Infrastructure Fund Adviser Penalized $1.6M by SEC for Fee, Conflict Violations

The Securities and Exchange Commission ordered American Infrastructure Funds LLC, a private fund adviser specializing in infrastructure, to pay about $1.6 million to settle fiduciary breach charges related to conflicts of interest and fees. The total penalty included $1.2 million in fines and about $445,000 in disgorgement to affected investors.

The SEC alleged that AIM (the ‘M’ stands for MLP, or master limited partnership) violated the Investment Advisers Act of 1940 by not disclosing its conflicts of interest, fee structures and inter-fund loans properly to investors. The SEC also found that the firm violated duty of care obligations by not considering its clients’ interests when transferring funds or adequately informing them of those transfers.

AIM agreed to a cease-and-desist order, censure and the payment, without admitting or denying the SEC’s findings.

Conflicted Fee Structure

According to the SEC order, AIM managed and advised affiliate funds, which paid management fees to AIM. The fund adviser also collected monitoring fees from the companies in the funds’ portfolios for advisory and consulting services. One such subsidiary fund, GEN I Funds, invested in a private waste management company. AIM collected monitoring fees from that company, a portion of which was returned to investors in GEN I as an offset to their fund management fees.

Want the latest institutional investment industry news and insights? Sign up for CIO newsletters. 

AIM had a 10-year agreement with the waste company for advisory services that included a provision that the waste company would pay an accelerated $4.5 million fee if either party ended the relationship early. In 2019, AIM sold its stake in the company, terminated the agreement and collected the accelerated fee.

This action represented a conflict, according to the SEC, because AIM was advising GEN I, a fund with its own stake in the company, when it had an incentive to sell its stake in the same company and collect a large fee at the expense of GEN I’s ownership interests. AIM never disclosed this conflict to the investors of GEN I.

The SEC order also found “that AIM violated its duty of care by failing to consider whether the fee acceleration was in its clients’ best interest.”

Locking Up Investor Funds

From 2010 to 2015, the GEN I fund also invested $70 million in a toll bridge company. AIM, still the adviser to GEN I, transferred the bridge company assets to NABF, a new private fund created and managed by AIM, according to the order. In exchange for this transfer, GEN I received an ownership stake in NABF.

However, the transfer carried with it a 12-year agreement that locked up the GEN I funds in the bridge company. The SEC wrote that the agreement “locked up investor money for at least an additional decade without obtaining investor consent, without providing existing investors an option to exit, and without disclosing AIM’s conflicts of interest in the transaction.”

Improper Loan Disclosure

Lastly, the SEC found that another fund advised by AIM, GEN II Funds, incurred $1.3 million in expenses related to the acquisition of post office properties without actually acquiring the property. In 2018, AIM created a postal fund dedicated to postal properties. Since the new fund was taking over the post office portfolio, AIM reimbursed GEN II Funds the $1.3 million.

Since GEN II had taken those costs on behalf of the postal fund before being reimbursed, that was effectively a loan from GEN II to the postal fund, the SEC found. AIM never disclosed this loan to the investors of GEN II or considered if the loan was in the client’s best interest. This was also an undisclosed conflict, because AIM took these actions in the interest of its entire portfolio, without considering the effect it would have on the investors in the GEN II Fund, according to the regulator.

Tags: conflict of interest, private funds, SEC

The Rockefeller Foundation announced it plans to invest more than $1 billion over the next five years to advance global climate transition, a new investment strategy the philanthropic organization identifies as the first of its kind in the organization’s 110-year history.

“We believe climate change’s threats and the climate transition’s opportunities—especially for the most vulnerable—justify what will be the biggest and most impactful bet in our history,” Rajiv Shah, president of The Rockefeller Foundation, said in a release. “The strategy is designed around a simple idea: Humanity does not have to choose between addressing climate change and advancing human opportunity, we simply have to work in new ways and at a bigger scale and with new people and in new places to make sure everyone cannot just survive the climate crisis but thrive.”

According to the foundation, climate funding tends to be directed at either mitigating or adapting to climate change, rather than both. Its new strategy aims to integrate climate transition among its four main areas of focus: power, health, food and finance.

As part of the strategy, the foundation will earmark $35 million for climate-finance investments, including $5 million for grants for decarbonization and carbon removal strategies and $20 million for the development of climate-smart infrastructure in the U.S. It will also announce a series of new grants and initiatives in the coming months.

Never miss a story — sign up for CIO newsletters to stay up-to-date on the latest institutional investment industry news. 

“Current efforts to help people mitigate and adapt to climate change are insufficient,” the foundation’s release stated. “People’s interests reside at the nexus of both mitigation and adaptation, but current spending and action aims at one or the other. The best climate solutions will serve both.”

The foundation’s release emphasized that climate change is exacerbating inequities in the world’s financial system and estimates that $3.2 trillion more in spending on climate change is needed each year. Although its findings on climate transition are “dire,” the foundation stated that innovations and ideas exist that can slow the climate crisis and speed progress for people.

“But these transformations are incomplete and inequitable,” the foundation’s release reiterated. “They are underway in wealthier countries and communities, while special interests and structural barriers keep everyone else from joining in.”