On August 21, 2013, the SEC filed an order instituting administrative proceedings against Chariot Advisors LLC (“Chariot”), a North Carolina-based investment adviser, and its former owner, Elliott Shifman, for misleading the board of trustees (the “Board”) of the Chariot Absolute Return Currency Portfolio (the “Fund”), a series of the Northern Lights Variable Trust, in connection with the Board’s evaluation and approval of the Fund’s advisory contract with Chariot pursuant to Section 15(c) of the Investment Company Act (the “15(c) process”).

The SEC alleged that Shifman, acting on behalf of Chariot, misled the Board during the 15(c) process conducted in connection with the formation of the Fund by stating that Chariot would implement the Fund’s currency trading strategy using a computer model and algorithm that would permit the Fund to take advantage of currency arbitrage opportunities. Chariot also provided a proposed prospectus for the Fund that described the Fund’s ability to engage in algorithmic currency trading, and similar statements were made in the Fund’s initial registration statement filed with the SEC in June 2009. The SEC alleges that, contrary to what Shifman told the Board and what was stated in the prospectus, Chariot did not possess an algorithm or model capable of engaging in currency trading. According to the SEC order, for at least the first two months after the Fund launched in July 2009, the Fund’s currency trading was under the control of an individual trader who was not using an algorithm but instead made trading decisions based on a combination of technical analysis and intuition. Chariot and Shifman have been charged with violations of Sections 15(c) and 34(b) of the Investment Company Act (the “1940 Act”), and violations of Sections 206(1), 206(2) and 206(4) of the Investment Advisers Act (the “Advisers Act”).

The action against Chariot follows the recent settlement of an SEC enforcement action brought against the trustees of Northern Lights Variable Trust, which was based on inaccurate statements made by the trustees with regard to their approval of advisory contracts for other series of the trust. The current proceeding against Chariot demonstrates that the SEC staff will also scrutinize the statements made by investment advisers during the 15(c) process. The Ropes & Gray Alert summarizing the Northern Lights Variable Trust enforcement action can be found here. The full text of the SEC order against Chariot can be found here.