SEC ends one probe, starts another

WASHINGTON — The SEC has completed a two-year investigation of investment consultants.

The agency determined that the firms found with the most conflicts of interest on advice to pension funds were doing a much better job of identifying, disclosing and managing the problems.

The Securities and Exchange Commission still could take legal action against consultants that continue to have blatant conflicts of interest, such as recommending money managers and brokerage firms that pay the consultants to steer business their way.

And while the consultant investigation has ended, the SEC has begun examining the proxy-voting policies and procedures of mutual funds and their investment advisers.

In the consultants' investigation, the "small number" of firms "that needed the most improvement" of the 24 initially inspected underwent a follow-up exam, Lori A. Richards, director of the SEC's Office of Compliance Inspections and Examinations, said in a telephone interview Dec. 7.

In a speech on Dec. 5 in San Francisco, Ms. Richards said: "We're seeing indications of positive responses from pension consultants when it comes to identifying, disclosing or curtailing conflicts of interest in the advice that they provide to pension plan sponsors."

In her speech, Ms. Richards reiterated the findings of the initial examination: that the advice consultants gave often was self-serving and not in the best interest of their clients.

In the future, Ms. Richards said in the interview, "it is my hope that you would see the marketplace step up to demand unbiased and uncompromised advice, and see consultants provide unbiased and uncompromised advice."

Ms. Richards said the SEC is publicizing the findings to let the more than 1,800 investment consultants know what steps others have taken to isolate and manage their conflicts of interest.

Ms. Richards declined to say whether the SEC was contemplating legal action against consulting firms that continue to violate their fiduciary duty to provide unbiased advice to their clients.

Kathryn McGrath, a partner in the Washington law firm of Mayer, Brown, Rowe & Maw LLP and a former director of the SEC's division of investment management, said the SEC might be considering legal action against some consultants as a deterrent.

In the proxy-voting probe, a source provided Pensions & Investments with a copy of a Nov. 21 letter from Daniel Wong, chief of examinations in the SEC's Boston office, to a mutual fund company that requested reams of information on proxy voting, including copies of the proxy-voting policies and procedures, and identification of individuals within the organization responsible for voting proxies.

Because several firms are targeted in an examination, similar letters presumably were sent to other mutual fund companies.

Mr. Wong also requested copies of the company's annual and semiannual reports, prospectuses and information to shareholders on how to obtain the company's proxy-voting policies for each fund in the family, and copies of requests from shareholders on how proxies were voted.

He also requested copies of proxy-voting records for all clients, plus all e-mails and written correspondence from the proxy manager, members of the proxy voting committee, outside proxy voting consultants and compliance officers. What's more, Mr. Wong asked for copies of proxies where a vote was not cast and an explanation for why the vote was not cast; and copies of proxy statements where there were conflicts of interest and documents elaborating on the conflicts.

Also requested were minutes of board meetings since July 1, 2003, that pertain to proxy voting, and details of each fund's stock holdings as of June 30, 2004, and June 30, 2005.

The company must supply the information by Jan. 6.

This is the first time the SEC has looked at mutual fund proxy voting since it adopted a rule on Jan. 31, 2003, requiring mutual fund companies and their investment advisers to disclose their votes, and their policies and procedures for voting proxies on stocks they hold in their portfolios. The rule prompted thousands of comments about the costs of complying, and worries that mutual fund shareholders would seek to influence votes on portfolio companies.

"My assumption is it's a fishing expedition," David Tittsworth, executive director of the Washington-based Investment Adviser Association, said of the SEC's exams. "It's consistent with what we've been hearing from (the SEC's Office of Compliance Inspections and Examinations) that they're doing less comprehensive exams and more of the sweeps or targeted examinations."

One reason for the rule was investment advisers were not casting proxy votes, said Douglas J. Scheidt, associate director and chief counsel of the SEC's investment management division. The rule reminded mutual fund companies and their investment advisers that proxies are a shareholder asset, and it is their fiduciary duty to vote, he said.

Mr. Scheidt said it's not uncommon for SEC staff to conduct targeted examinations to ascertain compliance with a new rule. "Enough time has passed since the rule was adopted for it to be reasonable" for the SEC to expect that mutual fund companies and their investment advisers have put proxy-voting policies and procedures in place, he said.