Dive Brief:

• Macquarie Investment Management Business Trust has agreed to pay $79.8 million to settle charges by the Securities and Exchange Commission for overvaluing collateralized mortgage obligations, the agency announced Thursday.

• The investment firm overestimated roughly 4,900 largely illiquid CMOs held in 20 advisory accounts, including 11 retail mutual funds, and executed several cross trades between advisory clients that favored certain accounts at the expense of others, the SEC found.

• “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 I. Bustillo, director of the SEC’s Miami regional office, said in a statement. “Utilizing a third-party pricing service does not negate an investment adviser’s obligation to value assets accurately.”

Dive Insight:

The investment management business trust is one of Macquarie Asset Management’s registered investment advisers in the U.S.

From January 2017 through April 2021, the firm managed a fixed-income strategy that primarily invested in mortgage-backed securities, CMOs and treasury futures. The strategy investments included thousands of smaller “odd lot” CMO positions, which traded at a discount to larger positions, according to the agency.

The Macquarie subsidiary used a third-party pricing service to value the odd lot CMOs, but the service's prices were meant for institutional-sized lots and did not offer separate valuations for smaller odd lots. The federal regulator found that the inflated valuation led the firm to overstate the performance of client CMO accounts. 

“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,” the SEC said.

The firm tried to minimize the losses by initiating cross trades with affiliated accounts rather than selling the overvalued products in the market. The firm conducted 465 internal cross trades between a selling account and 11 retail mutual funds, causing losses for the mutual funds. It also facilitated about 175 dealer-interposed cross trades involving temporary sales of odd lot CMO positions to broker-dealers, followed by repurchases for affiliated clients, providing liquidity in an illiquid market — a difficult market to sell assets in. Both trades were often carried out at above-market prices, the agency noted. 

The SEC settlement ends a probe related to Macquarie's investment firm’s absolute return mortgage-backed securities strategy, which it discontinued in April 2021.

Though the firm did not admit or deny the charges, it has agreed to pay a civil penalty of $70 million and $9.8 million in disgorgement and prejudgment interest.

“Our business is built on the principles of integrity and accountability. This legacy matter is not consistent with how we do business,” the firm said in a statement Thursday. “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.”

The Macquarie investment firm will also adhere to certain undertakings, including appointing a compliance consultant to conduct a comprehensive review of its policies and procedures related to cross trading valuation, CMOs valuation and associated liquidity risk, the SEC noted.