SEC Settles with Service Providers and Trustees of two Mutual Fund Trusts for Inaccurate Disclosures Regarding Section 15(c) Advisory Contract Approval Process

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On May 2, 2013, the SEC filed an order instituting settled administrative proceedings against the trustees (“Trustees”) and certain service providers of two “turnkey” open-end series investment companies, Northern Lights Fund Trust and Northern Lights Variable Trust (collectively, the “Trusts”), relating to alleged disclosure, reporting, recordkeeping and compliance violations of the Investment Company Act of 1940 (the “1940 Act”). The violations related to the Trustees’ advisory contract approval process under Section 15(c) of the 1940 Act and the approval by the Trustees of certain subadvisers’ compliance programs. The SEC’s order underscores the heightened scrutiny on the part of the SEC Enforcement Division’s Asset Management Unit on the 15(c) advisory contract approval process, as well as the Asset Management Unit’s concerns regarding the governance of “turnkey” mutual fund complexes.

Between January 2009 and December 2010, the Trusts included up to 71 funds, many of which were managed by different unaffiliated advisers and sub-advisers. A common board of five trustees oversaw both Trusts. For both Trusts and their respective funds, Gemini Fund Services, LLC (“Gemini”) acted as administrator and its affiliate, Northern Lights Compliance Services, LLC (“NLCS”), provided chief compliance officer services. According to the order, the Trustees held 15 board meetings during the period, at which they approved 113 advisory contracts and 32 sub-advisory contracts. The SEC’s focus on the number and nature of the board meetings at which the Trustees approved the continuance or renewal decisions on advisory contracts pursuant to Section 15(c) of the 1940 Act, together with certain statements made in the SEC’s related press release, appear to signal its concerns regarding the governance of turnkey mutual fund programs.

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Topics:  Compliance, Disclosure Requirements, Mutual Funds, Recordkeeping Requirements, Reporting Requirements, Sanctions, SEC, Trustees

Published In: Business Torts Updates, General Business Updates, Finance & Banking Updates, Securities Updates, Wills, Trusts, & Estate Planning Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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