Bloomberg Finance agreed to pay a $5 million fine for alleged misleading disclosures it made about how it calculated the valuations it provided on fixed-income securities to the financial services industry.
From at least 2016 to October 2022, Bloomberg failed to disclose valuations offered through its paid subscription service, BVAL, could be affected by a single data input, such as a broker quote, the Securities and Exchange Commission (SEC) said Monday in a press release.
Bloomberg disclosed to its BVAL customers “that its independent valuations of fixed income securities are derived by using proprietary algorithmic methodologies,” the SEC said in its order, and described those methodologies in detail.
However, on certain “thinly traded” fixed-income securities that were difficult to price, the BVAL rate could be largely driven by a single data input, the SEC said. Bloomberg maintained to its customers all BVAL prices were always calculated by its algorithm using “observed comparables.” Several BVAL customers were able to determine the price on certain securities could be tied to one broker quote.
The SEC found Bloomberg was aware its subscription service customers might be using its prices to set fund asset valuations, “including for valuing fund investments in government, supranational, agency, and corporate bonds; municipal bonds; and securitized products.”
BVAL’s prices can have an impact on the price at which securities are offered or traded, the SEC said in its order, though it noted, “[T]here is no evidence that BVAL’s prices were erroneous or not reflective of the market during the relevant period.”
Without admitting or denying the agency’s findings, Bloomberg agreed to the pay the penalty, cease future violations, and take certain actions to improve its BVAL line of business.
Remedial steps taken by Bloomberg to address the misleading disclosures included voluntarily hiring an outside expert to examine and make enhancements to its BVAL line of business, the SEC said. In October 2022, Bloomberg made additional disclosures that spelled out, in certain circumstances, its BVAL valuation methodologies might be derived from a single broker quote.
Bloomberg declined to comment, though a spokesperson noted the SEC said the BVAL prices at issue represented a small fraction of total reported valuations, and that these prices would have been assigned a low BVAL score, which is designed to gauge the amount and consistency of market data used in BVAL’s models.
Amid efforts to wind down use of the London Interbank Offered Rate following rampant manipulation, regulators and other entities were lobbied by Bloomberg to consider using its rate, the Bloomberg Short-Term Bank Yield Index (BSBY), to replace LIBOR as the benchmark rate in financial contracts. SEC Chair Gary Gensler said in speeches he believed BSBY had “many” of the same weaknesses and susceptibilities to manipulation as LIBOR.
The U.S. government instead adopted the Secured Overnight Financing Rate (SOFR) to replace overnight, one-month, three-month, six-month, and 12-month LIBOR benchmark rates in contracts.
Editor’s note: The author of this report previously worked as a reporter for Bloomberg Law.