UPDATE 2-SEC settles charges with Nebraska mutual fund trustees and servicers

Thu May 2, 2013 6:03pm EDT

By Ross Kerber and Aruna Viswanatha

BOSTON/WASHINGTON May 2 (Reuters) - Trustees for a pair of Nebraska mutual fund trusts and two fund services firms on Thursday settled civil charges alleging they provided misleading disclosures, with the latest case arising from regulators' increased scrutiny of fee arrangements for asset managers.

Shareholder reports issued by Northern Lights Fund Trust and the Northern Lights Variable Trust misrepresented or omitted details the trustees considered in approving investment advisory contracts, the Securities and Exchange Commission said. The two trusts included as many as 71 series of mutual funds, the SEC said.

The SEC's action stemmed from a broad review of fee arrangements in the fund industry by the agency's asset management investigative unit. In December, for instance, the SEC charged eight board members of funds run by brokerage firm Morgan Keegan, alleging they failed to oversee managers who inaccurately priced assets.

Mercer Bullard, a law professor at the University of Mississippi who follows the fund industry, said the SEC's latest action shows outside directors of other fund complexes should also expect more scrutiny.

"Independent directors are in the cross-hairs," he said.

For instance, the SEC's charges against Northern Lights cited industry fee comparison data which it said trustees glossed over, signaling that the agency is focusing more on pricing matters, Bullard said. If he were a fund firm attorney, Bullard said, "I would be concerned about that as a shot across the bow."

Both the Morgan Keegan case and the Northern Lights matter show the increasing effort being made by the SEC's investigative unit, which has gotten more resources in recent years, said Stephen Crimmins, a K&L Gates attorney representing the Morgan Keegan funds' six independent directors.

"That's why we're seeing cases that deal with more technical matters than we saw in past," Crimmins said. All eight trustees in the Morgan Keegan case have reached a settlement agreement with SEC staff, which must still be approved by the commission. Terms are not yet available, he said.

In the latest case, the funds' administrator, Gemini Fund Services, and its compliance firm, Northern Lights Compliance Services, neither admitted nor denied the charges, but each agreed to pay a $50,000 penalty.

The firms and the five fund trustees also agreed to engage an independent compliance consultant to address the violations the SEC identified, the agency said.

"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 Canellos, who co-leads the SEC's enforcement division.

"We cooperated fully with the SEC in this inquiry, and are pleased that the matter has now been resolved," said James F. Moyle, a lawyer for the firms and the trustees.

Ian Roffman, an attorney for Nutter McClennen & Fish, said the latest case could draw particular notice among mid-sized fund complexes that, like the Northern Lights trusts, use many different advisers and sub-advisers.

"The SEC is sending a clear message that they're looking at fund trustees to ensure that funds are actually fulfilling their obligations and not simply acting in a perfunctory manner," Roffman said.

Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.