PIMCO Settles SEC Charges Regarding Valuation Strategies, Performance Disclosures

On December 1, 2016 the SEC announced a settlement with PIMCO regarding charges that PIMCO misled investors about the performance of its Total Return ETF and failed to accurately value certain fund securities. Without admitting or denying the SEC’s findings, PIMCO agreed to be censured and pay fees and a penalty totaling approximately $20 million. According to the SEC’s announcement, the ETF’s strong initial performance was attributed to buying smaller-sized bonds known as “odd lots” as part of a strategy to help boost the fund’s early performance.  However, PIMCO’s investor reports gave misleading reasons for the ETF’s early success and did not disclose that the performance results from the odd lot strategy was not sustainable as the fund grew in size. The SEC also found that the odd lot strategy caused the Total Return ETF to overvalue its portfolio and consequently fail to accurately price a subset of fund shares.  According to the SEC’s settlement order, PIMCO also did not make appropriate disclosures to the fund’s board about the odd lot strategy and the strategy’s impact on fund performance. As part of the settlement, PIMCO agreed to hire an independent compliance consultant to review its compliance policies and procedures to address the pricing and valuation of odd lots, among other procedures.