Valuation settlement with Bloomberg highlights an enforcement roadmap

On January 23, 2023, the Securities and Exchange Commission (“SEC” or the “Commission”) settled an administrative proceeding with Bloomberg alleging that Bloomberg violated Section 17(a)(2) of the Securities Act in misleading clients its BVAL valuation service.
- Specifically, the SEC alleges that Bloomberg failed to inform BVAL customers that the valuations for certain fixed-income securities could be based on a single data input, such as a broker quote, which did not adhere to methodologies it had previously disclosed.
Valuation: While Bloomberg is not an investment adviser, the structure of the case is very similar to one that might be brought against private fund managers.
Service Providers: The case is also similar to other service provider cases – such the 2021 case against App Annie and Bertrand Schmitt – and therefore raises questions about the responsibilities private fund managers have to spot red flags and diligence service providers.

Valuation Service Disclosure:
- Bloomberg made disclosures to its customers that did not explicitly include language informing clients that valuations provided by its BVAL valuation service for certain thinly-traded fixed income securities could, in certain circumstances, be largely driven by a single data input, such as a broker quote.
- Specifically, Bloomberg disclosed that its BVAL algorithm used the highest quality observations and that the algorithm required statistical corroboration of valuation data.
- In fact, in a very specific circumstance BVAL would utilize a single data point when valuing highly illiquid securities. The Order does not make it clear whether this was due to a malfunction or intentional design.
  - Analysis – This case is based on an omission rather than an affirmative misstatement creating a potentially lower bar to bring cases that contain complex facts and where the Commission may have difficulty finding any single affirmative misstatement.

Omissions Particularly in Marketing – Most private fund advisers make very few affirmative statements about the process or methodology of performing valuations. This gives compliance departments comfort that internally valued holdings pose a reduced level or risk. However, this case demonstrates that what’s not said about valuations could be more important than what is said. Proper and complete footnoting is the best approach to reduce this risk.
Service Provider Diligence – The published SEC order does not make clear whether the investment advisers consuming the data would have seen red flags associated with the BVAL valuation. However, in many similar situations there are red flags which the vendor often leaves unexplained. This could create exposure for the investment adviser. Seeking advice of counsel may be a good solution for managing this risk.