SEC Charges in Connection with Disclosures Regarding the Renewal of an Advisory Contract to a Mutual Fund

The SEC 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.

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 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 SEC's order found that:

1. "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";
2. "Certain mutual fund series did not follow their policies and procedures for the trustees' approval of the investment advisers' compliance programs";
3. "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."

All mutual fund directors are required 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.

See: SEC Order and SEC Press Release.