PIMCO Settles with SEC For $20m After Misleading Investors Over ETF

PIMCO was on the hook for $20m to settle charges to the SEC after misleading investors over its ETF performance.

Investment management giant Pacific Investment Management Company (PIMCO) has just agreed a settlement for misleading investors, resulting in nearly $20 million paid to reconcile charges levied by the US’ Securities and Exchange Commission (SEC), per a regulatory filing.

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A previous order found that PIMCO had duped investors about the performance of one its first actively managed exchange-traded funds (ETFs), having also failed to accurately value certain fund securities for clients.

PIMCO had initially succeeded in enticing a strong interest in its Total Return ETF given the fund’s strong performance since early 2012, besting even its flagship mutual fund offerings. However, the initial performance was largely attributable to buying smaller-sized bonds known as ‘odd lots’, which helped foster an artificially strong performance at the time of the fund’s inception.

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The discrepancy lied in monthly and annual reports to investors, where PIMCO wrongfully asserted reasons for the ETF’s inaugural and early success, failing to properly disclose that the standout performance of the funds was tied to the odd lot strategy and not sustainable as the fund evolved.

Subsequently, the SEC’s order also charged PIMCO with overvaluing its portfolio via its odd lot strategy utilized in its Total Return ETF – in some cases by a net asset value (NAV) of as much as $0.31. Facing such charges, PIMCO agreed to pay disgorgement of fees totaling $1.33 million plus interest of $198,179 along with a penalty of $18.3 million.

According to Andrew J. Ceresney, Director of the SEC’s Division of Enforcement, in a recent statement on the settlement: “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 advisers must accurately describe the significant sources of performance and the strategies being used.”

“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 added.

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