Bloomberg Fails To Fully Disclose Methodology

Pricing services are frequently relied on by those trying to determine the value of a security. Frequently they are used to aid the valuation of thinly traded stocks. In some instances, the services are used to aid valuing more complex instruments. It is the use of these services, and what must be disclosed about them, which is at the heart a recent case brought by the Commission. In the Matter of Bloomberg Finance, L.P., Adm. Proc. File No. 3-21284 (January 23, 2023).

Respondent Bloomberg Finance is a subsidiary of Bloomberg I.P., a privately held financial, software, data and media firm based in New York City. The firm has long operated a pricing service known as BVAL. It provides daily price valuations to numerous subscribers and customers. Bloomberg Finance is an industry leader.

Customers of the firm are told that when valuing fixed income securities it did so either by direct observation algorithm or observed comparable algorithm. The former includes market data about the target security. Those observations are filtered by Bloomberg to include only the highest quality observations. The approach requires that executable levels and indicative market quotes are statistically corroborated.

The firm also uses what it calls the Evaluator Input or EIT. This approach incorporates into the algorithm a single data point about the target security. This can be a broker quote that may not have been automatically incorporated by BVAL.

What Respondent did not explicitly disclose over a six-year period, beginning in 2016, is that in certain circumstances the use of EIT could result in a valuation based on an uncorroborated single data input. This made the Bloomberg disclosure materially misleading, according to the Order Instituting Proceedings. This is because it conveyed that the prices of fixed income securities from the observed composable algorithm were based on value relative to comparable securities only. That in fact is not correct since a single broker quote for the target security might be the basis. The Order alleges violations of Securities Act Section 17(a)(2).

To resolve the matter, Respondent consented to the entry of a cease-and-desist order based on the Section cited in the Order. In addition, Respondent will pay a penalty of $5 million.

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