SEC Settles Charges With PIMCO Over Misleading Investors

By Chris Lange Updated Jan 12, 5:09PM EST · Published Dec 4, 5:05PM EST

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SEC Settles Charges With PIMCO Over Misleading Investors — © Wikimedia Commons

The U.S. Securities and Exchange Commission (SEC) recently announced that investment management firm Pacific Investment Management Company (PIMCO) agreed to retain an independent compliance consultant and pay roughly $20 million to settle charges.

These charges are related to misleading investors about the performance of one its first actively managed exchange traded funds (ETFs) and a failure to accurately value certain fund securities.

According to the SEC, 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.

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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 agency further found 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 by as much as 31 cents.

Andrew J. Ceresney, director of the SEC’s Division of Enforcement, commented:

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.

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About the Author Chris Lange →

Chris Lange is a writer for 24/7 Wall St., based in Houston. He has covered financial markets over the past decade with an emphasis on healthcare, tech, and IPOs. During this time, he has published thousands of articles with insightful analysis across these complex fields. Currently, Lange's focus is on military and geopolitical topics.

Lange's work has been quoted or mentioned in Forbes, The New York Times, Business Insider, USA Today, MSN, Yahoo, The Verge, Vice, The Intelligencer, Quartz, Nasdaq, The Motley Fool, Fox Business, International Business Times, The Street, Seeking Alpha, Barron’s, Benzinga, and many other major publications.

A graduate of Southwestern University in Georgetown, Texas, Lange majored in business with a particular focus on investments. He has previous experience in the banking industry and startups.