Pricing Service Provider Fined for Misleading Disclosure on Valuation Methodologies

A pricing service provider settled SEC charges for failing to disclose that its independent pricing service could, at times, provide a valuation largely driven by a single data input.

Based on the respondent's disclosures, the SEC stated that the pricing service provides daily price valuations to financial entities as to securities, including thinly traded and hard-to-price fixed income securities. The SEC said that the pricing system works by utilizing several market observations that are then further corroborated.

According to the Order, the SEC found that the provider failed to disclose that if an evaluator added data for a thinly-traded or hard-to-price security, for which little observable market data exists, the algorithm's pricing determination could be largely based on a single uncorroborated input. The SEC said that the provider's description of its valuation methodology was materially misleading because it had previously stated that the proprietary algorithm's pricing of fixed income securities would only utilize the values of comparable securities, omitting the possibility that some pricing may be based largely on a single data input. As a result, the SEC determined that the company violated Securities Act Section 17(a)(2) ("Fraudulent Interstate Transactions").

To settle the charges, the company agreed to (i) cease and desist from further violations and (ii) a civil monetary penalty of $5 million.