent of conflict of interest disclosure. In our actuarial example, questions now must go beyond fees received for brokering insurance, to whether the actuarial firm has other business relationships with the insurance company it recommends and the extent and nature of those relationships. Also whether the actuarial firm has subsidiaries that advise pension funds and the nature and extent of those subsidiary’s financial ties to money managers and other consultants. Mere separate corporate entities with common ownership are nothing more than form over substance. Of course, the study contains many other examples of conflicts and non-disclosures. The McLaughlin Company anticipates that underwriters for fiduciary coverages will be soon be asking questions about consultants with multiple ties especially when the insurance broker is providing “other services.” Underwriters who determine that consultants are providing multiple services or have financial ties to other consultants may be forced to increase premiums to cover the plan’s increased exposure.

The McLaughlin Company believes that each of its clients is entitled to an insurance representative free of any conflicts of interest. Plan trustees have a duty to ask their insurance brokers do you have potential conflicts of interest or financial ties to other consultants. Or simple questions such as are you licensed to sell this service and do you have errors and omissions insurance for this “other service.” The McLaughlin Company has been dedicated to providing, first and foremost, excellent and ethical service to each and every one of its clients. Pension Plan’s fiduciary insurance is very important to the Funds and its trustees. The placing of such complex and important insurance needs to be handled professionally, and not as an afterthought or part of a package of “other services” provided by a plan consultant. We welcome the opportunity to discuss this further at any time and we appreciate you considering The McLaughlin Company for your insurance needs.




[1] To obtain a copy of the article Are Your Consultants and Advisors Wearing Multiple Hats, Lest They doubt Our Sincerity go to http://www.mclaughlin-online.com/.