The SEC brought administrative charges against Stephen J. Treadway, the former Chief Executive Officer of PA Fund Management LLC (“PAFM”), the investment adviser to the PIMCO Funds, and PA Distributors LLC (“PAD”), the distributor for the PIMCO Funds, and the former Chairman of the PIMCO Funds Multi-Manager Series (“MMS Funds”) Board of Trustees (“MMS Board”). The SEC alleged that Treadway did not ensure that PAFM fulfilled its fiduciary duty to disclose to the MMS Board that the MMS Funds' brokerage commissions were being directed to broker-dealers to reduce PAD's payments for increased "shelf space" within the broker-dealers' distribution systems and that a corresponding conflict of interest existed for PAFM.
The SEC found that between 2000 and 2003, PAD entered into shelf space arrangements with nine broker-dealers to promote the sale of all PIMCO Funds distributed by PAD. Treadway and other members of PAD approached PEA Capital LLC (“PEA”), the sub-adviser to the MMS Funds, to discuss whether PEA would be able to direct brokerage commissions on the MMS Funds' portfolio transactions, but did not tell PEA that directing brokerage commissions to certain broker-dealers would reduce PAD's cash payments for the shelf space arrangements. As the CEO of PAFM and PAD, Treadway approved of PAD's participation in the shelf space arrangements and negotiated the terms of some of the arrangements.
The SEC also found that by encouraging PEA's use of fund assets to benefit and defray the expenses of PAD, a third party to the MMS Funds, Treadway created a conflict of interest that he should have disclosed to the MMS Board. As a result, the SEC found that Treadway willfully aided and abetted and caused PAFM's violation of Section 206(2) of the Investment Advisers Act of 1940. Please click http://www.sec.gov/litigation/admin/2007/ia-2602.pdf to access a copy of the administrative action.