Maryland firm fined for charging ‘unauthorized’ fees

Potomac Asset Management Company is also alleged to have breached a number of compliance rules.

A private equity firm and its management have been fined by the Securities and Exchange Commission for allegedly taking $2.2 million in unauthorized fees and expenses from two of its funds.

The agency said Maryland-based Potomac Asset Management Company used the money, charged to Potomac Energy Fund and Potomac Energy Fund II, to pay the firm’s advisor-related expenses including compensation for one of its investment team, rent and regulatory compliance costs.

“PAMCO was not authorized to charge these fees and failed to disclose the use of fund assets to the limited partners,” the SEC filing said.

It added that the fund’s audited financial statements failed to disclose the payments as related party transactions, meaning the statements were not prepared in accordance with Generally Accepted Accounting Principles.

“As a result, PAMCO, which had custody of client assets, was unable to rely on an exception to the custody rule,” the SEC said.

The SEC also alleged a number of compliance shortcomings, including a failure by PAMCO to implement written policies and procedures “reasonably designed” to prevent violations of the Advisers Act arising from the allocation of portfolio company fees and certain advisor-related expenses between PAMCO and the funds.

It added that the firm’s manager, Goodloe Byron, failed to make capital commitments to the funds in the time frame set out by the limited partnership agreements, and this failure was not adequately disclosed to LPs.

The firm was fined $300,000 and since the investigation has formed an LP advisory board, hired a new chief compliance officer and employed an independent consultant to review and revise the compliance program, and reimbursed the funds with interest.