Last week, the Securities and Exchange Commission (“SEC”) announced the settlement of two enforcement actions relating to disclosure and policies and procedures violations involving two funds managed by Pacific Investment Management Company LLC (“PIMCO”). Without admitting or denying the SEC’s findings, PIMCO agreed to a cease-and-desist order and a censure in each action and to pay a combined $9 million penalty.

In the first case, the SEC found that PIMCO willfully violated Section 206(4) of the Advisers Act and Rule 206(4)-7, by failing to adopt and implement policies and procedures reasonably designed to prevent violations of the Advisers Act. From April 2011 to November 2017, PIMCO failed to waive approximately $27 million of certain advisory fees as required by its agreement with its mutual fund, the All Asset All Authority Fund (the “Authority Fund”). The Authority Fund operates as a “fund of funds” and primarily invests in other PIMCO-managed funds. As per the advisory agreement, PIMCO agreed to a fee waiver, provided that PIMCO receives a certain amount of fees from the management of the other PIMCO funds in which the Authority Fund invests.

Although PIMCO did waive a portion of the agreed fees, the SEC discovered that PIMCO failed to waive approximately $27 million in advisory fees due to an error in the formula that PIMCO created and provided to its sub-administrator. The sub-administrator discovered the error in December of 2017 and notified PIMCO. The SEC also found that through 2018, PIMCO failed to have reasonably designed policies and procedures in place to prevent violations relating to its oversight of the advisory fee calculations and related fee waivers.

In the second case, the SEC found that PIMCO willfully violated Section 206(4) of the Advisers Act and Rule 206(4)-8 and Section 34(b) of the Investment Company Act of 1940, by failing to disclose material facts and risks. From September 2014 to August 2016, PIMCO inadequately disclosed the risks associated with its use of paired interest rate swaps for the PIMCO Global StocksPLUS & Income Fund (“PGP”). For almost two years, the paired interest rate swaps became the main source of income for distributions which allowed PIMCO to maintain PGP’s dividend rate; however, the continued use of the swaps contributed to a decline in the net asset value of the fund. PIMCO ultimately revised its disclosures in PGP’s 2016 fiscal year-end report to disclose the use of paired interest rate swaps and the potential impact on the fund’s portfolio.

We always say that your firm’s disclosures are the first line of defense with the regulators. There is no silver bullet for the perfect disclosures, but you should make sure they are timely, complete, accurate, and consistent across all documents. In addition to disclosures, you should make sure that you have adopted and implemented the appropriate policies and procedures in your compliance manual, and they are being adhered to. It is not enough to simply have adopted written policies and procedures, but you should also ensure that they are actually being performed and documented.

SEC3 can assist with reviewing your firm’s disclosures. Additionally, SEC3 can assist with assessing your firm’s compliance manual and policies and procedures. SEC3 will work with you on updating existing policies and procedures that are tailored to your firm’s business and easy to manage, while also meeting the SEC’s regulatory requirements.

SEC3 leverages over 100 years of combined regulatory compliance experience to deliver compliance knowledge and insight that you can trust. SEC3 strives to develop effective partnerships, where our clients feel we are an extension of your firm rather than another service provider. We pride ourselves on our quality and service that is unmatched rather than adopting the typical client-consultant relationship.

For more information, please contact us at info@seccc.com, at (212) 706-4029 x 229, through LinkedIn or visit us on our website at www.seccc.com.