Index Provider Fined $9 Million for Inaccurate Valuations
The SEC fined an index provider $9 Million for failing to adjust the valuation of its index in accordance with its published policies.
Following an extremely volatile trading day, the index provider’s systems put an auto hold on price adjustments pending manual intervention. The SEC asserts that the required manual intervention did not occur because the index provider was understaffed and manual adjustments were unnecessarily delayed. Consequently, the index provider reported inflated valuations to investors in an ETN note issuer, who subsequently exercised a right to repurchase based on the true valuation. The SEC charges the index provider with violating Section 17(a)(3) of the Securities Act for engaging in a practice that operates as a fraud on the purchaser of securities.
The SEC has rarely taken action against index providers because they are not required to register as investment advisers. As Commissioner Hester M. Peirce argues, the use of Section 17(a)(3) is questionable because the index provider is not selling securities and the harmed purchasers do not buy from the index provider. This case really asks the bigger question of whether index providers should be deemed investment advisers for purposes of Section 15(c) of the Investment Company Act, thereby subjecting them to Board scrutiny and direct SEC supervision. This case may augur more informal regulation, as the SEC enforcement lawyers get creative until Congress changes the law.
Read SEC Order here.