Pricing Service to Pay $8 Million to Settle SEC Charges

December 18, 2020

The SEC recently settled charges against a global securities pricing service and registered investment adviser (Pricing Service), for compliance deficiencies relating to its delivery to clients of prices for certain categories of fixed-income securities based on quotes it received from a single market participant (single broker quotes).  According to the SEC order (Order), the Pricing Service failed to adopt and implement policies and procedures reasonably designed to address the risk that the prices based on single broker quotes would not reasonably reflect the value of the securities. The Order also states that the firm’s quality controls for such prices were not effectively or consistently implemented. For example, the Pricing Service did not always receive daily quotes from market participants for single broker quoted securities, sometimes only receiving quotes once a month.  Also, the Pricing Service did not consider other market information for broker quotes, when available, such as trades or quotes from other sources, as a check on whether the quotes reflected the security’s value.

The Order indicates that these failures (which occurred from at least 2015 through September 2020 and affected the prices for more than 40,000 fixed-income securities) impaired the firm’s ability to assess the reliability of quotes it received from market participants and determine whether a market participant was an accurate source of information.  The Pricing Service agreed to pay $8 million to settle the charges due to its failure to adopt and implement written policies and procedures reasonably designed to prevent violations of the Investment Advisers Act of 1940 and its rules.

While the Order does not directly relate to new Rule 2a-5 under the Investment Company Act of 1940 regarding good faith determinations of fair value (which is not yet effective), it highlights the importance of the valuation procedures of pricing service providers, which typically play a critical role in fair value determinations for funds.  Please see Seward & Kissel’s client memorandum that discusses new Rule 2a-5 in detail: https://www.sewkis.com/publications/sec-adopts-rule-to-modernize-fund-valuation-practices/.

See the Order: In the Matter of ICE Data Pricing & Reference Data, LLC, SEC Release No. IA-5643 (Dec. 9, 2020), available at https://www.sec.gov/litigation/admin/2020/ia-5643.pdf.


Categories

Compliance, Enforcement Actions, Exchange-Traded Funds (ETFs), Investment Advisers, Investment Companies, Mutual Funds, Regulatory