PIMCO agreed Thursday to pay almost $20 million to the Securities and Exchange Commission for misleading investors about the performance of one of its first actively managed ETFs — the PIMCO Total Return ETF (BOND) — and for failing to accurately value certain fund securities.
According to the SEC’s order, PIMCO’s Total Return ETF, which was formerly managed by PIMCO co-founder Bill Gross, attracted significant investor attention as it outperformed even its flagship mutual fund in the four months following its launch in February 2012.
The SEC states that 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,” the SEC states.
PIMCO agreed to pay a penalty of $18.3 million and $1.5 million in disgorgement fees and interest. Gross wasn’t named in the administrative order.
The Newport Beach, California-based firm said last August that it had received a Wells Notice from the SEC indicating the regulator’s staff was recommending civil action against the firm related to an investigation into the ETF.
Andrew Ceresney, director of the SEC’s Division of Enforcement, noted in a statement that 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. “Investment advisors 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,” the order states.
“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,” Ceresney said.
In a statement on its website, PIMCO said that it 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.”
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.
— Related on ThinkAdvisor: