Updated with correction
Nearly a decade after the Securities and Exchange Commission targeted investment consulting firms in a sweeping examination of their practices, compensation arrangements and disclosure, the landscape appears to be more transparent.
This is not to say, however, that there isn't room for improvement, or that there aren't those within the sector who think things have actually gotten worse.
“You may be the first phone call about pay-to-play I've received in about eight years,” said Donald B. Trone, founder and CEO of 3ethos, Mystic, Conn., a company that trains investment advisers on being responsible investment stewards. “So it's clearly not the same problem it was in the 1990s.”
In December 2003, the SEC sent letters to several consultants, informing them of a broad fact-finding review, trying to get to the bottom of several allegations of excessive fees and pay-to-play schemes in which recommendations by investment consultants of money managers and investment strategies are based on financial incentives rather than performance.
Following the SEC's investigation, a number of consulting firms (and institutional investors) faced serious scrutiny and litigation. In 2005, the city of San Diego filed suit against San Francisco-based Callan Associates, alleging Callan was negligent in advising the then-$4.6 billion San Diego City Employees' Retirement System. The two parties ultimately settled out of court the following year, with Callan agreeing to pay the pension fund $4.5 million. (At the time of the settlement, Callan spokeswoman Nancy Malinowski said the city acknowledged it “found no evidence that Callan engaged in pay-to-play or any other unfair business practices in connection with the hiring of money managers.”)
As a result of the SEC's inquiry, some consulting firms increased their level of transparency to clients. Julia K. Bonafede, president of the consulting unit of Wilshire Associates Inc., Santa Monica, Calif., e-mailed Pensions & Investments the following statement: “As a result of the SEC's review of industry practices, we further enhanced our disclosures to clients as well as our internal policies and procedures. To this day, we remain committed to those enhanced disclosure requirements.”
“Some firms exited the businesses that were questionable,” said Barry Dennis, co-founder, managing director and chairman of Strategic Investment Solutions, San Francisco, referring to such businesses as money manager-sponsored conferences and the selling of analytical data. “The others probably improved their disclosure.”
Although Mr. Dennis noted disclosure has improved within the consulting industry since the SEC letters, he said he believes the uptick in consultants getting involved in the outsourced CIO business in the past five years “creates a whole new set of conflicts of interest.”