Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Monday, 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

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