The federal investigation of Alan B. Bond for alleged fraudulent trading activities should leave a number of pension sponsors with more than red faces. The alleged activities might have cost their pension funds money. The alleged activities could even cost their trustees money, if they are found to have failed in their fiduciary duty.
The investigation also should serve as a timely warning to plan sponsors and their consultants that they must not become complacent in their hiring and monitoring of money managers.
It has been years since there has been a major scandal involving a prominent pension fund money manager, and this might have led to complacency. And complacency can be dangerous to fiduciaries.
The revelation of the investigation of Mr. Bond makes the due diligence and monitoring by some sponsors and their consultants appear complacent at best, negligent at worst. Some sponsors and consultants, it appears, did a lousy job of scrutinizing Mr. Bond's firm, formerly called Bond Procope Capital Management and now called Albriond Management Capital LLC.
How could they have hired and retained a manager now facing criminal charges of fraud from the U.S. attorney's office and civil charges from the Securities and Exchange Commission?
How could they have overlooked the questionable actions on which the federal officials have focused?
The charges against Mr. Bond still have to be proven. But even if he ultimately is vindicated, cases like this raise warning flags and some troubling issues.
For a start, they suggest sponsors and their consultants need to dig deeper into each manager's trading operations, especially with over-the-counter stocks, when hiring or monitoring managers. At each step they should examine a meaningful sample of trades. If they fail to do so, they are failing in their fiduciary responsibilities to the pension fund and participants.
Sponsors should hire special expertise to monitor closely trading execution and brokerage. A momentum style, such as that used by Mr. Bond's firm, can make trading abuses difficult to detect, some observers say.
All the more reason to hire one of the firms that have made a specialty of studying trading and execution.
Likewise, performance often can serve as a red flag. Sponsors and their consultants should become concerned when money managers stop reporting their investment performance to public databases such as the Pensions & Investments Performance Evaluation Report, as Mr. Bond's firm did.
The causes of poor performance should be closely examined using the quantitative performance attribution tools available.
In addition, sponsors and their consultants must demand the highest level of auditing under the Association for Investment Management Research performance reporting standards. And that highest level should involve going back to the trades that generated the performance. Too often pension sponsors treat the performance presentation standards too casually and simply accept assurances of compliance by money managers.
The Bond case also reinforces the danger of pension executives or trustees accepting gifts or favors from money management organizations. The acceptance of such gifts may cloud judgment, but even if it does not it leaves the impression of a conflict of interests. Gifts from managers are unacceptable. Executives and trustees accepting gifts of more than nominal value from current or prospective managers should face disciplinary action. Pension funds that don't have policies banning gifts must institute them immediately.
Whatever the outcome of the Bond investigation, it should serve as a timely reminder that ERISA requires pension fund fiduciaries to oversee their funds with care, skill, prudence and diligence. Those standards are not static. They become tougher to meet over time as new analytic and monitoring tools become available.
Pension executives and their consultants must use all available tools in the monitoring process. Now is the time for executives at all funds to re-examine their monitoring processes to be sure they are up to date, and that they have not become complacent in their practices.
