On May 17, 2021, the SEC announced that it had settled charges against S&P Dow Jones Indices LLC for alleged violations of Section 17(a)(3) of the Securities Act of 1933 relating to the failure to disclose a feature of an index tracked by an exchange-traded note (ETN) that resulted in the publication of index values that did not accurately reflect the economic value of the ETN. 

S&P Indices published the index in question, the S&P 500 VIX Short Term Futures Index ER, based on the price of certain volatility-based futures contracts, and entered into agreements to license the index to, among others, an issuer of an inverse ETN. S&P Indices designed the index with an “auto hold” feature such that if the index experienced a significant spike, the publication of new index values would be frozen and the prior index value would continue to be published until such time as the index value came back within those thresholds or personnel manually released the auto hold. The ETN also included a provision that would permit the issuer to accelerate redemption of the notes upon the breach of a key metric of volatility. 

On February 5, 2018 the VIX experienced spikes that triggered the auto hold feature. As a result, during certain intervals between 4:00 p.m. and 5:08 p.m. Eastern Time, the published index value remained static and inaccurately reflected the economic value of the ETN. Had the correct index value been published, the issuer’s right to accelerate redemption of the notes would have been exercisable. The continued publication of the stale index value created the impression that the issuer’s redemption rights had not been triggered and resulted in investors purchasing ETNs at prices that were higher than the ETN’s actual economic value. 

The SEC charged S&P Indices with violating Section 17(a)(3) of the Securities Act, under which it is unlawful for any person in the offer or sale of securities to engage in any transaction, practice or course of business that operates or would operate as a fraud or deceit upon the purchaser. Although S&P Indices was not the issuer of the ETN, the SEC based its Section 17(a)(3) claim on the failure to publicly disclose the auto hold feature in light of a provision in the index licensing agreement that required S&P Indices’ express sign-off on the description of the index in the issuer’s informational materials, including prospectuses and pricing supplements. 

Without admitting or denying the charges, S&P Indices agreed to cease and desist from future violations of Section 17(a)(3) and to pay a civil penalty of $9 million.

The settlement order is available here; the SEC’s press release relating to the settlement is available here.

Following the issuance of the settlement order, SEC Commissioner Hester M. Peirce, who dissented from the order, issued a public statement  describing her concerns with the charges brought against S&P Indices.  Commissioner Peirce stated that, in her view, S&P Indices' conduct was outside the reach of Section 17(a)(3) and that the order could set a precedent resulting in an expansion of the federal securities laws such 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.”  She also noted that this enforcement action may evidence a broader concern about index providers, which have grown integral to the securities markets but which are not subject to a specific regulatory regime.  She stated that she would be open to exploring the need for such regulation but that she believed an enforcement action was not a substitute for establishing an appropriate regulatory framework.

Commissioner Peirce's public statement is available here.