SEC Fines Pricing Service $8 Million for Over-Relying on Single Broker-Quotes
The SEC fined a pricing service $8 Million for relying on single broker-quotes for certain exotic securities without sufficient controls to ensure accuracy. Over the course of 5 years, the pricing service used single broker-quotes for complex fixed income securities such as synthetic convertible notes, index-linked notes, ABS, CMBS, and structured notes. The SEC faults the firm, a registered investment adviser, for failing to implement policies and procedures to assess whether the broker quote reflected the security’s true value. According to the SEC, the pricing service continued to report stale prices, ignored client information, and neglected to consider market information “such as trades or quotes from other sources, as a check on whether the quotes being received reasonably reflected a security’s value.”
Very interesting that this case comes out so soon after the SEC adopted its new fund valuation rule. Most fund advisers rely heavily on third party pricing services (and we have argued that they should). This only works if its reasonable to rely on them. As the large pricing services have become an oligopoly and industry utility, they should be held to a commensurate level of accountability. If you don’t use a pricing service, consider some of the SEC’s allegations in this case as guidance for how to create a valuation process.