United States: Court Rejects Excessive Fee Claims Following Trial On Mutual Fund "Manager Of Managers" Theory

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 the “Gartenberg factors” – the non-exhaustive list of factors that courts may consider in deciding Section 36(b) claims, first set forth by the Second Circuit Court of Appeals in Gartenberg v. Merrill Lynch Asset Management, Inc. in 1982. The decision gives relatively little attention to the actual standard of liability articulated in Gartenberg and later enshrined by the Supreme Court in Jones: that an adviser only violates Section 36(b) if it charges a fee that 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. Instead, the decision essentially treats the Gartenberg factors as though they are the standard, and also suggests – inconsistently with the language of Section 36(b) – that the fiduciary duties of the funds’ independent trustees (rather than those of the adviser) were at issue in the trial.

On the central issue of the services respectively provided by AXA and its sub-advisers, the judge rejected the plaintiffs’ effort to focus exclusively on the contractual language of the investment management and sub-advisory agreements. Although the court acknowledged that the “broad and vague” language in the “fairly boilerplate” agreements might suggest that most of the adviser’s duties are delegated, “voluminous testimony of credible witnesses” demonstrated that the adviser, in fact, bears an array of significant responsibilities that are not delegated to the sub-advisers. The judge concluded it would elevate “form over substance” to look only at the contractual language. Instead, “the analysis must consider all duties, whether enumerated in a contract or undertaken in a manner to carry out the contractual duties.” Similarly, the court found that, as sponsor of the funds, the adviser bears “a large amount of enterprise risk,” including “litigation and reputational risks, operational and business risks, and the risk that [the adviser] and the Funds may have to pay the sub-advisers in the event of legal action.” Such risks “would justify a portion of the fees charged to investors.”

More generally, the court found AXA’s fact witnesses and experts to be credible, while questioning the credibility of the plaintiff’s proffered experts. The judge pointed, in particular, to the “credible and reliable” testimony provided by the funds’ lead independent trustee, that the court described as “generally consistent, thorough, and accurate.” By contrast, plaintiffs’ expert Dr. Steven Pomerantz – a “professional expert witness” who has testified in several Section 36(b) cases – was heavily criticized in the opinion: the court gave “little weight to his testimony due to inconsistencies, oversimplifications, and his sarcastic demeanor.” In considering the plaintiffs’ various arguments under the Gartenberg factors, the court was unpersuaded by the plaintiffs’ critiques of AXA’s profitability methodology, concluding, for example, that allocating costs on the basis of revenue was consistent with accounting principles. The judge credited the defendants’ evidence on economies of scale, demonstrating that both break-points and other cost-saving devices had been used to share economies with shareholders. Regarding the comparison of the funds’ fees to those of other funds, the judge rejected the plaintiffs’ attempt to discredit the reliability of the Lipper comparative data relied upon by the board and found the trustees’ reference to comparative fees to be “reasonable.” Regarding the makeup and actions of the fund board, the court held that its members were impartial, diverse and independent. While the judge appeared to give some credence to the plaintiffs’ critique that the board chair was not independent, he also seemed comforted by the presence of an active “lead” independent trustee.

Given the fact-intensive nature of much of the court’s findings and reasoning, it is unclear how significantly the Sivolella opinion will impact other Section 36(b) cases. The court’s recognition of the fact that boilerplate language in industry-standard management and sub-advisory agreements does not tell the whole story about the services provided and responsibilities and risks borne by fund advisers should give other courts pause when assessing allegations in complaints that point to nothing more than the contract language. What is certain, however, is that this court’s decision provides further confirmation that the stringent standard of Section 36(b) liability imposed by Congress in framing the 1940 Act and later embraced by the Supreme Court in Jones erects a high hurdle for plaintiffs attempting to impose liability for ostensibly “excessive” fees.

Ropes & Gray’s litigators are actively involved in defending advisers in Section 36(b) litigation, and are closely monitoring developments in the case law.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions