Macquarie Investment Management Business Trust (MIMBT), a registered investment advisor under Macquarie Asset Management, has agreed to a settlement of $79.8 million with the US Securities and Exchange Commission (SEC) due to allegations of asset overvaluation and illegal cross trading practices.
The SEC charged MIMBT with fraud for inflating the value of approximately 4,900 largely illiquid collateralized mortgage obligations (CMOs) in 20 advisory accounts, which included 11 retail mutual funds. Additionally, the SEC found that the firm executed cross trades that favored certain clients over others.
From January 2017 to April 2021, MIMBT managed the Absolute Return Mortgage-Backed Securities strategy, which focused primarily on mortgage-backed securities, CMOs, and treasury futures. In a statement, Macquarie Asset Management indicated that this strategy has since been discontinued.
The SEC’s investigation revealed that the strategy included many smaller “odd lot” CMO positions that were traded at a discount compared to larger institutional lots. MIMBT used pricing data from a third-party service intended for institutional lots, failing to provide distinct valuations for odd lots. The SEC determined that MIMBT did not have a reasonable basis for the inflated valuations, leading to an overstatement of client account performance.
Furthermore, the SEC found that MIMBT sought to mitigate losses by conducting cross trades with affiliated accounts instead of selling the CMOs, leading to retail mutual funds absorbing losses that would have been incurred by the selling account in a market transaction.
The SEC concluded that MIMBT violated the antifraud and compliance provisions of the Investment Advisers Act of 1940, as well as certain aspects of the Investment Company Act of 1940. As part of the settlement, MIMBT has agreed to pay the civil penalty without admitting or denying the SEC’s findings and has committed to remediating the clients impacted by the investigation.
Additionally, MIMBT will implement further compliance measures, including hiring a consultant to comprehensively review its policies and procedures related to CMO valuations, liquidity risks, and cross trading.
Eric I. Bustillo, the director of the SEC’s Miami Regional Office, stated, “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. Utilizing a third-party pricing service does not negate an investment adviser’s obligation to value assets accurately.”
In response to the situation, Macquarie Asset Management emphasized its commitment to integrity and accountability, declaring that this legacy issue does not reflect the company’s business practices. The firm has already undertaken remedial actions to address the investigation’s findings, with a focus on client impact, and continues to invest in strengthening its risk culture to uphold its fiduciary duties.