The consulting community's reactions to the long overdue Securities and Exchange Commission look at consulting firm practices has been fascinating, as has been the volume of press this issue has generated. Equally fascinating have been the "letters to editors" of industry publications, together with letters to clients from high-profile representatives of the consulting community, most of which appear to be directed at rationalizing present practices. If there is a common thread in the messages from many of the consultants, it's this: "It's high time for this ox to be gored — just be sure it's someone else's ox."
A case in point is the letter to the editor titled "Consultants ask managers to take a stand" in the April 19 issue of Pensions & Investments, encouraging money managers to clean up their act in regard to consultant client conferences (which coincidentally don't happen to be sponsored by that collection of consultants). Conspicuously absent from that letter was reference to disclosures of other consulting firm practices that can also produce conflicts of interest.
Historically, suggestions that additional disclosure by consultants is needed have been met with statements downplaying the existence of conflicts such as, "It's such a small portion of our revenues that it doesn't have any impact, and we have Chinese walls, and you just don't understand the economics of this business and … and, why are you asking so many questions anyway?" Now that the SEC, a regulatory body with responsibility for investor protection, is asking very direct questions that should require very direct responses to this very specific issue (read "no wiggle room"), we get the ultimate in condescending statements that go something like this: "Anyone who thinks this very large source of revenue to my firm that I first denied and then downplayed and only now am begrudgingly forced to acknowledge has in any way compromised me in my ability to be objective is just being paranoid. This is clearly the work of small-minded people."
It seems to me that it's time for the consulting community to simply recognize that the genie is finally out of the bottle and just get on with disclosures that will allow plan sponsors to fully evaluate the situation and make informed decisions. How about something like this: "My consulting firm does not accept payments, directly or indirectly, from service providers that our plan sponsor clients, whom we serve as full fiduciaries, do or will potentially contract with." Or, "We receive income from service providers that our plan sponsor clients, whom we serve as full fiduciaries, do or will potentially contract with, and such income totaled $x during the last year. The following is a detailed listing of the service providers that paid us directly or indirectly, the amount they paid, and the services they received for such payments. As a senior officer of my firm, I attest that this listing is complete and represents full disclosure of all revenues that my firm, or any of its affiliates, received from each firm listed." If this information were readily available, I'd be perfectly happy to let the marketplace sort it out.
The disclosures suggested should not just be provided on some obscure form filed with the SEC. While I think it should be filed with the SEC, under penalty of perjury for filing false information, it more importantly should be provided annually to all of a consulting firm's existing clients and be included in proposals to all prospective clients.
As long as it is at it, the SEC should probably resurrect its study of soft dollars (one of the great obfuscation tools of all time). A classic example is the outcry from the research community, suggesting that its ability to sell its products is dependent on the continued availability of soft dollars. It seems that it thinks money managers are going to be unwilling to purchase research if they cannot surreptitiously shift the cost to their clients. Doesn't this seem to underscore the view that research is being sold at prices that are unjustifiably high? This is a problem that will not go away until commissions are unbundled and the Section 28(e) safe-harbor is repealed.
In the context of this overall issue, a dollar of revenue to a money manager or an investment consultant or a research firm started out as a plan asset. It does not matter if it was a hard dollar or a soft dollar, or how many filters it runs through, or how many times it changes hands before ultimately reaching a manager or consultant or researcher, it was a plan asset to begin with. As a plan asset, the governing and managing fiduciaries at a plan are obligated to be able to account for its disposition. Unfortunately, there are a number of smokescreens that have become institutionalized and that seem targeted at keeping this information from ever seeing the light of day. The SEC is well positioned to mandate practices that will clear the air. It's time for transparency to prevail — in its capacity as the investors' advocate, I hope the SEC has the resolve to bring this matter to a close in a way that truly protects the interests of investors.
Gary W. Findlay is executive director of the Missouri State Employees' Retirement System, Jefferson City.
