SEC Issues Wells Notice to Pimco Over ETF MBS Disclosures

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The SEC has sent a Wells Notice to Pimco for disclosures to investors in its flagship Total Return Active ETF in connection with the purchase of certain mortgage bonds during a period in 2012.

At issue is the valuation of mortgage backed securities and their disclosure to investors. The fund reportedly bought small odd lots of mortgage backed securities and pooled them together over time. Odd lots trade at a discount because they are more difficult to sell in the open market. When valuing the combined bond holding, Pimco valued them at their “true” value rather then their odd lot purchase price.

Pacific Investment Management Company, better known as Pimco, has more than $1 trillion assets under management. The exchange traded fund at issue is a popular one with investors and has more than $2 billion in assets under management. Bill Gross, who has been referred to as the king of bonds, departed from the investment company that he managed for four decades in 2014.

The SEC issues a Wells notice when the Commission staff recommends a lawsuit against the company as a result of their investigation. According to a Wall Street Journal study in 2013, about 20% of investigations are dropped without a lawsuit following the issuance of a Wells notice.

In other bond news, Puerto Rico defaulted on its first bond on Tuesday. The territory has previously indicited that it does not have the money to make bond payments and asked its creditors to renegotiated the debts. The missed payment was small, just $5 million, compared to an upcoming $370 million payment on bonds due January 1st.

Puerto Rico is currently prohibited by law from declaring bankruptcy. There is a bill before Congress that would give it access to U.S. bankruptcy court so that it could seek protection from its creditors and work out its debts with them.

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