Global investment management firm, Pacific Investment Management Company (Pimco), has received a Wells notice from the US Securities and Exchange Commission (SEC), indicating that a completed investigation revealed concerns about how the firm valued a popular investment fund and whether it misled investors.

The Suspect Fund

The issue relates to Pimco’s Total Return exchange-traded fund (ETF), and the associated purchases and valuations of mortgage-backed securities by the ETF between February and June 2012.

Specifically, the SEC has been investigating whether these mortgage-backed securities were bought at discounted prices, the value of which was later artificially inflated when the fund subsequently calculated the value of its holdings.

Such a move would give investors a misleading picture of the fund’s performance, which returned a strong 8.7% between March and August of 2012. Indeed, the fund gathered $2.4 billion in assets in the first six months, an abnormally high rate of growth for an ETF. With the stellar performance of the fund, its popularity soared.

SEC Involvement

Consequently, the SEC has been investigating the ETF for at least a year, according to FT, to ascertain whether or not Pimco did indeed artificially boost returns, which included an examination of the firm’s performance disclosures and compliance policies and procedures to determine potential wrong-doing.

The issuance of a Wells notice from the SEC indicates that the US financial watchdog plans to bring an enforcement action against Pimco based on its investigation. However, it is important to note that the notice is not in itself a formal allegation and does not officially constitute an enforcement action. Rather, Pimco has the opportunity to explain any improprieties and convince the SEC that forward movement on such actions is unnecessary.

The Response

Pimco’s response has been confident.

The Wells process provides us with our opportunity to demonstrate why we believe our conduct was appropriate.

Defending the inflated valuation, Pimco has said that the higher prices were justified due to the fact that the ETF aggregated add-hoc securities into a larger, more attractive, instrument for which there was greater investor demand, according to FT.

In a statement, Pimco said: “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. We will continue to engage with the SEC and we are confident that this matter will not affect our ability to serve our clients.”