United States of America
In the Matter of
FT Interactive Data,
|ORDER INSTITUTING PUBLIC ADMINISTRATIVE AND CEASE-AND-DESIST PROCEEDINGS, MAKING FINDINGS, AND IMPOSING REMEDIAL SANCTIONS AND A CEASE-AND-DESIST ORDER PURSUANT TO SECTIONS 203(e) AND 203(k) OF THE INVESTMENT ADVISERS ACT OF 1940 AND SECTIONS 9(b) AND 9(f) OF THE INVESTMENT COMPANY ACT OF 1940|
The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest to institute public administrative and cease-and-desist proceedings pursuant to Sections 203(e) and 203(k) of the Investment Advisers Act of 1940 ("Advisers Act") and Sections 9(b) and 9(f) of the Investment Company Act of 1940 ("Investment Company Act") against FT Interactive Data ("Interactive Data" or "Respondent"), formerly known as Interactive Data Corporation and Muller Data Corporation.
In anticipation of the institution of these proceedings, Respondent has submitted an Offer of Settlement (the "Offer"), which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings herein, except as to the Commission's jurisdiction over it and the subject matter of these proceedings, Respondent consents to the entry of this Order Instituting Public Administrative and Cease-and-Desist Proceedings, Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order pursuant to Sections 203(e) and 203(k) of the Investment Advisers Act of 1940 and Sections 9(b) and 9(f) of the Investment Company Act of 1940.
On the basis of this Order and Respondent's Offer, the Commission finds that:1
1. Respondent, FT Interactive Data, formerly known as Interactive Data Corporation and Muller Data Corporation, is the major operating division of Interactive Data Corporation, a global provider of financial and business information to institutional and individual investors. Interactive Data Corporation, in turn, is a Delaware corporation headquartered in Bedford, Massachusetts with offices in New York and elsewhere. Respondent has been registered with the Commission as an investment adviser since March 3, 1998, and provides valuations for fixed income and equity securities to investment companies, investment advisers, broker-dealers, insurance companies, banks, trust companies, and other institutional investors (among others). In addition, Respondent is a "NRMSIR" (Nationally Recognized Municipal Securities Information Repository), or an entity designated by the Commission to serve as a clearinghouse for official statements, interim and annual financial statements, continuing disclosure documents and material event notices pertaining to municipal securities. Respondent is one of only a few pricing services that regularly values high-yield municipal bonds. On July 29, 1999, Muller Data Corporation, a wholly owned subsidiary of Interactive Data Corporation, merged into Interactive Data Corporation. Muller Data was a Delaware corporation engaged in analyzing and collecting financial information and pricing securities.
1. Heartland Advisors, Inc. ("Heartland Advisors"), was founded in 1982 and maintains its principal place of business in Milwaukee, Wisconsin. Heartland Advisors has been dually registered with the Commission since June 1983 as an investment adviser and as a broker-dealer, and provides investment advisory and brokerage services to individuals, institutions and retirement plans. In addition, Heartland Advisors manages the mutual fund portfolio series of Heartland Group, Inc. ("Heartland Group"), subject to the authority and oversight of Heartland Group's Board of Directors, and serves as the principal underwriter of Heartland Group's securities. During the period relevant to this Order, Heartland Group offered seven different series of mutual funds, including three equity and four fixed income funds. On March 21, 2001, the Commission obtained an order of permanent injunction and other equitable relief against Heartland Group for violations of Sections 30(b)(2), 30(e) and 30(g) of the Investment Company Act and Rules 30b2-1, 30d-1(a) and 30d-1(c) promulgated thereunder, which froze the assets of Heartland Group's High Yield Municipal Bond Fund ("High Yield Fund"), Short Duration High-Yield Municipal Fund ("Short Duration Fund"), and Taxable Short Duration Municipal Bond Fund ("Taxable Fund"). In addition, a receiver was appointed over the three funds, who was authorized to suspend redemptions in, manage, and, if appropriate, liquidate the three funds.
1. This matter arises from Heartland Advisor's fraudulent pricing of certain bonds held in the High Yield and Short Duration Funds (collectively, the "Funds") beginning in Spring 2000. During the period relevant to this Order, Heartland Advisor's Pricing Committee was charged with oversight of the valuation of the Funds' portfolio securities, and implementation and administration of the Board of Directors' procedures for valuing such securities. Specifically, because the Board had previously determined that market quotations for the Funds' securities were not readily available, the pricing procedures directed the Pricing Committee to use valuations provided by Respondent as benchmarks to fair value the Funds' securities and to determine the Funds' daily net asset values per share ("NAVs"). Members of the Pricing Committee reviewed the valuations provided by Respondent daily. The pricing procedures also required the Pricing Committee to review Respondent's valuations to ensure they were sufficiently timely and accurate. In those instances where the Funds' portfolio managers believed that Respondent's valuations did not reflect the securities' fair value, and where such disagreements could not be resolved with Interactive Data, the pricing procedures directed the portfolio managers to submit the dispute to a quorum of the Pricing Committee for the purpose of making a final, fair value determination. Any time the Pricing Committee made a fair value determination, the Pricing Committee was required to document its reasons for doing so.
