The Securities and Exchange Commission continues to lift the hood on the marketing practices of registered investment advisers, as evidenced by the regulator's current investigation into Aon Hewitt Investment Consulting Inc.
The SEC notified Aon in the first quarter of the year that it had shifted a portion of a routine examination from 2017 into an enforcement investigation focused on its marketing materials and the custodial fees charged to several clients, an Aon spokesman told Pensions & Investments in late November.
In a Dec. 5 emailed statement, Aon provided an update: "It is our understanding that this inquiry is now focused on the calculation of a single metric in marketing materials. That metric is not focused on OCIO or any other single portion of our business, has no bearing on fees paid by clients or client portfolio performance, and has no industry standard."
The company declined to comment further on the metric in question.
The Aon investigation surfaced after the SEC's office of compliance inspections and examinations issued a risk alert in September 2017, offering a list of the most frequent compliance issues related to its advertising rule — Rule 206(4)-1 under the Investment Advisers Act of 1940 — which "prohibits advisers, directly or indirectly, from publishing, circulating, or distributing any advertisement that contains any untrue statement of material fact, or that is otherwise false or misleading," the alert said.
Compliance issues most frequently identified by the OCIE were advertisements containing misleading performance results, one-on-one presentations, claims of compliance with voluntary performance standards and cherry-picked profitable stock selections, according to the SEC alert. Additionally, advertisements containing misleading selections of investment recommendations were among the list, as were instances of advisers "that did not appear to have compliance policies and procedures reasonably designed to prevent deficient advertising practices."
Aon Hewitt Investment Consulting, a Chicago-based subsidiary of Aon PLC, is a registered investment adviser with the SEC and provides both general investment consulting services to institutional investors as well as discretionary investment solutions, which includes outsourced CIO services, stated the firm's most recent Form ADV, dated March 28.
So far, Aon has disclosed the ongoing SEC investigation to at least two institutional investors — one being a pension fund client that was told in late November that the probe was related to Aon's OCIO and custodian services.
On Nov. 29, Aon representatives attended an investment committee meeting for the $2.8 billion Sonoma County Employees' Retirement Association, said Kelly Jenkins, assistant CEO for the plan. Aon serves as a general investment consultant for the Santa Rosa, Calif.-based fund.
"It was mentioned (by Aon) that (the SEC investigation) had to do with their OCIO services and custodian services. I think there was accepted recognition on our part that we don't utilize those services. It doesn't impact the services (they) provide, and there was no concern expressed at that time," he said.
Sonoma County fund officials expect to get an update from Aon at the conclusion of the SEC's case, Mr. Jenkins added.
Aon representatives declined to comment further on the matter outside of its statement, which said the metric in question in marketing materials was not focused on its OCIO business.
P&I reached out to several other Aon clients; two declined to comment while the others did not respond. The SEC also declined to comment.
In October, Aon also notified a prospective client, the $2.4 billion Fairfax County Educational Employees' Supplementary Retirement System, Springfield, Va., of the SEC investigation. Fund executives did not respond to a request for comment, but Aon submitted the information to the plan in response to an October RFP for a general investment consultant contract. Aon's proposal was published on the plan's website.
"The SEC concluded an examination of AHIC in 2017," Aon's RFP response stated. "As a registered investment adviser governed by the Investment Advisers Act of 1940, other applicable laws, and the oversight of the SEC, AHIC is subject to periodic examinations by the SEC. At the conclusion of the examination, AHIC received a comment letter from the staff identifying areas of improvement and recommending that AHIC make certain enhancements to its compliance program. AHIC has responded to the staff's comments and has made, and will continue to make, appropriate enhancements to its compliance program and business operations."
In its September 2017 alert, the SEC said that common compliance issues "were most frequently identified in deficiency letters recently sent to SEC-registered investment advisers … and as part of an examination initiative that focused on advisers' use of accolades in their marketing materials."
In its RFP response, Aon also disclosed that it later became aware the SEC was shifting a portion of its examination into an enforcement investigation.
The SEC is known to conduct either general exams or targeted risk-based exams on registered investment advisers — the former are typically done every three or four years, said Marco Adelfio, a Washington-based partner at Goodwin Procter LLP's financial industry and investment management practices. "They try to examine an adviser on a three- or four-year cycle for general purposes. It sort of varies depending on the size of the funds," he added.
When recurring issues are found in routine exams, however, they may end up in a subsequent risk alert, which may highlight areas of concerns to guide more focused exams by the SEC, Mr. Adelfio explained.
Regarding the SEC's interest in registered investment advisers' marketing practices, another attorney said that cases have generally been focused on one issue.
"What I see the government going after is — are their marketing materials misleading?" said Marcia Wagner, founder and managing partner of The Wagner Law Group, Boston.
In August, MFS Investment Management agreed to pay a $1.9 million penalty to the SEC to settle claims that its marketing materials contained materially false and misleading information about its quantitative data and research.
At the time, the SEC determined that "MFS' misleading advertisements were due in part to a failure to adopt and implement written compliance policies and procedures reasonably designed to prevent violations of the Advisers Act. … Specifically, MFS failed to adopt and implement policies and procedures reasonably designed to prevent inaccurate advertisements that it directly or indirectly published, circulated or distributed," the SEC order stated.