WASHINGTON -- The registration of Chicago-based Hutchinson Advisers Inc. was revoked on Aug. 20 for securities pricing violations in connection with its operation of the country's only open-end municipal lease mutual fund, the Securities and Exchange Commission announced yesterday.
The action follows an agency order on Aug. 8 that enjoined the firm from further violations of the pricing, antifraud, and record-keeping requirements of the Investment Company Act of 1940.
The agency's latest order also permanently bars the company's founder, Howard H. Hutchinson, from acting as a supervisor in the registered securities business. Mr. Hutchinson yesterday said he will continue brokering nonregistered leasing deals and will work in a nonsupervisory capacity with a small broker dealer.
The SEC charged the firm sold and redeemed shares of its Municipal Lease Securities Fund at prices that were not based on the calculated net asset value of those shares.
In addition, the firm "falsely stated" -- in documents filed with the SEC and distributed to investors -- that the share prices were based on their calculated net asset value, the SEC order states.
Mr. Hutchinson, who has managed the $18 million fund since 1985, yesterday said the pricing violations were not intentional and were caused by the firm's inability to keep up with the mountain of paperwork involved in operating such an open-end portfolio of diverse leases with short terms between three and five years.
A lack of "back office control of the leasing payments caused us to fall behind in keeping the daily balances, which made it impossible to calculate the net asset value of the shares according to prospectus requirements, which led to other violations we did not intend," he said.
Such a chain of events may be a hazard to any firm that tries to operate such an open-end leasing fund, he maintained. "I don't think it's possible to do under the Investment Company Act of 1940. The act was meant for liquid securities. It didn't envision lease-backed securities," he said.
During the four years the fund operated before the SEC went to court and had it taken over by a receiver in December 1989, it offered high tax-exempt returns for investors but never made a profit, he said. "This thing cost a ton of money to run and was a great big cash hemorrhage," he said.
"Given the 1940 act and other acts that apply to public sale, I think it's going to be very difficult to do in the future because of the cost of doing legal fees, underwriting expenses, servicing expenses, origination expenses, and other back office expenses," he said.
When those factors are "weighed against the gross spread or profit margin, they don't balance, it goes nowhere," he said. Other leasing analysts have agreed recently that the costs of setting up and running pass-through lease securities funds may be prohibitive.
Mr. Hutchinson and the court-appointed receiver, former Arthur Andersen partner Richard Lindrooth, currently are liquidating the fund, and have paid off about $10 million of the original investments of the fund's 550 shareholders in the last two years.
Mr. Hutchinson says he expects to complete the liquidation in another two years as remaining leases in the portfolio mature, if he does not find a buyer to administer what is left of the fund first.