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Rating:SEC Smites Northern Lights Not Rated 4.0 Email Routing List Email & Route  Print Print
Thursday, May 2, 2013

SEC Smites Northern Lights

Reported by Neil Anderson, Managing Editor

Gemini Fund Services, two of its mutual fund series trusts, another unit and five mutual fund trustees just settled with the SEC over disclosure issues.

Today the regulatory agency revealed that Gemini and Northern Lights Compliance Services will each pay $50,000 after the SEC found that the two — plus Northern Lights Fund Trust, Northern Lights Variable Trust and mutual fund trustees Lester Bryan, Anthony Hertl, Gary Lanzen, Michael Miola and Mark Taylor —caused "untrue or misleading disclosures about the factors they considered when approving or renewing investment advisory contracts on behalf of shareholders."

A spokeswoman for the trusts emailed MFWIre the following statement:
We are pleased to have reached this settlement with the SEC. The issues addressed by the settlement are somewhat technical in nature, but nonetheless important, regarding selected disclosures, record-keeping, and compliance. There are no allegations that investors suffered any monetary harm. We have cooperated fully with the SEC over the last two years to reach this favorable resolution, and appreciate the efforts of the SEC and the Board to get us here. Those efforts have led to enhancements and revisions to our policies that make us an even better company. And, as industry leaders in helping advisors successfully form and manage the innovative mutual funds that many investors desire, we embrace our role in developing market-leading standards in all aspects of our business. In fact, it’s that dedication to our clients and their investors that has propelled us to the forefront of the industry.
Between January 2009 and December 2010, according to the SEC, the two series trust included up to 71 mutual fund series. The trusts' spokeswoman said that "no particular funds or advisors are included in the charges."

"The Trusts have and will continue to enhance procedures to insure proper disclosure," the spokeswoman stated. "The issues were technical in nature, but nonetheless important."

The SEC claims that "some of the trusts' shareholder reports either misrepresented material information considered by the trustees or omitted material information about how they evaluated certain factors in reaching their decisions on behalf of the funds and their shareholders."
The SEC’s order found that some boilerplate disclosures related to the 15(c) process that were included by GFS in some fund series shareholder reports contained untrue or misleading information.  For example, one disclosure claimed that the trustees had considered peer group information about the advisory fee, however no such data had been provided to the trustees.  Other disclosures misleadingly indicated that the fund’s advisory fee was not materially higher than its peer group range, when in fact the fee was nearly double the peer group’s mean fee or even higher.  GFS failed to ensure that certain shareholder reports contained the required disclosures about the trustees’ evaluation process and failed to ensure that certain series within the trusts maintained and preserved their 15(c) files.    The SEC’s order also found that certain mutual fund series did not follow their policies and procedures for the trustees’ approval of the investment advisers’ compliance programs.  Fund boards are required to approve the policies and procedures of service providers to a fund, including its adviser.  The policies and procedures of each series within the Northern Lights trusts stated that the trustees could approve the compliance program of each series’ investment adviser based on their review of an adviser’s compliance manual or based on a summary provided by NLCS that familiarized them with the salient features of the compliance program and provided a good understanding of how the program addressed particularly significant compliance risks.  Rather than following this process, the trustees’ approval of the advisers’ compliance programs was based primarily on their review of a brief written statement prepared by NLCS saying that the advisers’ compliance manuals were “sufficient and in use” and a verbal representation by NLCS that such manuals were adequate.
And the SEC may be putting other mutual fund series trust operators on notice, too, with a top official implying that heavier scrutiny of this type of business is coming.

"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 recordkeeping obligations," stated Marshall Sprung, deputy chief of the asset management unit within the SEC's enforcement division.

The trusts' spokewoman offered a statement about what's next for them and Gemini.

"Many of the changes have been made years ago and we are always seeking to enhance the process," the spokeswoman stated. "We are utilizing state of the art technology to improve the process and procedures have been implemented to avoid future deficiencies."


Press Release


FOR IMMEDIATE RELEASE                                                                                          2013-78  

  SEC CHARGES GATEKEEPERS OF TWO MUTUAL FUND TRUSTS FOR INACCURATE DISCLOSURES ABOUT DECISIONS ON BEHALF OF SHAREHOLDERS  

  Washington, D.C., May 2, 2013 – The Securities and Exchange Commission today charged the gatekeepers of a pair of mutual fund trusts with causing untrue or misleading disclosures about the factors they considered when approving or renewing investment advisory contracts on behalf of shareholders.   

