Trustees “First Do None Harm.”

Despite repeated warnings from the DOL, SEC and other regulators, professional fund consultants persist in trying to provide multiple and conflicting services including procurement of regulated products (i.e. securities, mutual funds, insurance, etc.) as part of a “total package of services” or as an “accommodation.”

If this pitch persuades your fund to hire one of these consultants, then at a minimum a "prudent trustee" must:

1. Find out if the consultant is receiving a commission (both an up front commission and/or eligible for a contingent commission) from any vendor. Is such an arrangement inconsistent with your contract with the consultant?

2. Receive a copy of the individual consultant's license to sell any regulated product for the relevant jurisdiction. Do not accept the statement, “that we run it through our ________ office.” Ask, “is your company licensed to sell this product in our state.” Obtain a copy of the license.

3. Review the consultant's professional negligence policy to make sure it covers the sale of regulated products such as securities, mutual funds, insurance, etc., not just professional errors and omissions. Check with your Fund’s fiduciary carrier whether the proposed arrangement creates additional risk. Even if the arrangement is covered, it may be and is perhaps costing the Fund more in the way of additional premium.

4. Most importantly, obtain from the consultant a hold harmless agreement that protects your Fund should a claim be made against the Fund or any trustee as a result of a potential conflict of interest. Ask for language like the following:

“Consultant agrees to hold Fund, its trustees, its employees and its agents harmless from any and all claims, lawsuits, causes of action, etc that might arise, regardless of its origin, that asserts, claims, alleges or accuses the Fund, its trustees, its employees, its agents, and or its consultants for acting improperly or imprudently by reason of the Fund allowing Consultant to procure for the Fund regulated products while performing other services for the Fund.”

The safest approach for a prudent Trustee is, of course, to avoid potential conflicts of interest; but if you can’t resist the lure, protect your Fund and yourself. Be prepared to answer the following question, “What steps did I, as a prudent trustee, take to make sure that the Funds assets were not exposed by this arrangement.” If the answer is simply, the “consultant said it was not a problem,” you are likely to have failed the “prudent trustee” rule.