May 14, 2007
SEC Settles "Shelf Space" Payments Charges against PIMCO Investment Adviser
On May 14, the Commission settled charges against Stephen J. Treadway (Treadway) relating to conflicts of interest involving "shelf space" payments. The Order finds that Treadway- the former Chief Executive Officer of both PA Fund Management LLC (PAFM), the investment adviser to the PIMCO Funds, and PA Distributors LLC (PAD), the distributor for the PIMCO Funds, and the former Chairman of the PIMCO Funds Multi-Manager Series (MMS Funds) Board of Trustees (MMS Board)--did not ensure that PAFM fulfilled its fiduciary duty to disclose to the MMS Board that the MMS Funds' brokerage commissions were being directed to broker-dealers to reduce PAD's payments for increased "shelf space" within the broker-dealers' distribution systems and that a corresponding conflict of interest existed for PAFM.
The Commission's Order specifically finds that between 2000 and 2003, PAD entered into shelf space arrangements with nine broker-dealers to promote the sale of all PIMCO Funds distributed by PAD. Treadway and other members of PAD approached PEA Capital LLC (PEA), the sub-adviser to the MMS Funds, to discuss whether PEA would be able to direct brokerage commissions on the MMS Funds' portfolio transactions, but did not tell PEA that directing brokerage commissions to certain broker-dealers would reduce PAD's cash payments for the shelf space arrangements. As the CEO of PAFM and PAD, Treadway approved of PAD's participation in the shelf space arrangements and negotiated the terms of some of the arrangements. The Order also finds that by encouraging PEA's use of fund assets to benefit, and in fact defray, the expenses of PAD, a third party to the MMS Funds, Treadway created a conflict of interest that he, as the CEO of PAFM and PAD and the individual through which PAFM addressed the MMS Board, should have disclosed. Treadway, however, when acting on behalf of PAFM and PAD, and when addressing the MMS Board, failed to disclose this conflict of interest and did not ensure that anyone else disclosed this information. As a result, the Order finds that Treadway willfully aided and abetted and caused PAFM's violation of Section 206(2) of the Investment Advisers Act of 1940.
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Posted by: Leo | May 14, 2007 4:07:13 PM
This enforcement action and subsequent settlement reaffirms the absolute necessity of for an investment advisor to thoroughly and regularly review its business practices for conflicts of interest and then fully disclose such conflicts to its client (in this case the mutual fund). In short, the key to this exercise is for the investment advisor's CCO to follow the money, which will undoubtedly lead to the conflicts.
Posted by: Bryan Hill | Jul 6, 2007 8:01:34 PM