Fee sweeps case could cost state $6 million


Kansas could be hit with a $6 million bill over a lawsuit contending the state unlawfully used millions of dollars in fees for regulating the securities industry to subsidize general state operations.

Two legislative budget-writing committees on Tuesday agreed to add $6 million to the budget for reimbursing the plaintiffs in a class-action lawsuit that was brought in 2019 challenging whether the fees could be funneled into the general fund.

The money would go to the Department of Administration to pay out for any settlement that is reached in the case. The settlement agreement is not signed.

“We are not quite settled, but we are nearing a settlement,” state Budget Director Adam Proffitt told lawmakers Tuesday.

“We are confident that if we appropriate $6 million to the Department of Administration, that should be able to satisfy any monetary settlement that might come with this,” he said.

The attorney general’s office declined to comment on the case.

The lawsuit was brought on behalf of all Kansas broker-dealers, agents and investment advisers who paid fees — such as the filing of a registration application — to help fund the regulation of their industry.

The lawsuit contended that the fees collected by the state Securities Commission were “grossly disproportionate” to the amount required to regulate the industry.

“While these fees are for the purported purpose of regulating the securities industry, only a small fraction of these fees are actually used for this purpose,” the lawsuit stated.

“Instead, the bulk of the fees are transferred to the state general fund and used for general purposes,” the lawsuit said.

The lawsuit challenges a state law requiring any balance of more than $50,000 in the Securities Commission’s regulatory fee fund to be transferred to the state general fund.

The excess fees were to cover the cost of any governmental services such as accounting, budgeting and payroll that are performed on behalf of the state agency.

However, the lawsuit showed that the regulated businesses were paying far more than what it was costing the state to oversee the securities industry.

The Kansas Securities Commission, which is housed in the Insurance Department, had a budget of $2.5 million in fiscal year 2018 but collected about $14 million in fees.

Likewise in 2019, the commission’s budget was $3.1 million and in 2020 it was $3.2 million. The state collected about $13 million in each of those years.

The lawsuit was filed against the state, not the Securities Commission nor the Insurance Department.

The lawsuit said the net effect of the law led to the Kansas Securities Commission being paid twice — and sometimes three times — the amount for the same regulatory service, and to “substantially overpay for what those services actually cost.”

The lawsuit said the state was violating the state and federal constitutions by directing those excess fees — also known as “sweeps” — into the state general fund.

“These sweeps result in the fees being an unlawful tax on Plaintiff and other fee-paying participants in the Kansas securities industry, with these taxes used for general purposes and not for any specified purpose,” the lawsuit said.

Proffitt told lawmakers that the Insurance Department plans to study the Securities Commission’s fee structure and how it compares to other states’.

Lawmakers also plan to add language to the budget that will stop the transfer of the fees from the Securities Commission to the general fund.

A spokesman for the Insurance Department declined to comment, citing the ongoing litigation. The spokesman emphasized the department was not a party to the lawsuit.

This type of legal issue is not new to Kansas.

Four years ago, the state agreed to repay $3 million out of the general fund to compensate for fees that were taken from state agencies in 2009 to help balance the budget at the start of the Great Recession.

The case centered on a budget passed toward the end of former Gov. Kathleen Sebelius’ administration that called for moving $22 million out of various funds, including about $2.4 million out of the state’s workers’ compensation fund, into the general fund to make up for shortfalls caused by the recession.

And three years ago, former Insurance Commissioner Ken Selzer filed a lawsuit against former Gov. Jeff Colyer to stop the state from moving $8 million in fees from the department’s Service Regulation Fee Fund to the general fund.

Selzer’s lawsuit centered on Colyer’s veto of a budget item that blocked the transfer of $8 million out of the agency’s fee fund.

Ultimately, new Insurance Commissioner Vicki Schmidt reached a settlement in the case in 2019 when the Legislature passed a budget restoring about $16.1 million from the fee sweeps over three years.