PORTFOLIO MANAGERS SANCTIONED FOR CHARGING UNAUTHORIZED FEES
Unauthorized and undisclosed “credit monitoring” fees and conflicts of interest are the predicate for administrative proceedings and sanctions against two former portfolio managers. In the Matter of Kimball L. Young, File No. 3-1418 (Jan. 7, 2011); In the Matter of Thomas S. Albright, File No. 3-14179 (Jan. 7, 2011). In August 2001 Aquila Investment Management, LLC began to directly manage The Tax Free Fund for Utah. Aquila, a registered investment adviser, previously contracted with banks to perform the portfolio management function. The Fund is a non-diversified open-ended investment company that invests in tax- free municipal obligations issued by the State of Utah.
Messrs. Young and Albright were retained to mange the Fund in August of 2001. As co-portfolio managers they were responsible for the day-to-day management of the Fund. As part of their plan for the Fund they began acquiring non-rated private placement offerings. This was approved by the board. Mr. Young also suggested that the board adopt a performance based compensation system. The board declined to implement that suggestion.
In 2003 Messrs. Young and Albright started charging issuers of the non-rated and private place bonds a “credit monitoring fee.” Purportedly the fee covered the cost to monitor the credit risk posed by the unrated securities. The fees ranged between 0.5% and 1.0% of the face value of the instruments. This was a one-time charge paid at closing to Mr. Young’s company, MCM. In fact little work was done in connection with monitoring the risk.
Between 2003 and 2009 about $520,626 in fees was paid. Although the deal documents stated the fees went to the Fund, in fact they were split by the Respondents. The board of Aquila was not told about the fees. Payment of the fees was contrary to the policies of Aquila. Accordingly, when the board discovered them it reported the matter to the SEC.
According to the Order the payments violated Exchange Act Section 17(e)(1) which prohibits any affiliated person of a registered investment company, or any affiliate, from receiving compensation from any source other than the investment company in connection with the sale of the company’s property. With respect to Respondent Young, who reviewed documents which falsely stated that the fee would be paid to the Fund, the Order also states that he willfully violated Section 206(1) of the Advisers Act which prohibits an investment adviser from employing any device, scheme or artifice to defraud any client. It also states that he violated Section 206(2) which prohibits an investment adviser from engaging in any transaction, practice, or course of business which operates as a fraud or deceit upon any client. The Order in the action naming Mr. Albright as a Respondent provides that in addition to Section 17(e)(1) he willfully violated Section 206(2) of the Advisers Act.
To resolve the actions each Respondent consented to the entry of and order directing that they cease and desist from committing or causing any violations and any future violations of the Sections cited in the Order in their respective cases. In addition, Mr. Young agreed to the entry of an order barring him from association with any broker, deal or investment adviser with a right to reapply after five years. He will also pay disgorgement of $260,313 along with prejudgment interest and a civil penalty of $75,000. Mr. Albright will be similarly barred with a right to reapply after one year. He will also pay disgorgement of $260,313 along with prejudgment interest and a civil penalty of $50,000.