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Pimco, Regulators Set Tentative Deal

The stock fund group would pay at least $10 million to settle probes into incentives for brokers, sources say.

September 04, 2004|Walter Hamilton and Tom Petruno | Times Staff Writers

NEW YORK — State and federal regulators have reached a tentative deal with the Pimco mutual fund group to settle probes into whether the company sent stock trades to brokerages that aggressively pushed its funds to investors, people familiar with the matter said Friday.

Pimco would pay at least $10 million to $12 million to resolve twin investigations into the incentive deals with brokers who sold Pimco stock funds. The settlement is expected to be finalized in the next two weeks, the sources said.

The Times reported July 30 that Pimco was in settlement talks with the Securities and Exchange Commission and the California attorney general's office. Pimco spokesman Phil Neugebauer said Friday that "discussions with federal and state regulators are continuing and we are hopeful we can settle outstanding issues promptly."

The probe has focused on the practices of New York-based PEA Capital, the sister firm of Newport Beach-based Pacific Investment Management Co., the nation's largest bond mutual fund company.

Charges of improper trading by the bond fund operation were dropped by the New Jersey attorney general three months ago.

Both companies are owned by German insurance giant Allianz.

As part of their continuing crackdown on the fund industry, regulators have been closely examining the payments that mutual fund companies make to brokerages to encourage them to peddle their funds. Practices under scrutiny include "directed brokerage," in which funds send stock trades to brokerages that push their funds, as well as direct cash payments to the brokerage firms.

The probes go to the heart of how the fund and brokerage industries have long operated, and center on basic issues of customer fairness, such as whether brokers recommend funds to their clients based on hidden financial incentives rather than the investors' best interests.

The SEC began investigating directed brokerage deals last year, and California Atty. Gen. Bill Lockyer launched a probe in January.

Spokesmen for Lockyer and the SEC declined to comment.

Regulators are negotiating the final details of a similar settlement with Franklin Resources Inc. of San Mateo, Calif., that could be completed by the end of this month, sources said.

A Franklin spokeswoman declined to comment beyond earlier company comments on the issue.

A statement on Franklin's website says the company thinks potential charges would be unwarranted but "also believes that it is in the best interest of the company and fund shareholders to resolve these issues voluntarily."

The SEC voted last month to ban directed brokerage. Until then, the practice was allowed, but fund companies had to make proper disclosures to investors and fund trustees.

Critics said disclosures were typically so obscure that investors would have little way of knowing about the arrangements.

This year, Massachusetts Financial Services Co. paid $50 million to settle SEC charges that it did not properly disclose payments to brokers. Last year, brokerage giant Morgan Stanley paid $50 million to settle SEC allegations related to payments from 14 mutual fund companies.

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