Published on May 17th, 2021 |

On May 17th, 2021, the SEC settled charges with S&P Dow Jones Indices for Failures Relating to Volatility-Related Index for which they agreed to a cease-and-desist order and to pay a $9 million penalty.

This news comes in at a surprise as they were charged under Section 17(a)(3) of the Securities Act for failing to disclose a quality control feature on one of its volatility-related indices that resulted in inaccurate real-time values. The intention for the feature was to prevent the publication of potentially erroneous values and hold the published intraday index value constant until the Auto Hold is released. Ultimately, failure to timely release the values caused the S&P Dow Jones Indices to disseminate stale index values during a period of spiked volatility.

Daniel Michael, Chief of the SEC Enforcement Division’s Complex Financial Instruments Unit stated, “Index providers like S&P DJI play a crucial role in the financial markets.” He also provided additional detail stating “When index providers license their indices for the issuance of securities, as S&P DJI did here, they must ensure that the disclosure of critical features of their products as well as the publication of real-time values are accurate.”

It is also important to note that Commissioner Hester M. Peirce was critical of the SEC Enforcement Division’s decision to charge this case under the anti-fraud provisions of Section 17(a)(3) saying that the “SEC will open the door to subsequent expansions of the securities laws to reach all manner of actors” and that this enforcement action may hint at a deeper, unspoken concern that index providers, whose products have become so integral to our securities markets, are not governed by a regulatory framework explicitly tailored to their activities. To see her full statement click HERE.

With the strong importance towards this charge Vigilant has provided 3 Key Recommendations to be prepared:

  • Funds should ensure that Index Providers are reviewed annually along with the Fund’s Investment Adviser, Principal Underwriter, Administrator, and Transfer Agent.
  • Funds should have a thorough understanding of the controls and processes used by the Index provider to ensure proper disclosure to investors.
  • Index Providers should conduct testing of various market conditions to ensure their processes and procedures are designed to operate effectively, and they should be aware of the costly consequences should their index result in the publication of inaccurate values to the market.

Interested in viewing the full SEC Release? Click HERE.