U.S. regulators are going after a $A938.3-billion-AUM (about $603.51 billion, as of March 31) multinational asset manager, accusing a U.S. subsidiary of overvaluing certain assets and making cross trades that disadvantaged some mutual funds over four years. The firm has settled the charges for $79.8 million.

Yesterday, Eric Bustillo, director of the Miami regional office of the U.S. Securities and Exchange Commission (SEC), unveiled charges against by Macquarie Investment Management Business Trust (MIMBT), a U.S. subsidiary of Macquarie Asset Management [profile], accusing MIMBT of compliance, disclosure, and antifraud violations of the Investment Company Act of 1940 (the '40 Act) and the Investment Advisers Act of 1940 (the Other '40 Act). The charges focus on the use of MIMBT's now-defunct Absolute Return Mortgage-Backed Securities Strategy (ARMBS strategy) as a slice of the holdings of 11 retail mutual funds, four private investment funds, and five other unregistered investment vehicles. Bustillo also revealed that MIMBT has settled the charges, without admitting to or denying the regulatory agency's findings.

"Our business is built on the principles of integrity and accountability. This legacy matter is not consistent with how we do business," the Macquarie AM team writes in a statement on the settlement. "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 SEC's 12-page order on the charges and settlement confirms that the ARMBS strategy in question was launched by an MIMBT predecessor in 2007 and that strategy was discontinued in April 2021 after the SEC's investigation began. The order also confirms that MIMBT served as investment advisor or subadvisor to each of the twenty affected advisory accounts, including the 11 mutual funds. However, the order does not identify those funds or any of the other advisory accounts.

The SEC's charges focus on the period from January 2017 through April 2021. SEC investigators, led by Crystal Ivory and Christine Lynch of the agency's Miami office, accused the MIMBT team of overvaluing about 4,900 collateralized mortgage obligations (CMO) position — mostly small, "largely illiquid," "odd lots" — by using third-party pricing meant instead for large, institutional CMO positions, thus leading to overstated NAVs and performance.

The investigators also accuse of MIMBT of executing internal cross trades of those overvalued CMO positions, trying to minimize trading losses from institutional redemption requests by having the mutual funds instead absorb the trading losses. In the order, the SEC team notes that none of the affected mutual funds even held more than seven percent of their assets in the relevant CMO positions.

"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," Bustillo states. "Utilizing a third-party pricing service does not negate an investment adviser's obligation to value assets accurately."

As part of the settlement, MIMBT agreed to pay the SEC about $7.6 million in disgorgement, $2.2 million in interest, and $70 million in civil penalties, within 10 days (i.e. by September 29). Also as part of the settlement, MIMBT agreed to be censured, and to cease and desist from further violations.

As for what's next, the SEC can then either distribute the settlement money or send it to the U.S. Treasury. Meanwhile, the SEC team also describes the investigation as ongoing. Yet the Macquarie AM team states that "the settlement resolves the investigation concerning MIMBT."

"MIMBT will remediate clients impacted by the valuation and trading activity at issue in the investigation," the Macquarie AM team writes. 

Stay ahead of the news ... Sign up for our email alerts now
CLICK HERE