Pimco has agreed to pay $20 million to settle Securities and Exchange Commission (SEC) charges that allege it misled investors about the performance of one of its flagship exchange-traded funds (ETFs).
The SEC has also charged the Newport-based firm for failing to accurately value certain holdings within the Pimco Total Return ETF. Pimco has not admitted or denied the charges and has agreed to retain an independent compliance consultant.
According to the SEC’s order, Pimco’s Total Return ETF attracted ‘significant investor attention’ as it outperformed even its flagship mutual fund, the Pimco Total Return Fund, in the four months following its launch in February 2012. Both the mutual and ETF were run by Bill Gross until his departure in September 2014.
The initial performance could be attributed to buying smaller-sized bonds of non-agency mortgage-backed securities, known as ‘odd lots’ as part of a strategy to help bolster performance, said the SEC.
However, the firm gave ‘misleading reasons’ for the ETF’s early success, according to the SEC, and Pimco 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 Ceresney, director of the SEC’s division of enforcement.
In a statement, Pimco said that the SEC has not criticized the firm for the practice of using the 43 small positions, which it said was common on the outset of launching a fund in order to not concentrate risk in a few issues.
Further to this, the SEC found that the strategy caused the Total Return ETF to overvalue its portfolio and consequently fail to accurately price a subset of fund shares.
The regulator said Pimco ‘blindly’ valued the small positions using independent third-party pricing vendors without ‘any reasonable basis to believe it accurately reflected what the fund would receive if it sold the odd lots’.
This caused Pimco to overstate the Total Return ETF’s net asset value by as much as 31 cents, it added.
The firm has agreed to pay disgorgement of fees totaling $1.3 million plus interest of nearly $200,000 and a penalty of $18.3 million.
The firm said in a statement, ‘Pimco is pleased to have resolved the bond ETF matter with the SEC. Pimco is committed to conducting its business in a manner that meets or exceeds the expectations of its regulators.
‘Accordingly, the firm has enhanced its policies and procedures relating to valuation of smaller-sized positions and performance attribution disclosure.’
In August 2015, Pimco warned it might face civil charges from how it valued holdings from the fund's inception in February 19, 2012 and June 30, 2012.