According to the U.S. District Court for the District of New Jersey, plaintiff Mary Ann Sovolella can sue AXA Equitable Life Insurance Co. on behalf of eight mutual funds that belong to a variable annuity program for excessive management fees. Per Judge Peter Sheridan, the economic realities and a broad interpretation the 1940 Investment Company Act Section 36(b) gives her standing. The defendants are AXA Equitable Funds Management Group LLC (collectively AXA) and AXA Equitable Life Insurance Company (AXA Equitable).
Sovolella is suing on behalf of the AXA Funds, EQ Advisors Trust and those that paid investment management fees. She alleges that charging the funds management fees that were excessive violates ICA’s Section 36(b). The defendants’ sought to have the securities lawsuit dismissed on the grounds of lack of statutory standing.
The plaintiff joined the EQUI-VEST Deferred Variable Annuity Program after the opportunity was offered to her by her employer, Newark School System (due to a group annuity contract involving AXA Equitable). The eight AXA Funds in the EQ Trust are part of the portfolios that were made available to Sovolella through the program. AXA charges the funds an investment management fee that is taken out of the fund balance, which lowers the “value of the Plaintiff’s investment.”
While ICA’s Section 36(b) includes the provision that investment advisers have a fiduciary obligation regarding the “receipt of compensation for services” that they give to mutual funds, there are limits as to who can pursue a claim. An action can only be brought by the Securities and Exchange Commission or a security holder for a mutual fund that is allegedly charging fees that are excessive. However, per the court, ICA doesn’t provide a definition for the term “security holder.” While the defendants argued that Sovolella is not a “security holder” the plaintiff, maintains that she is one as this pertains to the funds.
Denying the defendants’ motion to dismiss, the court said that while it doesn’t make “sense to limit standing” in in order to enforce Section 36(b) to AXA or any entity that didn’t pay the fees that were allegedly excessive, Sovolella and other investors that are similarly situated are accountable for and did pay all challenged fees while bearing the complete risk of “poor investment performance,” entitled to direct AXA on how to vote their shares, and when the plaintiff opts to take out her investment in the fund it will be her responsibility to pay the investment taxes. Plaintiff, therefore, possesses an “economic stake” in these transactions.
Sivolella v. AXA Equitable Life Insurance Co., Justia (PDF)
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