Pimco investigated over pricing of bond ETF

US Securities and Exchange CommPimco has confirmed it is being investigated by the Securities and Exchange Commission (SEC), the US regulator, over its pricing procedures.

Although the SEC has not commented on the probe, the Wall Street Journal, which first reported the story, says the investigation concerns whether the Pimco Total Return ETF bought bonds at a discount and then relied on higher valuations to calculate its holdings shortly after.

This technique might make it seem the fund scored quick gains when it was really benefiting from variations in bond market pricing, says the report.

“Pimco has been cooperating with the SEC in this non-public matter, and we take our regulatory obligations and responsibilities to our clients very seriously,” says a statement from the firm. “We believe our pricing procedures are entirely appropriate and in keeping with industry best practices.”

Commentators have suggested the case concerns pricing of “odd lots”, small blocks of bonds which are harder to sell than big blocks. A large fund could buy many odd lots at a discount, and combine them into a big block, potentially making them more valuable because they are easier to sell.

If this analysis is correct, the SEC's investigation may focus on whether Pimco's technique for pricing combined odd lots is fair and whether it leads to potentially misleading information about the holdings of the fund.

News of the investigation has reopened a debate about whether it is appropriate to apply active management to an ETF, or exchange-traded fund, which in essence are transparent products that track an index. Pimco's Total Return ETF is one of the most successful active ETFs on the market, with about $3.6 billion (€2.8 billion) under management.

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