The recent enforcement action against S&P Dow Jones Indices could lead to regulatory controls on index providers by the Securities and Exchange Commission.
The SEC on Monday announced a settlement with S&P Dow Jones Indices and a $9 million fine for charges that it was negligent overseeing a quality control feature of a volatility-related index that failed during a volatile day of trading in February 2018.
SEC Commissioner Hester Peirce did not support bringing the action, which she said was "outside the reach" of the securities law invoked and could lead to other questionable applications, but she did raise the possibility of index providers being subjected to regulation in the U.S., bringing them closer to European Union standards.
"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," Ms. Peirce said in a statement.
The Republican commissioner, who has been an outspoken critic of several SEC regulatory proposals such as ESG disclosure, said "I am open to exploring the need for and propriety of such a framework."
In the meantime, the commissioner expressed concern about future enforcement actions in such cases, which "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."
According to the SEC order, the S&P 500 VIX Short Term Futures Index ER was intended to calculate values based on real-time prices of certain CBOE Volatility index futures contracts. On Feb. 5, 2018, the VIX spiked 115%, but the index remained static at one point in the afternoon because of an undisclosed "auto hold" feature that reports a previous value if an index value breaches certain thresholds, the SEC found. When S&P DJI did not release the hold, stale index values were published instead of ones based on real-time prices.
Index licensee Credit Suisse AG used the index to construct its XIV exchange-traded note series that offered investors an inverse of the index's performance. Both Credit Suisse and XIV investors were not aware of the auto hold, which Ms. Peirce described as a common index feature.
S&P DJI should have told Credit Suisse about the feature, Ms. Peirce said, but Credit Suisse was obligated to disclose it to investors, and it made the decision to accelerate the notes. "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," she said.
