Aquila Management Corp. of New York, adviser to the Tax-Free Fund for Utah, the sole single-state municipal bond fund in Utah, notified shareholders that Zions First National Bank intends to resign as the fund’s sub-adviser sometime before its contract expires in September.

Zions First National Bank is a subsidiary of Zions Bancorporation, both of Salt Lake City. Zions' March 16 resignation was disclosed in a March 28 fund filing.

The resignation follows allegations by state lawmakers that a conflict of interest existed by virtue of Zions’ management of the Aquila Utah municipal bond fund. Zions had led support for the passage of legislation that would have removed the state tax-exempt status of income received from municipal bonds issued outside of Utah, giving Utah residents an incentive to purchase only municipal bonds issued in Utah.

Currently, Utah and Indiana are the only states that offer their residents tax exemptions for out-of-state municipal bond income.

The bill was vetoed by Utah Governor Mike Leavitt late last month.

Aquila is currently exploring alternatives to continue local portfolio management of the fund, including bringing the fund’s management in-house, said Diana Herrmann, president and chief operating officer of the fund group.

Aquila, which advises five single-state muni funds, two regional equity funds and five money funds, only manages three of its own funds. The single-state funds and one of the regional funds are sub-advised by managers in the regions in which the funds invest.

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