Commentary: Expecting the unexpected — preparing for a pension fund investigation

Pension fund trustees and executive leaders juggle numerous priorities — from high-level investment strategy to administrative hurdles associated with providing retirement benefits for members. Occasionally, however, despite best efforts, the unexpected happens, resulting in the need for an internal investigation or to respond to an investigative inquiry from a regulatory or other governmental bodies.

Investigations can be prompted by trustees, executive leaders or government regulators. Often, these investigations stem from concerns that are not unique to pension funds, such as claims of sexual harassment, employment discrimination or compliance risks. For example, in 2018, Oklahoma Attorney General Mike Hunter confirmed an investigation into claims of embezzlement at the $3 billion Oklahoma Police Pension and Retirement System, Oklahoma City. (The pension fund chief was later terminated and entered into a settlement with state prosecutors.)

Other inquiries, however, are more unique to the pension fund environment. For example, beneficiaries could launch a challenge to investment decisions. Today, we are seeing an increased focus on ESG concerns, ranging from divestment in coal or other fossil fuels to investments in countries with poor human rights records.

Other investigations can stem from the relationship between the fund and its investment advisers, as more and more funds are being challenged on the nature of relationships with private equity funds. For example, in 2021, the U.S. Department of Justice launched an investigation into the $9.5 billion District of Columbia Retirement Board. Media coverage indicated that the subpoenas issued sought "documentation of a variety of financial transactions, including, specifically, records of payments to investment managers and investment consultants."

Such concerns regarding the relationship between funds and advisers are not new. Nearly 20 years ago, significant attention was focused on the $11.5 billion Chicago Public School Teachers' Pension & Retirement Fund and reporting indicates that the fund is still engaged in a forensic audit. Finally, for public pension funds, unique concerns can arise related to contours of state law, freedom of information compliance or criminal wrongdoing.

Regardless of how the investigation is initiated, the organization must then consider several strategic and overarching principles in how it seeks to conduct and respond to the investigation: Who is running point? Will outside counsel be engaged? Who oversees outside counsel? How do the trustees ensure alignment with their fiduciary duties? How will the trustees engage with the media and the fund's members?

Often these are questions that are not typically presented to a fund or its internal counsel during the course of day-to-day business. The selection of outside counsel, in particular, can present the opportunity to ensure trust and accountability in the outcome of the investigation. A decision should be made to determine if outside counsel will report to internal counsel, the executive leadership, a committee of the board or entire the board.

A general best practice is for the board to establish a separate special committee to oversee the investigation and its outcome. The American College of Trial Lawyers advises that the board "should appoint a committee of independent Board members, often the audit committee, to oversee such an investigation, and the Independent Committee should retain counsel to conduct the investigation. No director, officer, or employee whose conduct is being investigated should participate in the investigation except as a witness."

Once established, outside counsel should be given clear guidance regarding its contacts, from whom it will request documents, with whom it should coordinate the scheduling of witness interviews, and the ultimate deliverable (or findings). Regarding a deliverable, it is often preferable to have outside counsel start with a closed/executive session oral presentation and then, upon request of the committee, prepare a written report. Care should be taken to understand what steps must be taken to ensure that the report remain privileged, if appropriate, or released more broadly, if needed for transparency and disclosure obligations.

The retention of outside counsel to respond to an internal or external investigatory need is often a fast-paced and nervous time for a pension fund. If prompted by a government inquiry, the fund is facing pressure to respond quickly and perhaps to heightened public and media scrutiny.

Thus, the time to lay the groundwork for an investigative response is before the response is required. While the exact contours of an investigation are never exactly foreseen, there are basic steps that an organization can take to be prepared for the unexpected. Document retention and litigation hold practices should be reviewed and updated. If your document retention policy was first drafted more than five years ago, the rapid changes in technology and storage merit revisiting and updating. If your in-house team typically handles most litigation issues internally, and therefore has never required the retention of outside e-discovery services, it may be useful to engage in a prescreening process to allow for some basic understandings of the costs, benefits and options available — the type of review that may not be possible under time sensitivities.

Finally, the organization should consider a review of its bylaws and policies to ensure that they address privilege, confidentiality and reporting structure. These are issues that will need to be considered if the organization needs to engage outside counsel. The bylaws should permit the creation of an independent special committee and should contemplate the reporting structure. For example, does your general counsel report to your executive director or trustees?

While preparation cannot eliminate the risk of an investigation, consideration of a response plan can ensure that the investigation is as minimally disruptive and well organized as possible.

Considering some early preparatory steps can assist in ameliorating the pressures and angst surrounding the need for an internal investigation. Start the process now and have a plan with how to deal with an investigatory need prior to the occurrence. Lining up outside counsel, plans for point personnel, document collection, etc., will make things easier in the long run for the fund.

Claire Rauscher and Sarah Stone are partners at law firm Womble Bond Dickinson (U.S.) LLP, based in Charlotte, N.C. This content represents the views of the authors. It was submitted and edited under Pensions & Investments guidelines but is not a product of P&I's editorial team.