In a case alleging revenue-sharing payments between Morgan Stanley Company and ING Life Insurance and Annuity Company violated ERISA prohibited transaction rules, the U.S. District Court for the Southern District of New York found “[f]ee-sharing arrangements or kickbacks do not in-and-of themselves create a violation, but their non-disclosure does.” The court said ERISA Section 408(b)(2) does not require invoices of the payments to be provided, but only a description of the compensation arrangements. Skin Pathology Associates was informed in writing of the arrangement between Morgan Stanley and ING and signed off on it.
The court noted that Skin Pathology Associates did not allege non-disclosure of the payment arrangement, so it failed to make a cognizable claim. The lawsuit was dismissed.
In the lawsuit, Skin Pathology Associates contends Morgan Stanley and Company, Inc., which sought out an investment and recordkeeping platform for the plaintiff’s 401(k) profit-sharing retirement plan, engaged in prohibited transactions under ERISA Section 406. The lawsuit says Morgan Stanley’s “Alliance Partners” program required retirement plans to pay additional compensation, but Morgan Stanley did no additional work for this compensation (see “Morgan Stanley, ING Sued for Plan Services Alliance”).
The lawsuit also says Morgan Stanley is acting under a conflict-of-interest because its economic incentive is to direct retirement plan clients to purchase investment/recordkeeping platform services from the Alliance Partners which pay it additional compensation rather than from platform providers that do not. Skin Pathology Associates contends ING participates in and takes advantage of this conflict-of-interest by paying additional compensation in exchange for being listed as one of Morgan Stanley’s Alliance Partners.
In its discussion the court noted that language in Section 406 does not support Skin Pathology’s argument, citing a U.S. Supreme Court decision that “Section 406(a) imposes a duty only on the fiduciary that causes the plan to engage in the transaction.” Morgan Stanley is not a fiduciary to the plan. The court said “although a fiduciary and a party in interest on the opposite side of [a] transaction can both be held liable for a violation, it would make no sense for a statute to impose a duty on a fiduciary to stop a transaction over which it has no control. The plan fiduciary here, Plaintiff, has no power to prevent ING from paying Morgan Stanley additional compensation; thus, logic dictates that Section 406(a) does not prohibit the arrangement, as Plaintiff cannot block a transaction in which it has no involvement.”
Skin Pathology rebuffed Morgan Stanley’s argument that plan assets were not involved in making the payments, so no prohibited transaction occurred. In its reasoning, the court said it was “stuck between a rock and a hard place” since the letter of Section 406(a)(1)(c) does not technically require use of assets, but the spirit of the provision, citing former case law, does. That is when the court turned to Section 408(b)(2), the reasonable compensation exemption form the Section 406(a) prohibited transaction and found disclosure of the arrangement was the deciding factor in its findings.
The opinion of the court is here.