After refunding $27 million in advisory fees, the investment advisor Pacific Investment Management Company has agreed to pay millions more to settle related SEC charges.
PIMCO, a Newport Beach, California-based firm, will pay $9 million
"These cases highlight our continued focus on ensuring that firms adequately disclose material information and implement reasonably designed policies and procedures," said Corey Schuster, co-chief of the SEC enforcement division's asset management unit. "PIMCO failed to comply with both of these critical obligations."
According to a
PIMCO, according to the settlement, had agreed through its contracts with investors to reduce the fees they owed on the overarching All Asset All Authority Fund if their money was also being put into the subordinate funds. It would do this, according to its agreements, through fee waivers.
The waiver amounts were left to the calculation of a subadministrator, who was unnamed in the SEC's complaint. But the formula used for those calculations came from PIMCO itself, and the formula was flawed.
The error was eventually discovered by the subadministrator.
"In the 79 months of miscalculations, PIMCO never identified any concerns with the sub-administrator's calculation of the Fee Waiver amounts," the SEC said.
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Adam Weinstein, an investor securities lawyer in the New York office of Gana Weinstein, said PIMCO's delegating of the waiver calculations did not absolve the firm of its obligation to make sure clients were being treated as promised.
"As far as the SEC is concerned, they are entirely responsible," Weinstein said.
The SEC said PIMCO moved quickly to correct the formula error once it was discovered and also hired a third-party firm to review the erroneous fee waivers. PIMCO eventually reimbursed investors $27 million for fees that should have been discounted, as well as a $3.2 million plus interest for returns that could have been made on that money had it been invested.
The SEC charged the firm with failing to adopt policies and procedures designed to prevent violations of the Investment Advisers Act of 1940. Of the $9 million settlement total, roughly $2.5 million arose from the alleged fee waiver failures.
PIMCO was founded in 1971 in part by the renowned "bond king" Bill Gross, who left in 2014 to join Janus Capital Group. The firm had $2.24 trillion in assets under management by March 31, according to the SEC.
PIMCO's swaps typically involved two "legs." In the first, the firm would swap its obligation to make fixed-rate payments with another party's obligation to make floating-rate payments. In the second, those obligations would be reversed — PIMCO would take on fixed payments and its counterpart would take on floating ones.
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PIMCO typically made money in its Global StocksPLUS & Income Fund in the first leg of the process, according to the SEC. But, when it came time to enter the second stage, it often chose to terminate the deals. Doing so forced it to pay a closeout fee, "resulting in a capital loss to the fund," according to the SEC.
The SEC accused PIMCO of not doing enough between Sept. 1, 2014, and August 26, 2016, to inform investors of just how reliant the fund was on interest rate swaps. The SEC said the swaps were a significant source of the dividends PIMCO paid out through its Global StocksPLUS & Income Fund, which had about $82 million in total net assets by Feb. 28. The firm reduced that dividend from 18.3 cents a share to 14.6 cents a share on Oct. 3, 2016.
"The disclosures in question subsequently were updated in (the fund's) fiscal year-end 2016 annual shareholder report," PIMCO said in an official statement. "PIMCO has agreed to pay the SEC $6.5 million in monetary penalties to settle the matter. The settlement contains no findings that PIMCO intended to mislead investors or breach any law."
