Federal Court Issues Trial Ruling in Section 36(b) "Manager of Managers" Lawsuit: AXA Advisory and Administrative Fees Held Not a Breach of Fiduciary Duty
The US District Court for the District of New Jersey issued its post-trial ruling on August 25, 2016 in Sivolella v. AXA Equitable Life Insurance Company—the first Section 36(b) trial decision since 2009. The court concluded that the plaintiffs failed to meet their burden to show that two AXA entities breached their fiduciary duty under Section 36(b) by charging excessive advisory and administrative fees to 12 AXA-sponsored mutual funds. The lengthy opinion highlights the heavy burden that plaintiffs face in Section 36(b) cases. It also serves as a reminder of the importance of witness expertise and credibility. Finally, as the first Section 36(b) case to go to trial following the Supreme Court’s decision in Jones v. Harris Associates, L.P., and the first trial of the “manager of managers” theory of liability, the AXA case has the potential to influence a number of the pending mutual fund “excessive fee” cases around the country.
Section 36(b) of the Investment Company Act of 1940 (1940 Act) imposes a fiduciary duty on an investment adviser to a mutual fund “with respect to the receipt of compensation,” and gives mutual fund shareholders a private right of action to enforce that duty. The statute expressly assigns to any such plaintiff the burden of proof, and subsequent case law makes clear that a breach may be shown only where the fee charged is “so disproportionately large that it bears no reasonable relationship to the services rendered and could not have been the product of arm’s length bargaining.”