On May 2, 2013, the SEC settled charges against the trustees, administrator and CCO service provider of the Northern Lights Fund Trust and the Northern Lights Variable Trust (the Trusts), finding that the trustees, administrator and CCO service provider violated the 1940 Act and various rules thereunder in connection with disclosures regarding the trustees’ approval of certain investment advisory contracts and approval of the compliance programs of the advisers to the Trusts’ series. The trustees, administrator and CCO service provider agreed to settle the SEC’s charges without admitting or denying the SEC’s findings. The Trusts offer multiple series managed by different unaffiliated advisers, administered by a single administrator and overseen by a single board of trustees, in an arrangement known as a “turnkey” investment company platform.
The SEC found that certain disclosures included in the Trusts’ shareholder reports relating to the factors the trustees considered in approving or renewing advisory contracts contained boilerplate language with false or misleading information. The SEC stated that, in one instance, the disclosure claimed that the trustees had considered peer group information about the advisory fee, yet the trustees never received this information. The SEC noted two other instances where the shareholder report disclosure implied that the advisory fee was not materially higher than the peer group range, when it was almost twice as high as the peer group’s mean. The SEC also determined that the administrator did not ensure that all applicable shareholder reports contained the mandatory disclosures about the trustees’ evaluation of advisory contracts and also failed to ensure that numerous series maintained and preserved their contract renewal files.
The SEC also found that the trustees did not follow the Trusts’ policies and procedures for approval of the compliance programs of advisers to the series of the Trusts. The SEC stated that the Trusts’ policies and procedures called for the trustees to approve the advisers’ compliance programs only after reviewing the advisers’ compliance manual or after receiving a summary of the essential parts of the compliance program from the CCO service provider. However, according to the SEC, the trustees’ approval of the advisers’ compliance programs was based primarily on their review of a brief written statement prepared by the CCO service provider stating that the advisers’ compliance manuals were “sufficient and in use” and a verbal representation by the CCO service provider that such manuals were adequate.
The SEC order found that the trustees caused violations of Section 34(b) of the 1940 Act; the trustees and the CCO service provider caused violations of Rule 38a-1 under the 1940 Act; and the administrator caused violations of Sections 30(e) and 31(a) of the 1940 Act and Rules 30e-1 and 31a-2 thereunder. The administrator and the CCO service provider agreed to pay $50,000 penalties each, and the administrator, the CCO service provider and the trustees agreed to engage an independent compliance consultant to address the violations found in the SEC order.