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Challenges to Revenue Sharing Practices
of
Financial Services Providers
Quintin F. Lindsmith
Bricker & Eckler LLP
July 2007
A new wave of litigation has challenged revenue sharing practices of financial services providers (FSPs)
across the country. Since March 2006, when a federal district court in Connecticut denied defendants'
motion for summary judgment in a revenue sharing
class action1, more than twenty potential class action lawsuits have been filed.
The lawsuits name as defendants employers, FSPs, and sometimes both.
The employer cases usually identify plan participants as the potential class members,
while the FSP cases identify all plans that deal with that particular FSP as potential class members.
Challenges to 457 plans usually proceed under state law claims because they are not
subject to Title I of ERISA. Except in such challenges, plaintiffs allege that
either the employer or the FSP (or both) are fiduciaries under ERISA and that the
defendant has breached its ERISA fiduciary duties.
Employers are accused of allowing excessive fees to be incurred by (1) failing
to monitor the fees and expenses paid by plans; (2) failing to remain informed of
industry payment and revenue sharing practices; and (3) failing to determine
whether the fees are reasonable and incurred solely for the benefit of plan participants.
FSPs are accused of failing to disclose fees and revenue sharing practices; it is
also asserted that these arrangements constitute prohibited transactions under ERISA.
Plaintiffs have made claims under ERISA Sections 409(a) and 502(a)(2),
whereby they seek to restore the plan losses caused by the alleged fiduciary breaches.
Claims brought under 502(a)(3) seek an accounting of all transactions in connection with
the plans and plan assets. They also seek a surcharge against defendants for
any transactions proven to be improper and disgorgement of plan fees and attorney fees.
Defenses have typically included assertions that (1) the plaintiffs do not
have standing; (2) the defendants are not fiduciaries; (3) ERISA does not
require disclosure of revenue sharing; (4) ERISA’s safe harbor provision protects
defendants; and (5) 502(a)(3) only permits equitable relief where plaintiffs have sought legal relief.
While one of the employer lawsuits recently resulted in complete dismissal2, other courts have allowed plaintiffs to amend their complaint.
One such case has gone forward and become the first certified class action in the country3. In three other cases, district courts have denied defendants’ motion to dismiss altogether4.
One bit of good news for FSPs is that since Haddock, the only court to decide a
motion to dismiss with an FSP defendant granted that motion in full5.
The court found that revenue sharing and its lack of disclosure were prohibited neither by
statute nor regulation. But other courts have been far more open to claims that revenue sharing
arrangements are unfair. Furthermore, not all FSPs are as removed from a position of
authority and control as Fidelity was in Hecker. The result is that the future of this
litigation around the country is far from certain.
Bricker and Eckler has first-hand experience dealing with the complex issues of this
newly emerging field of litigation. Because of this,
our firm's insurance and financial services attorneys are well-suited to help FSPs respond to claims of this nature.
Footnotes
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