Court Rejects Excessive Fee Claims Following Trial On Mutual Fund 'Manager Of Managers' Theory

Author:Mr John Donovan, Robert A. Skinner and Amy D. Roy
Profession:Ropes & Gray LLP

On August 25, a federal court in the District of New Jersey issued a much-anticipated decision, finding after a lengthy trial that shareholder plaintiffs failed to prove claims that AXA entities had charged excessive mutual fund management fees in violation of Section 36(b) of the 1940 Act. In the first case to proceed to trial since the U.S. Supreme Court established the legal standard for these claims in its landmark 2010 decision in Jones v. Harris Associates L.P., the New Jersey trial court held in the defendants' favor on all claims relating to twelve mutual funds operating in a “manager of managers” structure. The plaintiffs' central theory of liability - mirrored in several other pending cases across the industry - is that AXA improperly retained a significant portion of the management fees despite delegating virtually all of the management responsibilities to external sub-advisers. Based on review of extensive documents and testimony, Judge Peter G. Sheridan rejected the premise of this theory, finding that there was ample evidence that AXA retained responsibility for a range of management services and bore significant risks in its role as fund sponsor and adviser.

The case of Sivolella v. AXA Equitable Life Insurance Co., originally filed in 2011, was one of the earliest of the current wave of more than two dozen Section 36(b) cases filed since Jones. The funds at issue in the case all serve as investment vehicles underlying variable annuity products offered by AXA. The defendants initially moved to dismiss the claims, arguing that the plaintiffs did not have standing under Section 36(b) as “security holders” of the funds since they do not own the fund shares directly - but only owned units in the variable annuity separate accounts that, in turn, owned the funds. Judge Sheridan denied this motion in 2012, and the parties proceeded to discovery. After completion of discovery in 2014, AXA moved for summary judgment. The court denied this motion in 2015, ruling orally from the bench that there were disputed issues of fact regarding the respective services provided by the adviser and sub-advisers (among other issues) that required a trial. A 25-day bench trial before Judge Sheridan commenced on January 11, 2016, culminating in closing arguments on June 1.

Judge Sheridan's August 25 opinion spans over 150 pages, and is closely focused on the competing evidence offered by the parties at trial under theGartenberg factors - the...

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