Print
E-MailHester M. Peirce is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on her recent public statement. The views expressed in this post are those of Ms. Peirce and do not necessarily reflect those of the Securities and Exchange Commission or its staff.
Today [May 17, 2021] the Commission announced a settled enforcement action against S&P Dow Jones Indices LLC (“S&P DJI”). The Commission charged S&P DJI with violating Section 17(a)(3) of the Securities Act, which prohibits, in the offer and sale of securities, engaging in any transaction, practice, or course of business which operates or would operate as a fraud or deceit on the purchaser. In charging S&P DJI, the Commission addresses conduct that is outside the reach of Section 17(a)(3). Moreover, this precedent, if not appropriately confined to its particular facts, will open the door to subsequent expansions of the securities laws to reach all manner of actors and conduct with even more tenuous connections to the offer and sale of securities. Accordingly, I do not support bringing this action.
At issue here is a volatility-related index that S&P DJI created and licensed to users. Among the licensees was Credit Suisse AG (“CSAG”), which used the index, among other things, to construct the XIV, an exchange-traded note (“ETN”) series designed to offer sophisticated investors an inverse of the performance of the index. Unbeknownst to CSAG and XIV investors, S&P DJI’s index was subject to an “Auto Hold” feature. The Auto Hold, which is a common index feature, halts extraordinary movements in the index to prevent the publication of potentially erroneous values and holds the published intraday index value constant until the Auto Hold is released, either manually upon determination that the value was not erroneous or automatically upon the values returning to a pre-determined range. That feature became relevant on February 5, 2018, a day of extreme market volatility; the Auto Hold kicked in, which caused the published intraday index value to remain static during certain intervals from 4:00 PM to 5:08 PM. Because the note’s calculation agent used the reported intraday index values to calculate the intraday indicative value of the XIV ETN, the XIV’s published intraday indicative value likewise remained static even as the XIV’s market price fluctuated. During a very critical moment on a very critical day for CSAG and XIV investors, the public information about the intraday value of the index on which that ETN was based was stagnant. CSAG learned why after market close when, in response to CSAG’s queries, S&P DJI explained the Auto Hold. The next day CSAG exercised its right to accelerate the XIV notes, thus locking in investors’ losses. CSAG had the right to accelerate based on the intraday indicative value. Had S&P DJI’s Auto Hold not kicked in, XIV investors would have had another indication—in addition to the XIV’s market price—that acceleration was a possible outcome of February 5’s market turmoil.
That this course of events plausibly denied investors information they may have wanted does not make S&P DJI a primary violator of Section 17(a)(3). S&P DJI, by licensing its index to CSAG for use in a security, did not engage in an offer or sale of a security. We do not allege that S&P DJI interacted with investors. CSAG, not S&P DJI, had disclosure obligations. CSAG, not S&P DJI, made the decision to accelerate the notes. Was the nondisclosure a violation of S&P DJI’s contract with CSAG? Perhaps. Should S&P DJI, if it reviewed CSAG’s descriptions of the index, have ensured that the Auto Hold was mentioned? Yes. Should S&P DJI, at a minimum, have told CSAG about the Auto Hold feature in advance so that CSAG could decide whether and when to tell investors about it? Yes. Was S&P DJI’s failure to do so a violation of Section 17(a)(3)? No.
The charges against S&P DJI suggest that any person who knows another party will use her product or service to build a security could be charged under Section 17(a)(3) for omissions or misstatements about that product or service. Securities laws are not meant to address every wrong. CSAG was obligated to its investors. S&P DJI’s obligations ran to CSAG.
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. I am open to exploring the need for and propriety of such a framework. An enforcement action, however, is not a substitute for doing the hard work to determine whether a regulatory framework for index providers is appropriate and, if so, what it should look like.
