The Securities and Exchange Commission (“SEC”) issued a cease-and-desist order against Northern Lights Compliance Services, LLC (“Northern Lights”), Gemini Fund Services, LLC (“Gemini”) and the trustees of two investment companies (“Funds”) for which Northern Lights and Gemini were service providers for “disclosure, reporting, recordkeeping and compliance violations”.
Northern Lights, a compliance firm which provided outsourced chief compliance officer services to the Funds, and Gemini, the Funds’ administrator, were each fined $50,000 for failure to perform their respective functions appropriately.
The Funds were series trusts. These “turnkey” platforms are used by many investment advisers to establish small to mid-sized funds at a lower cost. These platforms allow funds to piggy back into an already existing fund structure without needing to set up a new fund company and corresponding administration, governance, and compliance.
The SEC order describes the use of boilerplate disclosure to fund shareholders that was “materially untrue and misleading”. In addition, the SEC order claims that Northern Lights and the trustees caused violations of the compliance rule (Rule 38a-1) under the Investment Company Act by not reviewing the compliance manuals (or adequate summaries of the compliance manuals), as required, to approve the compliance policies and procedures of the Funds’ advisers. The SEC order also describes Gemini’s failure to maintain certain required records regarding the board of director’s evaluation and selection process with respect to investment advisers. This SEC order brought into focus issues that will have several implications on Fund boards and service providers including, but not limited to:
- The directors and trustees level of involvement and their reliance on others including counsel and compliance officers;
- Fund counsel’s role in approving accurate and well drafted minutes, disclosure documents and other documentation; and
- Fund advisers and Fund Chief Compliance Officers — the preparation of sufficient information adequate for fund directors and trustees to fulfill their roles in evaluating and selecting advisers.
Organization and accountability are key.
The details on this case can be found on the SEC website.
