In the first part of this post, I explained how trading odd lot MBS can create the same valuation issue as trading PIPEs. I also touched on some important differences between MBS and PIPEs. In this part, I’ll examine why these differences may make the valuation of odd lot MBS more problematic than the valuation of PIPEs. The Order is significant for investment advisers as well as investment companies, insofar as the SEC asserted that PIMCO’s valuation procedures violated Rule 206(4)-7.
mortgage-backed securities
“Odd Lots” and Valuation Déjà Vu–Part 1
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The SEC’s recent settlement (the “Order”) with Pacific Investment Management Company (“PIMCO”) reflects a new twist on an old issue: buying securities at bargain prices and then marking them up when calculating NAVs. The SEC first addressed this issue in 1969 in the context of what we now refer to as “PIPEs.” The first part of this post examines the similarities and differences between PIPEs and the mortgage-backed securities (“MBS”) addressed in the Order. The second part explains why “odd lot” MBS may be more problematic than PIPES.…