(Article from Registered Funds Regulatory Update, July 2022)
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The SEC settled charges against AlphaCentric Advisors LLC (“AlphaCentric”) and Garrison Point Capital, LLC (“Garrison”), each a registered investment adviser, for compliance violations in their respective roles as adviser and subadviser to the AlphaCentric Income Opportunities Fund. An Order found that Garrison manipulated pricing vendor valuations causing the overvaluation of certain Fund securities and misled investors by providing materially inaccurate information regarding sources of Fund performance. A separate Order found that AlphaCentric failed to adopt and implement fair valuation policies and procedures reasonably designed to oversee the role of Garrison in valuing the Fund’s securities.
The Orders found that, from May 2015 through July 2015, Garrison purchased small “odd-lot” bonds for the Fund that often traded at a discount to larger round lots. Garrison valued these odd-lot bonds using the higher “round-lot” pricing provided by a third-party pricing vendor, which resulted in the Fund overstating its daily net asset value by over 7% during the relevant period.
The Orders also found that, from January 2017 to February 2019, Garrison manipulated pricing vendor fair valuation determinations. When Garrison believed a pricing vendor’s marks were too low, it placed bids with certain broker-dealers to purchase the bonds at higher prices. Garrison then provided those bids as its own bids to the pricing vendor to persuade the vendor to increase its marks on the bonds. The Fund then priced its securities based on the increased marks. In several instances where Garrison submitted deceptive pricing bids, the Fund owned the entire tranche of bonds and could not have even purchased additional bonds. During this period, Garrison also provided the vendors with its own analysis of a bond’s fundamental characteristics but when the pricing vendor did not consider its analysis, Garrison allegedly tried to change the valuation of many securities through its pricing bid tactic.
During this same period, AlphaCentric failed to adhere to its fair valuation policies and procedures, which required it to review the pricing of the Fund’s holdings daily for reasonableness. It also failed to oversee Garrison’s performance, its related communications with the pricing vendors, and Garrison’s use of pricing bids. While these alleged violations related to the pricing of “odd-lot” securities are similar to allegations in other recent SEC enforcement actions, the prior actions did not involve a third-party sub-adviser structure where the investment adviser allegedly failed to oversee the sub-adviser’s performance.
Without admitting or denying the SEC’s findings, AlphaCentric and Garrison agreed to cease-and-desist orders, censures and civil monetary penalties in the amount of $300,000 and $3.5 million, respectively.
In the Matter of AlphaCentric Advisors, LLC, SEC Admin. Proc. File No. 3-20877 (June 3, 2022), available at: https://www.sec.gov/litigation/admin/2022/ia-6040.pdf.
In the Matter of Garrison Point Capital, LLC, SEC Admin. Proc. File No. 3-20876 (June 3, 2022), available at: https://www.sec.gov/litigation/admin/2022/ia-6039.pdf.