2. Respondent, in turn, provided Heartland Advisors valuations for securities based in part on information obtained from Heartland Advisors itself. Respondent knew that the valuations it provided to Heartland Advisors would be used to price the Funds' bonds and, therefore, to calculate the Funds' NAVs.
3. With respect to a number of bonds held in the Funds, Heartland Advisors suggested that Respondent lower the bonds' valuations gradually in order to "smooth out" the negative impact that a precipitous drop in the bonds' values would have on the Funds' NAVs, and thereby protect the reported performance of the Funds in which those bonds were held. Specifically, on more than one occasion Heartland Advisors' portfolio managers received negative information regarding particular bonds and communicated that information to Respondent. Respondent, however, failed to reduce the valuations of those bonds immediately to account for the negative information. Instead, Respondent and Heartland Advisors agreed to reduce the values of the bonds in incremental amounts over time, which improperly "smoothed out" the negative impact of the bonds' decrease in value on the Funds' NAVs.
4. Between March 7, 2000 and May 8, 2000, at the request of the Funds' portfolio managers, Respondent devalued six bonds in this manner. On March 7, 2000, the carrying values Heartland Advisors assigned to these bonds, based on Respondent's values, ranged from approximately 87 percent of par value to 98 percent of par value. Beginning on that day, and continuing through at least May 8, 2000, the carrying values of the six bonds were reduced daily in increments of .5 percentage points until the bonds' carrying values reached 80 percent of par value. The bonds with initially lower carrying values dropped to 80 percent of par value in March 2000 while those with initially higher carrying values reached the 80 percent of par value carrying value in April or May 2000.
5. Of these six bonds, one remained at the 80 percent of par carrying value until July 2000. In July, the value of that bond was gradually reduced again by increments of .5 percentage points until it reached the price of 75 percent of par value, where it remained until September 28. The other bonds remained valued at 80 percent of par value until September 28, 2000. During approximately the same time period, the Funds' portfolio managers and Interactive Data gradually reduced the values of at least four other bonds by similar incremental amounts over time.
6. These incremental price movements were not based on any contemporaneous market or credit-related events, or other external factors affecting the individual securities, and did not reflect the portfolio managers' assessment of the bonds' fair values.
1. Based on the foregoing, Heartland Advisors willfully violated Sections 206(1) and 206(2) of the Advisers Act.2 Section 206(1) prohibits an investment adviser from employing "any device, scheme or artifice to defraud any client or prospective client." Section 206(2) prohibits an investment adviser from engaging "in any transaction, practice or course of business which operates as a fraud or deceit upon any client or prospective client." Specifically, Heartland Advisors violated Sections 206(1) and 206(2) by "smoothing" the prices of certain bonds held in the Funds, as described above.
2. Respondent, in turn, caused and willfully aided and abetted Heartland Advisors' violations of Sections 206(1) and 206(2) of the Advisers Act. A respondent will be liable for aiding and abetting a primary violation of the securities laws where: (1) there exists an independent primary violation, (2) the respondent had knowledge or a general awareness that his or her role was part of an overall activity that was improper, and (3) the respondent provided substantial assistance in the commission of the primary violation. Here, Respondent knowingly provided substantial assistance to Heartland Advisors' portfolio managers in gradually decreasing the prices assigned to bonds held in the Funds, which actions constituted a primary violation of Sections 206(1) and 206(2) of the Advisers Act, as described above. Further, Respondent provided this assistance even though it knew or was reckless in not knowing that the price decreases did not reflect the fair value of the bonds and were not tied to any daily market or credit-related events that would have affected the value of the individual bonds by the same amount each day.
3. Based on the foregoing, Heartland Advisors, Inc. also willfully violated Rule 22c-1(a), promulgated pursuant to Section 22(c) of the Investment Company Act. Rule 22c-1(a) provides that no registered investment company issuing any redeemable security, no person designated in such issuer's prospectus as authorized to consummate transactions in any such security, and no principal underwriter of or dealer in any such security shall sell, redeem, or repurchase any such security except at a price based on the current NAV of such security. Under Section 2(a)(41) of the Investment Company Act and Rule 2a-4 thereunder, current NAV calculations must be based on current market value or, if market quotations are not readily available, fair value as determined in good faith by the board of directors. Heartland Advisors, Inc., the investment adviser of the Funds and the principal underwriter of Heartland Group, Inc.'s securities, willfully violated Rule 22c-1(a) by selling, redeeming and repurchasing Fund shares at NAVs calculated using "smoothed" bond prices that were not based on the bonds' fair value as determined in good faith, which consequently resulted in incorrect NAVs for the Funds.
