Pacific Investment Management Co. said regulators are considering taking action against the firm over marking of securities in the exchange-traded fund version of its flagship Total Return Fund.
Pimco received a Wells notice from the U.S. Securities and Exchange Commission indicating the regulator’s staff is recommending civil action against the firm related to an investigation into the Pimco Total Return Active Exchange-Traded Fund, the Newport Beach, Calif.-based firm said Monday in a statement.
The notice relates to the fund’s valuation of smaller positions in mortgage-backed securities not guaranteed by the government between its inception on Feb. 29, 2012, and June 30 of that year, as well as performance disclosures and related compliance policies and procedures, according to the statement.
“The Wells process provides us with our opportunity to demonstrate to the SEC staff why we believe our conduct was appropriate, in keeping with industry standards, and that no action should be taken,” Pimco said. “We will continue to engage with the SEC and we are confident that this matter will not affect our ability to serve our clients.”
The SEC sends a Wells notice to a company or an individual after its staff has determined that sufficient wrongdoing has occurred to warrant civil claims being filed.
While the ETF has seen deposits in recent months, the Total Return mutual fund has suffered redemptions that intensified with the sudden departure of longtime manager Bill Gross last September. The regulatory notice won’t help improve flows, according to Todd Rosenbluth, director of ETF and mutual fund research at S&P Capital IQ in New York.
“The news of a SEC inquiry is unlikely to encourage investors to put fresh money back in,” he said in an e-mail. “Investors will likely want to see what, if anything, comes from the review.”
The total return ETF produced more than twice the gain of Gross’s parallel mutual fund in the first three months after it was started, helping it attract assets faster than any other actively managed ETF.
From March 1, 2012, through last week, the ETF returned 20 percent, compared with 12 percent for the mutual fund, according to data compiled by Bloomberg. This year, the ETF advanced 1.7 percent, versus 1.6 percent for the mutual fund.