Pimco settles with SEC for nearly $20 million

Regulator said fund company misled investors about the performance of its actively managed Total Return ETF.

The Securities and Exchange Commission today announced that Pimco will pay nearly $20 million to settle charges that it misled investors about the performance of Pimco’s Total Return ETF (BOND), one its first actively managed exchange-traded funds.
The fund attracted significant investor attention as it outperformed even its flagship mutual fund in the four months following its launch in February 2012, the SEC said in a release.
“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,” the SEC said. The fund was run by Bill Gross, Pimco’s bond star.
But the fund company told investors different reasons for the ETF’s outperformance. The Pacific Investment Management Company “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.”
(More: Vanguard, Pimco feel the pain as long-term funds get smacked)
Pimco’s odd lot strategy caused the Total Return ETF to overvalue its portfolio, the SEC said.
“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. Under the order, Pimco also will have to hire an independent compliance consultant.
“Pimco is pleased to have resolved the BOND ETF matter with the SEC,” the Newport Beach, Calif. company said. “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.”