Macquarie Investment Management Business Trust (MIMBT), a registered investment advisor of Macquarie Asset Management, is to pay $79.8 million in a settlement with the US Securities and Exchange Commission (SEC) in connection with overvaluing assets and engaging in unlawful cross trades.
The SEC charged the company with fraud for overvaluing approximately 4,900 largely illiquid collateralised mortgage obligations (CMOs) held in 20 advisory accounts, including 11 retail mutual funds, and for executing cross trades between advisory clients that favoured certain clients.
According to the SEC, from January 2017 to April 2021 MIMBT managed the Absolute Return Mortgage-Backed Securities strategy, a fixed-income investment strategy primarily invested in mortgage-backed securities, CMOs, and treasury futures. In their statement, Macquarie Asset Management report this strategy is now discontinued.
The SEC claim the strategy’s investments included thousands of smaller-sized, “odd lot” CMO positions that traded at a discount to institutional, larger-sized positions. MIMBT valued the odd lot CMOs using prices obtained from a third-party pricing service that were intended for institutional lots only, and did not provide separate valuations for odd lots.
The SEC’s order found that MIMBT had no reasonable basis to believe it could sell the odd lot CMOs at the pricing vendor’s valuations, and thousands of odd lot CMO positions were marked at inflated prices, resulting in overstating the performance of client accounts holding the overvalued CMOs.
Additionally, the SEC found MIMBT attempted to minimise losses by arranging cross trades with affiliated accounts rather than sell the CMOs. According to the SEC, this resulted in the retail mutual funds absorbing losses that otherwise would have been borne by the selling account in a market sale.
The SEC’s order finds that MIMBT violated the antifraud and compliance provisions of the Investment Advisers Act of 1940, and certain provisions of the Investment Company Act of 1940. MIMBT states that it has agreed to pay the civil penalty to settle the SEC’s investigation without admitting or denying its findings. The company claims it will remediate clients impacted by the investigation.
MIMBT also agreed to comply with other measures, including retaining a compliance consultant to conduct a comprehensive review of its policies and procedures relating to, among other things, valuation of CMOs and associated liquidity risks, and cross trading.
“It is alarming that a fiduciary took advantage of retail mutual funds it advised and executed unlawful cross trades to mitigate its overvaluation of fund assets,” said Eric I. Bustillo, director of the SEC’s Miami Regional Office. “Utilising a third-party pricing service does not negate an investment adviser’s obligation to value assets accurately.”
Macquarie Asset Management commented: “Our business is built on the principles of integrity and accountability. This legacy matter is not consistent with how we do business. We have already undertaken and are focused on completing additional remedial steps to address the issues identified in the investigation, with clients the priority. We also continue to invest in our risk culture to ensure we discharge our fiduciary duties to the highest standard.”