PIMCO Settles Charges for Allegedly Misleading Investors About the Performance of One of its ETFs

December 1, 2016

Pacific Management Company (PIMCO) settled charges with the SEC, agreeing to retain an independent compliance consultant and pay nearly $20 million to settle charges that it misled investors about the performance of one its first actively managed ETFs and failed 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.  But in monthly and annual reports to investors, the SEC stated that 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 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 (NAV) by as much as 31 cents.

Click here to access the enforcement action.