On Monday, August 3, 2015, Pacific Investment Management Co. LLC (Pimco) announced that it had received a Wells notice from the Securities and Exchange Commission concerning the valuation of certain nonagency mortgage-backed securities in its popular, exchange-traded Pimco Total Return ETF fund. The notice indicated that the SEC staff had made a preliminary determination to recommend that the SEC commence a civil action against PIMCO stemming from a nonpublic investigation relating to the fund.
At issue here are the fund’s performance disclosures from February 29, 2012, to June 30, 2012, and whether they contained an improper valuation of the ETF fund. The SEC has been investigating whether the fund bought these investments at discounted prices, but relied on higher valuations for the investments when the fund calculated the value of its holdings thereafter. The SEC also is likely looking at whether investors were given inaccurate information about the fund’s performance. Advertised performance reports are a common focus for SEC enforcement staff.
According to the Wall Street Journal, Pimco co-founder William H. Gross helped launch the Pimco Total Return ETF as a companion to Pimco’s popular Total Return Bond fund in February 2012, with about $103 million in assets. The fund made large gains early, returning 8.7 percent in its first six months, compared with 5.2 percent for the Pimco Total Return fund and 2.9 percent for the Barclays Capital U.S. Aggregate bond index, according to fund-research firm Morningstar Inc. In the first six months, the fund gathered $2.4 billion in assets, which, according to the Journal, analysts viewed as surprising for an exchange-traded fund.
In September 2014, Gross made a sudden departure from Pimco, and joined rival Janus Capital Group Inc. This senior management change came eight months after CEO Mohamed El Erian left the company. The Journal reports that Gross was interviewed by the SEC before he left.
As Pimco noted in its August 3 press release, a Wells notice is not a formal allegation of wrongdoing and may not lead to an enforcement action. Pimco now has an opportunity to respond to the SEC, and demonstrate that the securities’ pricing was consistent with the appropriate regulations. If the SEC is not convinced by Pimco’s response, it may bring administrative proceedings. It also may bring actions against individuals at the firm, such as the chief compliance officer, portfolio managers, members of the pricing committee or pricing group, or others.