STAMFORD, Conn., Sept. 15, 2004 (PRIMEZONE) -- As previously reported, PA Distributors LLC (PAD), PEA Capital LLC (PEA) and PA Fund Management LLC (PAFM) have been part of a Securities and Exchange Commission (SEC) industry investigation concerning revenue sharing and directed brokerage practices. Today, the companies confirmed, without admitting or denying involvement in any improper activities, that they have reached a settlement with the SEC.
Connecticut-based PAD also confirmed a settlement with the Attorney General of the State of California, which had launched its own probe of industry revenue sharing practices early this year. California's complaint, which included allegations PAD did not admit or deny, was filed concurrent with the State's settlement agreement.
PIMCO, the Newport Beach-based fixed income company, and the Funds managed by it, as noted in the SEC agreement, were not charged or involved in the SEC settlement. PIMCO also was not charged or involved in the California agreement announced today.
Under terms of the SEC agreement, the companies will pay a fine of $5 million. In addition, the companies will reimburse the PIMCO Funds: Multi-Manager Series (equity funds commonly referred to as MMS Funds) $6.6 million, an amount equal to the benefits the companies and the SEC calculated had been received from directed brokerage, including interest over an approximate four-year period.
It should be noted that the commissions generated by directed brokerage transactions, which were all done at best execution, represented a small fraction (about 4 percent) of PEA Capital's total equity trading commissions during this period. The $6.6 million represents benefits that PAD received, but since all trades were done at best execution, no fund or shareholder was harmed. Also, the firm voluntarily ceased all directed brokerage trades as of July 2003, well before these issues had been raised by regulators as a matter of concern.
In order to resolve compliance issues that arose during the investigation, the companies will implement governance and compliance policies and procedures that define more clearly activities involving trades with broker-dealers who also sell fund shares. Similarly, procedures that will strengthen disclosure of revenue sharing arrangements also will be implemented.
A similar agreement between PAD and California's Attorney General provides for a fine of $5 million and a payment of $4 million to cover the State's costs.
PAD spokesman, Phil Neugebauer said, "Settling these matters promptly insures that we will not become diverted from our ability to focus fully on our number one priority, serving the needs of our clients, employees and shareholders."
BACKGROUND
The following is a discussion of revenue sharing and directed brokerage and how they relate to PAD, PEA and PAFM
Revenue Sharing -- It has been common practice of broker-dealers to maintain preferred lists of mutual funds that they market to their customers. Revenue sharing involves making payments to certain broker-dealers in an effort to assist with the costs of educating the financial advisors and their clients about these "preferred" fund families and their shareholder services. A financial advisor is much better prepared to make portfolio recommendations and offer services to a client when properly educated, and the cost of this is primarily covered by the broker-dealers. As part of a business relationship with broker-dealers, it has been standard industry practice to share in a portion of these expenses. This practice, as disclosed by the Funds, results in payments made by PAD (not the fund or their shareholders) to certain broker-dealer firms that have sold retail shares of PIMCO Funds.
Directed Brokerage -- The term "directed brokerage" relates to the traditional industry-wide practice of taking into account mutual fund sales when deciding where to execute portfolio transactions, subject to best execution. (Best execution is determined by factors that include transaction costs, price, quality of executions and speed.) PAD and PEA believed at the time that this practice was consistent with industry standards, and in any event, all directed brokerage was always done at the best execution and no fund or shareholders were harmed.