  Some trusts are created as turnkey mutual fund operations that launch numerous funds to be managed by different unaffiliated advisers and overseen by a single board of trustees.  The federal securities laws require all mutual fund directors to evaluate and approve a fund’s contract with its investment adviser, and the funds must report back to shareholders about the material factors considered by the directors in making these decisions.  The SEC Enforcement Division’s Asset Management Unit has been taking a widespread look into the investment advisory contract renewal process and fee arrangements in the fund industry.  

  An SEC investigation that arose from an examination of the Northern Lights Fund Trust and the Northern Lights Variable Trust found that some of the trusts’ shareholder reports either misrepresented material information considered by the trustees or omitted material information about how they evaluated certain factors in reaching their decisions on behalf of the funds and their shareholders.  The trustees and the trusts’ chief compliance officer Northern Lights Compliance Services (NLCS) were responsible for causing violations of the SEC’s compliance rule, and the trusts’ fund administrator Gemini Fund Services (GFS) caused violations of the Investment Company Act recordkeeping and reporting provisions.  

  The firms and the trustees have agreed to settle the SEC’s charges.  

  “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,” said George S. Canellos, Co-Director of the SEC’s Division of Enforcement.  “We will aggressively enforce investors’ rights to accurate and complete information about the board’s process and decision-making.”   

  The five trustees named in the SEC enforcement action are: Michael Miola of Arizona, Lester M. Bryan of Utah, Anthony J. Hertl of Florida, Gary W. Lanzen of Nevada, and Mark H. Taylor of Ohio.  

  According to the SEC’s order instituting settled administrative proceedings, the Northern Lights trusts included up to 71 mutual fund series from January 2009 to December 2010, most of which were managed by different advisers and sub-advisers.  The trustees conducted 15 board meetings during that time period, and made decisions about 113 advisory and 32 sub-advisory contracts during what’s known as the 15(c) process.  Section 15(c) of the Investment Company Act requires fund directors to request and evaluate information that is reasonably necessary to evaluate the terms of any contract for an investment adviser of a registered investment company.   

  The SEC’s order found that some boilerplate disclosures related to the 15(c) process that were included by GFS in some fund series shareholder reports contained untrue or misleading information.  For example, one disclosure claimed that the trustees had considered peer group information about the advisory fee, however no such data had been provided to the trustees.  Other disclosures misleadingly indicated that the fund’s advisory fee was not materially higher than its peer group range, when in fact the fee was nearly double the peer group’s mean fee or even higher.  GFS failed to ensure that certain shareholder reports contained the required disclosures about the trustees’ evaluation process and failed to ensure that certain series within the trusts maintained and preserved their 15(c) files.   

  The SEC’s order also found that certain mutual fund series did not follow their policies and procedures for the trustees’ approval of the investment advisers’ compliance programs.  Fund boards are required to approve the policies and procedures of service providers to a fund, including its adviser.  The policies and procedures of each series within the Northern Lights trusts stated that the trustees could approve the compliance program of each series’ investment adviser based on their review of an adviser’s compliance manual or based on a summary provided by NLCS that familiarized them with the salient features of the compliance program and provided a good understanding of how the program addressed particularly significant compliance risks.  Rather than following this process, the trustees’ approval of the advisers’ compliance programs was based primarily on their review of a brief written statement prepared by NLCS saying that the advisers’ compliance manuals were “sufficient and in use” and a verbal representation by NLCS that such manuals were adequate.  

  “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 recordkeeping obligations,” said Marshall S. Sprung, Deputy Chief of the SEC Enforcement Division’s Asset Management Unit.   

  The SEC’s order finds that GFS caused violations of Sections 30(e) and 31(a) of the Investment Company Act and Rules 30e-1 and 31a-2(a)(6); NLCS and the trustees caused violations of Rule 38a-1(a)(1) under the Investment Company Act; and the trustees caused violations of Section 34(b) of the Investment Company Act.  Without admitting or denying the SEC’s findings, GFS and NLCS each agreed to pay $50,000 penalties, and the firms and trustees agreed to engage an independent compliance consultant to address the violations found in the SEC’s order.  They agreed to cease and desist from committing or causing any violations and any future violations of those provisions.   

The SEC’s investigation was conducted by Asset Management Unit members in the Denver and New York offices, including James Scoggins, Noel Franklin, John Mulhern, and Catherine Lifeso.  The examination that led to the investigation was conducted by Bruce Ketter, Craig Ellis, and Phil Perrone of the Denver office.
 

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