PIMCO settles with SEC over Gross-run ETF performance and valuation issues

PIMCO will pay $20 million and hire an outside compliance consultant to settle charges that it misrepresented the performance of its Total Return ETF, the Securities and Exchange Commission said Thursday.

SEC Enforcement Director Andrew Ceresney said in a statement that “PIMCO misled investors about the true long-term impact of its odd-lot strategy and denied them the opportunity to make fully informed investment decisions about the Total Return ETF.”

The Total Return ETF was launched in February 2012 and managed by former portfolio manager William H. Gross for the initial four-month period covered by the settlement. It outperformed PIMCO's flagship mutual fund in the following four months in part by buying smaller bonds known as “odd lots,” according to the SEC order, which said that reports to investors failed to disclose that the strategy's performance was not sustainable as the fund grew.

Mr. Gross left PIMCO to join Janus Capital Group in September 2014.

The SEC also charged PIMCO with overvaluing the portfolio and relying on a third-party vendor to inaccurately price different sized bonds, which overstated the Total Return ETF's net asset value by as much as 31 cents per share for four months, Mr. Ceresney said.

A spokesman for Pacific Investment Management Co., which did not admit or deny the SEC findings, said in a statement that PIMCO is pleased to have resolved the matter, and “the firm has enhanced its policies and procedures relating to valuation of smaller-sized positions and performance attribution disclosure.” The company will disgorge $1.3 million in fees, and pay a penalty of $18.3 million plus $198,179 in interest.