Investment advisor settles charges with SEC over violations

Investment adviser Macquarie Investment Management Business Trust (MIMBT) is settling charges with the Securities and Exchange Commission (SEC) for overvaluing illiquid collateralized mortgage obligations (CMOs).

According to the SEC’s order, the company overvalued approximately 4,900 largely illiquid CMOs held in 20 advisory accounts, including 11 retail mutual funds. The SEC also said the firm executed hundreds of cross trades between advisory clients that favored certain clients over others.

Macquarie agreed to pay a total of $79.8 million to settle the charges.

From January 2017 through April 2021, according to the SEC, the company managed the Absolute Return Mortgage-Backed Securities strategy, a fixed-income investment strategy primarily invested in mortgage-backed securities, CMOs, and treasury futures. Investments included thousands of smaller-sized, “odd lot” CMO positions that traded at a discount to institutional, larger-sized positions. Macquarie valued the odd lot CMOs using prices obtained from a third-party pricing service that were intended for institutional lots only. The pricing service did not provide separate valuations for odd lots.

The order finds 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. This resulted in MIMBT overstating the performance of client accounts holding the overvalued CMOs.

Further, the order said that MIMBT attempted to minimize losses to redeeming investors by arranging cross trades with affiliated accounts, rather than selling the overvalued CMOs into the market. In one instance, MIMBT executed 465 internal cross trades between a selling account and 11 retail mutual funds above independent current market prices. These trades resulted in the retail mutual funds taking losses that otherwise would have been borne by the selling account in a market sale, the SEC said.

“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,” Eric Bustillo, director of the SEC’s Miami Regional Office, said. “Utilizing a third-party pricing service does not negate an investment adviser’s obligation to value assets accurately.”

MIMBT violated the antifraud and compliance provisions of the Investment Advisers Act of 1940, and certain provisions of the Investment Company Act of 1940, the SEC said. Without admitting or denying the SEC’s findings, MIMBT agreed to a censure, to cease and desist from further violations of the charged provisions, and to pay a $70 million penalty and disgorgement and prejudgment interest, totaling an additional $9.8 million.

Further, MIMBT agreed to retain a compliance consultant to conduct a review of its policies and procedures relating to, among other things, valuation of CMOs and associated liquidity risks, and cross trading.

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