WASHINGTON — Now that the SEC is probing investment management consultants, pension funds are establishing lists of new, harder questions to ask their consultants and managers.
And their attorneys are going even further, pressing the Securities and Exchange Commission to tighten the regulations governing payments by managers to consultants.
"For a pension fund, there is no excuse not to ask consultants to put in writing all the compensation that is not in any way connected with the relationship," said Mercer Bullard, founder and head of Fund Democracy LLC, Oxford, Miss., a mutual fund investors' advocacy group. Mr. Bullard was assistant chief counsel in the Securities and Exchange Commission's investment management division between 1996 and 2000.
Some funds, such as the $31 billion Teachers' Retirement System of the State of Illinois, Springfield, are now considering asking those tough questions of their consultants and money managers.
The pension fund is contemplating asking its money managers to spell out, annually in dollars, any payments or fees they might have paid to the pension fund's investment consultant, said Jon Bauman, executive director. Before they are hired, money managers shortlisted in its searches must disclose if they have any relationship with the system's pension consultant, San Francisco-based Callan Associates.
Then, the Illinois Teachers fund also might ask its consultant to disclose compensation arrangements with managers in its lineup, depending on the responses it gets from the managers, Mr. Bauman said.
The $16.3 billion Public Employees Retirement System of Mississippi, Jackson, said Callan informed the board last month that the SEC gave it a clean bill of health following its November examination, said Frank Ready, executive director.
For the last three years, the system has asked all 26 money managers to disclose any fees paid to Callan. "It was interesting data. It will surprise you to know those that don't and those that do" make payments, he said.
Callan annually gives all plan sponsor clients "a complete list of all investment managers who do business with Callan," said Deanne Cristopulos, a Callan spokeswoman. In addition, she said, "all of our manager search reports presented to fund sponsor clients indicate whether or not any manager search candidate included in the report does any business with Callan."
The $5 billion New Hampshire Retirement System, Manchester, may ask its investment consultant — Evaluation Associates — for information about "other sources of revenue" besides consulting fees, and if it has any overt or indirect relationships with the system's money managers. Alan Cleveland, a partner in the Manchester, N.H.-based law firm of Sheehan Phinney Bass + Green, who serves of counsel to the system, said New Hampshire already asks all of its service providers to disclose gratuities they might have offered the pension fund's staff or trustees annually, but nothing about what they might offer each other.
"We think the events of the last several months have caused us to go back and ask better questions," he said.
Mr. Cleveland, who is the co-chair of the fiduciary committee of the National Association of Public Pension Attorneys, said regulators can help ensure that sponsors get more detailed information about any potential conflicts of interest between investment consultants and money managers.
Mr. Cleveland was among a group of public pension fund attorneys that met last month with Lori Richards, director of the SEC's office of compliance, inspections and examinations. He said the group asked the securities regulator to get rid of the "deficiencies" in Rule 206(4)-3 of the Investment Advisers Act, which regulates cash payments for client solicitation.
"We felt the rule could have been strengthened," he said, noting it was last revised in 1998. Mr. Cleveland also suggested strengthening disclosures that registered investment advisers must make on their periodic ADV filings with the SEC.
In an interview, Ms. Richards said the SEC is in the "information-gathering" mode, and she declined to say what actions the regulator might take.
The Labor Department also is following the SEC's examinations keenly, said a spokeswoman for the Employee Benefits Security Administration. Later in the spring, the EBSA intends to launch a fiduciary educational campaign, including guidance on fee arrangements between consultants and money managers, she said.
But not all pension plans are worried. The $6.8 billion Indiana State Teachers' Retirement Fund, Indianapolis, collects ADVs of its money managers annually but does not ask its investment advisers or consultant for other information about their relationships.
"If they are hidden, how would I be able to find out" about those relationships, asked Robert D. Newland, deputy director of investments. Mr. Newland said the system does not have concerns about relationships between its consultant and managers. "At this point, no, we have not seen a need" for additional information, he said.
And Gil Dickoff, treasurer of the $239 million pension plan of Crane Co., Stamford, Conn., said it sidestepped potential conflicts of interest when it hired CRA RogersCasey as its investment consultant three years ago. "By design we looked for a consultant where there was no room for improprieties," he said, explaining that the firm does not also advise mutual funds or subadvisers.