The United States District Court in New Jersey recently issued an unpublished ruling that a variable annuity holder had standing to sue for allegedly excessive management fees paid by an underlying mutual fund.
Under Section 36(b) of the Investment Company Act of 1940, an investment adviser has a fiduciary duty with respect to receipt of compensation for services it provides to a mutual fund. However, that Section by its terms authorizes only the SEC or a “security holder” of the mutual fund to bring an action for breach of such duty.
In this case, Sivolella v. AXA Equitable Life Ins. Co., the defendant argued that the undefined term “security holder” refers to the legal owner of a security. According to the defendant, therefore, a variable annuity holder did not have standing to bring a claim under Section 36(b), because the insurance company separate account, rather than the annuity holder, was the legal owner of the shares issued by the mutual fund. The plaintiff countered that the term “security holder” referred instead to the equitable or beneficial owner of a security.
The court concluded that annuity holders “paid all of” the management fees in question; had the right to instruct how the mutual fund shares would be voted; bore “the full risk of poor investment performance”; and would pay any taxes owed upon any decision by the annuity holder to “withdraw her investment in the [mutual funds]”. The court also stated that assets in the insurer’s separate account would be “immune from the claims of [the insurer’s] creditors, while being vulnerable to the claims of the [annuity holders’] creditors.”
Accordingly, the court found that the annuity holder had “all of the economic stake in these transactions” and granted standing under Section 36(b).