Financial Law Blog

Updates on Banking Law, Investment Management Law, Securities Law, Commodities/Derivatives Law

Tag: Investment Advisers Act

PIMCO settles SEC enforcement action for misleading disclosures about sources of fund performance

PIMCO agreed yesterday to pay $19.8 million to settle enforcement action by the SEC for misleading disclosures about sources of fund performance and defects in PIMCO’s fair value process.

PIMCO was able to outperform benchmarks for a new ETF by buying “odd lot” private label MBS bonds for the fund and marking them using “round lot” prices. Odd lots in that market, as opposed to round lots, are those bonds with lower face value. During the relevant period odd lots in that market traded at a “significant discount” to round lots. PIMCO bought odd lots for the fund but used values for round lots from its pricing vendor to mark these purchases. This increased the fund’s stated performance and NAV.

PIMCO’s investor-facing “Monthly Commentaries,” however, did not explain that this strategy was the reason for the fund’s performance and instead seemed to attribute performance to the private label MBS sector. The fund’s annual report, which was prepared by PIMCO, suffered from the same defect. These disclosures triggered investor-facing antifraud Rule 206(4)-8. PIMCO was also found to have violated ’40 Act, Section 34(b) because it was “responsible for the inclusion of” misleading statements in the fund’s annual report. The incorrect valuation of fund assets triggered another ’40 Act violation — SEC found PIMCO to have caused the fund’s violations of Rule 22c-1 since the fund executed transactions in its redeemable securities at prices based on an overstated NAV.

PIMCO’s pricing process was also found to violate Rule 206(4)-7: “By vesting the responsibility with its traders for determining when to report to PIMCO’s Pricing Committee any price that did not reasonably reflect market value without sufficient objective checks or guidance for elevating pricing issues to the Pricing Committee or Valuation Committee, PIMCO’s pricing policy was not reasonably designed to prevent valuation-related violations.”

Apollo to pay $52.7 million for failure to adequately disclose right to accelerate monitoring fees (and other violations)

Apollo agreed to pay $52.7 million on Tuesday to settle enforcement action by the SEC for failure to disclose to investors that it may accelerate monitoring fees paid by portfolio companies, along with other violations. While Apollo did disclose that it “may receive monitoring fees,” the SEC found that Apollo failed to adequately disclose that it “may accelerate future monitoring fees upon termination of the monitoring agreements.” When monitoring fees were accelerated with respect to a portfolio company (following an IPO or sale), Apollo did disclose the amount accelerated after the fact. However, the right to accelerate was not disclosed to LPs prior to commitments of capital (i.e., in fund documents). This type of nondisclosure is viewed as a breach of fiduciary duty for an investment adviser, which in turn is viewed as a violation of the antifraud provisions of the Advisers Act.

Apollo joins private equity advisers Blackstone ($39 million) and KKR ($30 million) which had settled SEC enforcement actions for fiduciary duty breaches in 2015. Apollo is at least the ninth private equity adviser to be subject to SEC enforcement action since statutory exclusions relied upon by private fund advisers were narrowed by Dodd-Frank. SEC Staff noted that the enforcement program with respect to private equity fund advisers has so far focused on three broad areas: (1) advisers that receive undisclosed fees and expenses; (2) advisers that impermissibly shift and misallocate expenses; and (3) advisers that fail to adequately disclose conflicts of interests, including conflicts arising from fee and expense issues.

Powered by WordPress & Theme by Anders Norén