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Tag: Investment Company 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.”

State Street settles SEC enforcement of ICA 34(b) violation for $167.4 million

State Street agreed yesterday to settle enforcement action by the SEC alleging that it applied undisclosed markups to foreign currency exchange trades by its custody clients, which include mutual funds.

The agreement is part of a global settlement with SEC, DOJ and DOL totaling $382.4 million, $167.4 million of which is disgorgement and penalties with respect to the SEC enforcement action. The SEC will issue its order only after a court approves State Street’s settlement of related securities class actions.

The SEC’s order “will find” that State Street willfully violated Section 34(b) of the ’40 Act and caused violations of Section 31(a) and Rule 31a-1(b) by giving mutual fund custody clients “trade confirmations and monthly transaction reports that were materially misleading in light of the representations it made about how it priced foreign currency exchange transactions.”

The SEC used similar reasoning in its 2011 enforcement action against Morgan Asset Management. Release No. 34-64720 (“Any person who makes a material misrepresentation … in the records required to be maintained by the Fund, or submits inflated prices to be included in the Fund’s NAV calculations and the records forming the basis for the Fund’s financial statements, violates Section 34(b)”).

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