Are Florida Insurance Policy Holders Entitled to Rebates?

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    From the perspective of individual investors, revenue sharing is the Trojan Horse of the mutual fund industry.

    That means most investors have no idea that when they buy an actively-managed load fund, with its implied promise of above-average returns, they are also buying a package driven by 12b-1 fees and revenue sharing deals that they commonly do not know exist.

    But here’s a twist on this common story: What if investors knew about revenue sharing.

    Further, what if the shareholder asked their financial rep for a rebate on the revenues paid to them by the fund distributor?  Then, the shareholder would be able to reduce their total fund expenses by getting a portion of the money their own purchase generated. 

    Some Quick Background on Revenue Sharing

    But first, investors need a definition of revenue sharing.  Revenue sharing is a financial incentive, in everyday language, a form of commission, which is paid by the mutual fund company to a broker who sells their funds.  This payment is nominally “disclosed” in the fund prospectus, but very few investors and few brokers can actually put their finger on the few sentences which describe revenue sharing in the prospectus. 

    As a result, this is commonly considered an under-the-table commission paid to financial reps for as long as the investor owns the fund.  This means it is in the financial rep’s best interests to keep an investor in an under-performing fund since they collect the revenue sharing only when the investor holds the fund.  If the invetsor sells it, the revenue sharing stops.

    The current discussion in Washington D.C. over the past few years has discussed issues, such as conflicts-of-interests, and fiduciary responsibilities between financial rep and their clients.  Revenue sharing is a main engine behind these conflict-of-interest discussions. 

    So with this in mind, the revenue sharing practice starts because an investor buys a mutual fund. Without the investor there would not be any revenue sharing.  So with that in mind, what if mutual fund shareholders started to ask their financial reps for a portion of the revenue sharing?   If this happened, it could change the balance of power in revenue sharing.  It would also give shareholders a claim on the payments their own purchase generated.

    This is a revolutionary proposal.  But is this a legal?

    Jumping for joy in Florida?

    Well, according to the State of Florida, it is, at least as far as insurance policyholders are concerned. 

    In a lawsuit which went to the Florida Supreme Court on Sept. 10, 1986 (Department of Insurance, Appellants vs. Dade County Consumer Advocates Office, Appellees, #66178), the court rules that Florida insurance agents had no right to prohibit purchasers of their insurance products from receiving a commission rebate. 

    The court found that the rebates were permisable since they increased the bargaining power of the consuming public.  Further, the Court held that individual consumers could negotiate with insurance agents to accept a commission which was lower than the one stated by the insurance company.

    In essence, the Florida Court ruled that people could receive a rebate from their insurance agent and that anti-insurance statutes “prevent price competition with respect to insurance agents’ commissions thereby depriving Florida consumers of their property without due process of law.”

    Can Anti-Rebate Statutes Apply to Revenue Sharing?

    I’m not a lawyer, but a layman’s reading of this case may provide an opening for mutual fund purchasers in Florida to ask their financial rep whether they are getting any revenue sharing money from the fund distributor who is offering the fund.

    This question will undoubtedly surprise them. 

    But if they say yes, ask for some money back as part of their fund purchase.  Say you want to participate in the revenue sharing, too.  Then cite the Florida ruling to them and wait as they run it through their branch office manager, then to the Compliance Department, and then to their very expensive outside counsel.

    From what I was told by the Dade County Consumer Advocates Office, this ruling still stands on the books in Florida, but not many insurance policy buyers have taken advantage of it.  Most likely, this is because most people don’t even know it is an option.

    Still, it would be interesting to see if this anti-rebate ruling could be applied to mutual fund sales in Florida.

    I was also told that a similar ruling exists in California, however, letters to California State Insurance Commissioner Steve Poizen have gone unanswered.  If the same anti-rebating prohibitions apply in Florida and California, insurance policy purchasers may be able to make a little extra money.  If this same rule can be extended to mutual fund shareholder purchases, it may make revenue sharing a little more egalitarian.

    After all, if the customer generates the revenue sharing deals in the first place, it seems they have every right to ask for a portion of that money in return.

    A Question for Securities Lawyers?
    So if there are any lawyers looking to create a significant pro-consumer action, this may be your big chance.

    <To see the Florida State Supreme Court decision, follow this link  to the PDF file.

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    Chuck Epstein has managed marketing communications and public relations departments for major global financial institutions and participated in the launch of industry-changing financial products. He also has written by-lined articles for over 50 publications, five books and served as editor and publisher of nation’s first newsletter on the topic of using the PC for personal investing and trading. (“Investing Online, 1994-1999). He also is a marketing consultant, writer and speaker on topics related to investor protection and opportunities in the very dynamic cannabis industry. He has held senior-level marketing, PR and communications positions at the New York Futures Exchange, Chicago Mercantile Exchange, Lind-Waldock, Zacks Investment Research, Russell Investments and Principal Financial. He has won national awards from the Mutual Fund Education Alliance (MFEA) and his web site, www.mutualfundreform.com, was named best small blog in 2009 by the Society of American Business Editors and Writers (SABEW).

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