Washington D.C., Dec. 1, 2016 —The Securities and Exchange Commission today announced that investment management firm Pacific Investment Management Company (PIMCO) agreed to retain an independent compliance consultant and pay nearly $20 million to settle charges that it misled investors about the performance of one its first actively managed exchange-traded funds (ETFs) and failed to accurately value certain fund securities.
According to the SEC’s order issued today, PIMCO’s Total Return ETF attracted significant investor attention as it outperformed even its flagship mutual fund in the four months following its launch in February 2012. The initial performance was attributable to buying smaller-sized bonds known as “odd lots” as part of a strategy to help bolster performance out of the gate. But in monthly and annual reports to investors, PIMCO provided other, misleading reasons for the ETF’s early success and failed to disclose that the resulting performance from the odd lot strategy was not sustainable as the fund grew in size.
“PIMCO misled investors about the true long-term impact of its odd lot strategy and denied them the opportunity to make fully informed investment decisions about the Total Return ETF,” said Andrew J. Ceresney, Director of the SEC’s Division of Enforcement. “Investment advisers must accurately describe the significant sources of performance and the strategies being used.”
The SEC’s order further finds that PIMCO’s odd lot strategy caused the Total Return ETF to overvalue its portfolio and consequently fail to accurately price a subset of fund shares. PIMCO valued these bonds using prices provided by a third-party pricing vendor for round lots, which are larger-sized bonds compared to odd lots. By blindly relying on the vendor’s price for round lots without any reasonable basis to believe it accurately reflected what the fund would receive if it sold the odd lots, PIMCO overstated the Total Return ETF’s net asset value (NAV) by as much as 31 cents.
“PIMCO overstated its NAV almost every day for four months because its policies and procedures were not reasonably designed to properly address issues concerning odd lot pricing,” Mr. Ceresney said.
PIMCO agreed to be censured and consented to the SEC’s order without admitting or denying the findings that the firm violated Sections 206(2) and 206(4) of the Investment Advisers Act of 1940, Rules 206(4)-7 and 206(4)-8, and Section 34(b) of the Investment Company Act of 1940. PIMCO agreed to pay disgorgement of fees totaling $1,331,628.74 plus interest of $198,179.04 and a penalty of $18.3 million.
The SEC’s investigation was conducted by Adam Schneir and Brian Fitzpatrick of the Enforcement Division’s Asset Management Unit as well as Kate Zoladz of the Miami office, Rhoda Chang, John Berry, Donald Searles, and Gary Leung of the Los Angeles office, and José Santillan of the Chicago office. The case was supervised by C. Dabney O’Riordan, Co-Chief of the Asset Management Unit, and Michele Layne, Regional Director for the Los Angeles office. The examination of PIMCO that led to the investigation was conducted by Eric Lee, Ryan M. Hinson, and Shawn McEnnis and supervised by Daniel C. Jung of the Los Angeles office.