December 9, 2023

After returning $27 million in advisory fees, investment adviser Pimco agreed to pay millions more to settle the SEC’s fees.

Newport Beach, Calif.-based PIMCO to pay $9 million solve a pair of cases Alleging it failed in its obligations to waive certain advisory fees and inform investors how one of its funds made money.

“These cases underscore our continued focus on ensuring companies adequately disclose material information and implement policies and procedures that are reasonably designed,” said Corey Schuster, co-director of the SEC Enforcement Division’s Asset Management Division. “PIMCO failed to comply with these two critical obligations.”

according to a SEC release, PIMCO failed to waive $27 million worth of advisory fees it charged between April 2011 and November 2017 to investors in its All Asset All Authority Fund, which had $2.2 billion in net assets under management at the end of January. of mutual funds. The SEC described the investment vehicle as a “fund of funds” that PIMCO used to transfer funds to other funds under its management.

Under the settlement, PIMCO has agreed, through its contracts with investors, to reduce the fees they owe the All Asset All Authority Fund if their money is also invested in affiliated funds. Under its agreement, it will do this through fee waivers.

The waiver amount was left to a sub-administrator, who was not named in the SEC complaint. But the formula used for these calculations comes from PIMCO itself, and that formula is flawed.

The error was eventually discovered by the deputy administrator.

“In 79 months of miscalculations, PIMCO has never identified any problems with the Subadministrator’s calculation of the amount of the fee reduction,” the SEC said.

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Adam Weinstein, an investor-securities attorney in Gana Weinstein’s New York office, said PIMCO’s delegating the waiver calculation doesn’t relieve the firm of its obligation to make sure clients get what they promise.

“As far as the SEC is concerned, they have full responsibility,” Weinstein said.

The SEC said PIMCO acted quickly to correct the errors after discovering the formula errors and hired a third-party firm to review the erroneous fee waivers. PIMCO ended up repaying investors $27 million in fees that would have been discounted, plus $3.2 million in additional interest, money that would have been paid off had it been invested.

The SEC accused the firm of failing to adopt policies and procedures designed to prevent violations of the Investment Advisers Act of 1940. Of the $9 million total settlement, about $2.5 million came from alleged fee reduction failures.

PIMCO was founded in part in 1971 by the famous “Bond King” Bill Gross, who left to join Janus Capital Group in 2014. The firm managed $2.24 trillion in assets as of March 31, according to the SEC.

The second tranche of the PIMCO settlement, approximately $6.5 million, Resolved allegations that PIMCO failed to inform investors in its Global StocksPLUS & Income Fund how it relied on so-called “interest rate swaps” to generate returns. Interest rate swaps are often used by fund managers to trade their obligation to pay interest at a fixed rate with another party’s obligation to pay interest at a variable or floating rate.

PIMCO’s swaps typically involve two “legs”. In the first case, the company would exchange its obligation to make fixed-rate payments for the other party’s obligation to make floating-rate payments. In the second case, these obligations would be reversed – PIMCO would assume fixed payments and its counterparty would assume variable payments.

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According to the SEC, PIMCO typically receives profits from its Global StocksPLUS & Income Fund during the first stage of the process. However, when it comes time to enter the second stage, there is often an option to terminate the deal. Doing so forced it to pay liquidation fees and “resulted in a loss of capital for the fund,” according to the SEC.

The SEC accused PIMCO of not doing enough to inform investors of the fund’s reliance on interest rate swaps between Sept. 1, 2014, and Aug. 26, 2016. The SEC said the swaps were a significant source of dividends paid by PIMCO through its Global StocksPLUS & Income Fund, which had total net assets of about $82 million as of Feb. 28. The company lowered its dividend from 18.3 cents per share to 14.6 cents and resumed trading on 3 October 2016.

“Relevant disclosures were subsequently updated in (the fund’s) annual shareholder report for the end of fiscal year 2016,” PIMCO said in an official statement. “PIMCO has agreed to pay a $6.5 million fine to the SEC to resolve the matter. The settlement agreement The report did not find that PIMCO intentionally misled investors or violated any laws.”