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April 15, 2002 01:00 AM

An example set for fiduciaries

Barry B. Burr
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    All pension fund trustees and executives, public and corporate, ought to get - and read - a copy of the audit of the Nashville and Davidson County Metropolitan Benefits Board, produced by KPMG Investment Consulting Group. Then they should ask some questions about the policies of their own funds, and their relationships with their money managers and consultants. And they should ask if regulatory disclosures are adequate to enable fiduciaries to perform due diligence on consultants and brokerage firms that the pension funds might use.

    The Nashville/Davidson case underscores the conflict that can arise when a consultant serves as a gatekeeper and has a powerful compensation incentive based on brokerage commissions. The 100-page audit led the metropolitan government to quantify the cost of conflicts of interests of the fund's investment consultant, PaineWebber, and its employee, William Keith Phillips, who oversaw the relationship.

    As a result of the audit, UBS PaineWebber Inc. paid $10.3 million to the Nashville/Davidson benefits board and metropolitan government to avoid litigation and settle any claims against it and Mr. Phillips stemming from the use of soft dollars and directed brokerage with the $1.3 billion pension fund.

    Executives at another Nashville pension fund might already have read the audit and begun to ask questions. The Electric Power Board of Nashville and Davidson County also used PaineWebber and Mr. Phillips as consultant for its $180 million pension fund. Decosta Jenkins, senior vice president and chief financial officer of the metropolitan government-owned utility also known as Nashville Electric Service, declined to discuss whether the company board is examining PaineWebber, saying he might be more amenable to talking in a month or two. The utility replaced PaineWebber about a year ago, outsourcing all pension investment management to SEI Investments Inc., he said.

    Any examination of relationships between consultants, managers and soft-dollar brokerage arrangements shouldn't be taken to suggest any improprieties. But it can provide a deeper understanding of the relationship and how to safeguard against risks of potential conflicts of interests.

    The entities that oversee disclosure of disciplinary actions - such as the National Association of Securities Dealers Inc., the Securities and Exchange Commission and the state securities commissions and their group the North American Securities Administrators Association - ought to use the Nashville/Davidson-UBS PaineWebber situation as an opportunity to re-examine their programs for providing information on brokerage firms.

    The Tennessee Securities Commission isn't looking into the UBS PaineWebber settlement with the metropolitan government to determine whether it is a cause for disclosure. Paul R. Marrone, director-media relations at UBS PaineWebber Inc., declined to comment on whether the settlement is a reportable event or whether he thinks it is something investors should know. He said the company isn't involved in any discussions with any other clients or former clients about actions similar to the Nashville/Davidson case. Mr. Phillips has declined to comment.

    Much of the credit for the UBS PaineWebber settlement belongs to David Manning, metro director-finance, who was instrumental in initiating the KPMG audit that uncovered problems, and Karl F. Dean, metro director of law, who led a more detailed investigation and the settlement negotiations.

    That audit was important. It found, among other things, PaineWebber presented misleading information in recommending action to generate trades and commissions, even though implementation would reduce the Nashville/Davidson fund's return and increase risk. PaineWebber was compensated based on commissions. In the year ended June 30, 1999, for instance, 95.8% of domestic equity trades went through PaineWebber, according to the audit.

    Now it's up to the fiduciaries of other pension funds where there might be problems, to follow Mr. Manning's example and seek audits. If anything significantly untoward is uncovered, they must follow Mr. Dean's example and seek appropriate remedies.

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