Investment advisory firm Macquarie Investment Management Business Trust was sanctioned in a settlement with the U.S. Securities and Exchange Commission (SEC), which accused the firm of violating securities rules by overvaluing certain securities and then dumping some of the inflated securities on certain accounts, including retail mutual funds.
According to the SEC’s order, the Philadelphia-based subsidiary of Australian financial giant Macquarie Group Ltd. managed a fixed-income investment strategy that held a variety of securities including certain “odd lot” collateralized mortgage obligations (CMOs) that traded at a discount to larger institutional CMO positions.
The regulator charged that the firm valued the odd lot positions at the same prices as the institutional positions, although the firm had “no reasonable basis to believe it could sell the odd lot CMOs” at those prices — overstating the value of those positions.
The SEC also alleged that the firm sold some of the improperly valued securities to certain client accounts at the inflated prices rather than trying to sell the securities in the market. As a result, certain clients avoided losses, which were transferred to others, including retail mutual funds.
“These trades resulted in the retail mutual funds absorbing losses that otherwise would have been borne by the selling account in a market sale,” the regulator alleged.
“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 Bustillo, director of the SEC’s Miami office, in a release.
“Utilizing a third-party pricing service does not negate an investment adviser’s obligation to value assets accurately,” he said.
Without admitting or denying the SEC’s findings, the firm agreed to be censured, to cease and desist from further violations, and to pay a US$70-million penalty, along with US$9.8 million in disgorgement and prejudgment interest. It also agreed to retain a consultant to review its policies for valuing CMOs, assessing liquidity risks, and internal cross trading.