In September 2024, the Securities and Exchange Commission (SEC) imposed significant penalties on Macquarie Investment Management Business Trust (MIMBT) for violating multiple securities laws, including improper pricing practices and cross-trading activities. The case involved MIMBT’s Absolute Return Mortgage-Backed Securities Strategy, a fixed-income strategy that primarily invested in U.S. agency mortgage-backed securities (MBS), collateralized mortgage obligations (CMOs), and treasury futures. The SEC found that MIMBT engaged in misconduct from January 2017 through April 2021, leading to inflated valuations and conflicts of interest that harmed investors.
Key Findings:
- Improper Pricing of Odd Lot Securities:
- MIMBT used a third-party pricing vendor that provided round lot pricing marks, but the firm applied these prices to odd lot securities. Odd lots are smaller, typically illiquid, and trade at discounts compared to round lots. MIMBT’s failure to properly adjust the valuation of these smaller positions led to inflated performance reports and overstated the Net Asset Value (NAV) of its registered investment companies (RICs).
- MIMBT used inflated values from round lot marks for over 4,900 odd lot securities, affecting the daily performance reporting for various strategy accounts, including private funds and RICs.
- Cross-Trading to Satisfy Redemption Requests:
- To fulfill redemption requests from investors in its private funds, MIMBT engaged in cross-trading between RICs and other investment vehicles. These trades, however, were not executed at current market prices, benefiting some investors at the expense of others. In particular, MIMBT sold odd lot positions to third-party brokers, repurchased them at higher prices, and executed internal cross-trades between accounts, violating the firm’s fiduciary duty of care and loyalty.
- Cross-trades between affiliated entities are subject to stringent rules under the Investment Company Act of 1940, and the SEC found that these transactions violated prohibitions against affiliate transactions.
- False and Misleading Disclosures:
- Throughout the relevant period, MIMBT made false and misleading statements in its marketing materials, annual reports, and communications with investors. The firm claimed that its investments were liquid and could be sold quickly without significant loss, but this was not true for many of the odd lot securities.
- Additionally, performance reports were overstated because they relied on inflated valuations, leading to investors receiving inaccurate information about the health and liquidity of the investments.
- Compliance Failures:
- MIMBT’s compliance policies failed to detect or prevent the improper pricing and cross-trading activities. Despite having policies in place to oversee pricing and cross trades, these systems were not followed or implemented correctly, allowing the violations to persist over several years.
SEC Sanctions:
- Disgorgement: MIMBT was ordered to pay $7.63 million in disgorgement, reflecting the firm’s ill-gotten gains from its misconduct.
- Prejudgment Interest: An additional $2.19 million was imposed as prejudgment interest.
- Civil Penalty: The SEC imposed a hefty $70 million fine on MIMBT for its pricing and cross-trading violations.
- Cease-and-Desist Order: MIMBT was ordered to cease any future violations of the securities laws under the Investment Advisers Act of 1940 and the Investment Company Act of 1940.
Compliance Remediation:
MIMBT has undertaken significant steps to address the SEC’s findings. The firm has retained a compliance consultant to review and improve its internal policies and procedures. The consultant will assess MIMBT’s valuation methodologies, cross-trading practices, and conflict-of-interest disclosures over a two-year period, with periodic reports submitted to the SEC.
Conclusion:
The SEC’s action against Macquarie Investment Management underscores the importance of accurate pricing practices and strict adherence to fiduciary duties, particularly when handling illiquid securities and cross trades. Investors must be provided with truthful, transparent information, and firms are expected to implement and enforce robust compliance measures. This case highlights the regulatory consequences for firms that fail to meet these standards.
About Michael Rasmussen
Michael Rasmussen is the founder of United Atlantic Legal Services. He is a licensed attorney in Florida and registered solicitor in the United Kingdom. Michael has acted as General Counsel and Chief Compliance Officer to several investment advisers, including private fund managers, responsible for the management of billions of dollars in client assets.
Michael is also the founder of FinProLaw, an online learning platform where Michael has created courses designed for investment adviser compliance professionals. These courses include:
- Investment Adviser Compliance Essential for Chief Compliance Officers
- Foundations of Investment Adviser Compliance
- What is a “Security”?
- Investment Adviser Marketing Rule
- Regulation A – Exemption from Registration
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Investment adviser firms who are also clients of United Atlantic Legal Services can receive many of these courses at a significantly reduced fee or, in some cases, at no expense. Contact us today or visit the FinProLaw to learn more.