4. Respondent, in turn, caused and willfully aided and abetted Heartland Advisors, Inc.'s violation of Rule 22c-1(a) under the aiding and abetting standard set forth above. Specifically, Respondent knowingly provided substantial assistance to Heartland Advisors' portfolio managers in gradually decreasing the prices assigned to bonds held in the Funds, which actions constituted a primary violation of Rule 22c-1(a), as described above. Further, Respondent provided this assistance even though it knew or was reckless in not knowing that the daily gradual price decreases did not reflect the fair value as determined in good faith of the bonds and were not caused by any market or credit-related events affecting the value of the individual bonds.
1. Respondent shall provide its customers with valuations for high yield municipal bonds that are not based solely on information received from a single investment company or investment adviser customer (including any investment adviser to, or officer, employee or agent of such customer) and have been verified by information from a third party other than that customer.
2. Respondent also shall assign valuations each day to such securities based solely on objectively verifiable information derived from or clearly relevant to the market for such securities, and shall not assign valuations to such securities based on the special circumstances or needs of one of the Respondent's customers or any group of Respondent's customers. On any given day, Respondent shall provide all of its investment company and investment adviser customers with the same valuations for the same security.
3. Respondent also shall comply with the Commission's guidelines governing the fair valuation of securities for which market quotations are not readily available. Specifically, Respondent shall assign valuations to such securities based on what it believes, in good faith, buyers in the marketplace would pay for the securities in a current sale, and not based on the special circumstances or needs of the Respondent's customers. Furthermore, such valuations shall take into consideration any bids to purchase a security of which Respondent is aware, whether or not such bids are motivated by factors other than a desire to consummate a sale at fair value, such as speculation by a buyer or a seller's urgent need to raise cash. Respondent shall make reasonable efforts to ascertain from its investment company and investment adviser customers whether those customers have received any bids for the securities Respondent is valuing.
4. Respondent shall also keep written records in the format and for the period provided in Advisers Act Rule 204-2 reflecting the basis for each of its valuations, in sufficient detail to permit the Commission to evaluate Respondent's compliance with these undertakings.
In view of the foregoing, the Commission deems it appropriate and in the public interest to impose the sanctions specified in Respondent Interactive Data's Offer.
Accordingly, it is hereby ORDERED:
A. Pursuant to Section 203(e) of the Advisers Act and Section 9(b) of the Investment Company Act, that Respondent Interactive Data be, and hereby is, censured.
B. Pursuant to Section 203(k) of the Advisers Act and Section 9(f) of the Investment Company Act, that Respondent cease and desist from committing or causing any violations and any future violations of Sections 206(1) and 206(2) of the Advisers Act, and cease and desist from committing or causing any violations and any future violations of Rule 22c-1(a) promulgated pursuant to Section 22(c) of the Investment Company Act.
C. It is further ordered that Respondent shall, within 30 days of the entry of this Order, pay a civil money penalty in the amount of $125,000 to the United States Treasury. Such payment shall be: (A) made by United States postal money order, certified check, bank cashier's check or bank money order; (B) made payable to the Securities and Exchange Commission; (C) hand-delivered or mailed to the Office of Financial Management, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Stop 0-3, Alexandria, VA 22312; and (D) submitted under cover letter that identifies Interactive Data as a Respondent in this proceeding, the file number of these proceedings, a copy of which cover letter and money order
or check shall be sent to David S. Slovick, Senior Attorney, Division of Enforcement, Securities and Exchange Commission, 175 W. Jackson Blvd., 9th Floor, Chicago, Illinois 60604; and
D. Respondent shall comply with the undertakings enumerated in Section III, above.
By the Commission.
Jonathan G. Katz
1 The findings herein are made pursuant to Respondent's Offer of Settlement and are not binding on any other person or entity in this or any other proceeding.
2 "Willfully" as used in this Order means intentionally committing the act that constitutes the violation. See Wonsover v. SEC, 205 F.3d 408, 414 (D.C. Cir. 2000); Tager v. SEC, 344 F.2d 5, 8 (2d Cir. 1965). There is no requirement that the actor also be aware that he or she is violating one of the Rules or Acts.
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