Securities regulatory authorities have levied a fine of $79.8 million on a Macquarie investment division due to alleged violation of securities laws.
The Securities and Exchange Commission (SEC) has announced that Macquarie Investment Management Business Trust has agreed to pay $79.8 million to settle charges for overvaluing collateralized mortgage obligations (CMOs).
The settlement includes a civil penalty of $70 million and $9.8 million in disgorgement and prejudgment interest. The firm has admitted to carrying out overvalued transactions, facilitating cross trades with affiliated accounts, and executing cross trades between advisory clients that favored certain accounts at the expense of others.
According to the SEC, the overvaluation led to an inflated valuation of client CMO accounts, misrepresenting clients’ financial positions. The firm attempted to minimize losses by initiating internal cross trades with affiliated accounts rather than selling overvalued products in the market.
Macquarie Investment Management Business Trust, one of Macquarie Asset Management's registered investment advisers in the U.S., managed a fixed-income strategy that primarily invested in mortgage-backed securities, CMOs, and treasury futures from January 2017 through April 2021.
The SEC's rules require advisers to perform regular and prudent valuations of complex securities, such as CMOs, consistently with fair value accounting principles and specific regulatory guidance on security valuations. Advisers must also avoid conflicts of interest and prohibit unlawful cross trades unless fully disclosed to, and consented by, clients.
Overvaluation of collateralized instruments can trigger regulatory scrutiny as it may violate rules against false or misleading statements and breach fiduciary duty. Cross trades must be executed at fair prices, with full disclosure, and under policies designed to protect client interests.
The SEC's Miami regional office director, Eric I. Bustillo, stated that it is alarming that a fiduciary took advantage of retail mutual funds it advised and executed unlawful cross trades.
In response to the investigation, Macquarie Investment Management Business Trust has undertaken remedial steps to address the issues identified and is focused on completing additional measures with clients as the priority. The firm has also stated its commitment to integrity, accountability, and ensuring the highest standard of fiduciary duties.
The firm has appointed 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 review aims to ensure compliance with SEC regulations and maintain market integrity and investor trust.
The settlement ends a probe related to Macquarie's investment firm's absolute return mortgage-backed securities strategy, which it discontinued in April 2021. The firm continues to invest in its risk culture to prevent similar incidents in the future.
- The overvaluation of collateralized mortgage obligations (CMOs) by Macquarie Investment Management Business Trust, while managing a fixed-income strategy, potentially violated rules against false or misleading statements and breached fiduciary duty in personal-finance and wealth-management practices.
- In the business of investment, Macquarie Investment Management Business Trust has agreed to pay a settlement following charges for overvaluing CMOs, admitting to carrying out overvalued transactions and cross trades, which may have affected the accuracies in client's wealth-management and personal-finance positions.
