The manager of a large bond ETF agreed to pay nearly $20 Million, including an $18.3 Million penalty, for mis-pricing securities and presenting an incorrect NAV to the Board, investors, and prospects. The SEC charges that the firm inflated reported performance by purchasing odd lot non-agency MBS at a discount but using the higher round lot prices for valuation purposes. The SEC asserts that several people knew about the strategy but failed to ensure that the firm accurately priced the securities. The SEC faults the firm for making misrepresentations to the Board as well as in shareholder reports and marketing materials. In addition to disgorgement and penalties, the respondent agreed to retain an independent compliance consultant. The SEC’s Enforcement Director admonished, “Investment advisers must accurately describe the significant sources of performance and the strategies being used.”
OUR TAKE: When performance looks too good to be true, it probably is. Outperformance in and of itself is a compliance red flag that should draw increased scrutiny.