SEC charges mutual fund firm with misleading shareholders on advisers

Fund board said adviser fees were competitive; they were actually double, agency claims

May 2, 2013 @ 3:57 pm

By Mark Schoeff Jr.

mutual funds, securities and exchange commission, disclosure, fees, compliance
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The Securities and Exchange Commission has charged two firms operating a group of mutual funds with misleading shareholders about their decisions on hiring investment advisers for the funds.

In a complaint, the regulator said that Northern Lights Fund Trust and Northern Lights Variable Trust failed to properly evaluate advisory contracts for mutual funds from January 2009 through December 2010.

During that time period, Northern Lights Fund Trust and Northern Lights Variable Trust oversaw 71 mutual funds, with 113 advisers and 32 subadvisers. The principal allegations, however, relate to a small number of funds no longer sold by the trusts.

The trustees' chief compliance officer, Northern Lights Compliance Services LLC, and the fund administrator, Gemini Fund Services LLC, along with five trustees, were cited for disclosure, reporting, record-keeping and compliance violations.

The firms settled with the SEC, paying $50,000 in penalties each and hiring an independent compliance consultant to address the violations. They did not admit to nor deny the charges.

The case is an example of both the SEC's recent crackdown on mutual fund directors and its review of mutual fund contract renewal and fee arrangements.

“Determining the terms of the investment advisory contract, especially compensation of the adviser, is one of the most critical duties of a mutual fund board,” George Canellos, co-director of the SEC's Division of Enforcement, said in a statement. “We will aggressively enforce investors' rights to accurate and complete information about the board's process and decision-making.”

The SEC said that the board of directors of the trusts had submitted to shareholders “boilerplate” statements about fund advisers that were materially misleading or untrue regarding their fees and compliance programs.

For instance, the board told shareholders that advisers' fees were competitive with those of similar advisers when, in fact, they were twice as high. The trustees had never sought out peer group information. In addition, the trustees approved advisers' compliance programs after reviewing a cursory report from the compliance company.

The SEC said that the trustees had glossed over the factors related to hiring advisers for the mutual funds in violation of Section 15(c) of the Investment Company Act.

“Boilerplate disclosure of the evaluation process for advisory contracts does not provide meaningful disclosure,” the SEC stated in the complaint.

The case highlights the SEC's concern about so-called “turnkey” mutual fund operations in which one board of directors oversees dozens of unaffiliated mutual funds, each of which have their own adviser.

“These violations make clear that turnkey mutual fund arrangements can pose significant governance concerns, and trustees must be vigilant in ensuring that the funds they oversee meet their disclosure, compliance, reporting and record-keeping obligations,” said Marshall Sprung, deputy chief of the SEC Division of Enforcement's asset management unit.


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