Statement on In the Matter of Bloomberg Finance, L.P.
Jan. 24, 2023
The Commission’s settled enforcement action finds that Bloomberg Finance, L.P. (“Bloomberg”) violated Section 17(a)(2) of the Securities Act of 1933, which prohibits the use of materially false statements to obtain money or property in the offer or sale of securities. Because we do not believe that the particular statements at issue were made in the offer or sale of securities, we do not support bringing this action.
Bloomberg operates an independent pricing service (“BVAL”), through which it provides to customers prices, on a daily basis, for more than 2.5 million securities across multiple asset classes, including thinly-traded and hard-to-price fixed income securities. Along with the price, Bloomberg provides a BVAL score, on a scale of 1-10 (lowest to highest), to convey the amount and consistency of the market data underlying the price. In describing to customers how it arrived at prices for fixed income securities, Bloomberg disclosed that it used one of two algorithms—the direct observation algorithm or the observed comparable algorithm. According to Bloomberg’s disclosures, the direct observation algorithm used market data about the target security. The observed comparable algorithm, used when market data about the target security either was unavailable or could not be corroborated, priced the target security using market data regarding comparable securities.
As part of the pricing process, Bloomberg’s evaluators could use an Evaluator Input Tool (“EIT”) to incorporate single data points that were not automatically captured by the algorithms. On some occasions, the EIT was used to add data to the observed comparable algorithm. In some instances, the EIT’s use could have produced a price for “certain illiquid, thinly traded securities for which little observable market data exists” that, for at least short periods of time, was based on the single data point. The Order is notably vague about the frequency of this occurrence, stating only that it occurred “for a very small fraction of the total reported valuations” of “certain fixed income securities.” The Order further notes that the single-data-point prices had correspondingly low BVAL scores to reflect the “limited amount and consistency of [the] market data” underlying the price. Nevertheless, the Order finds that Bloomberg made a materially misleading omission to its customers when it failed to disclose that the use of EIT in its algorithm could produce—in a “very small fraction” of instances—a price that temporarily reflected a single data point. The Order states that this materially misleading description violated Section 17(a)(2) because it “impacted offers and sales of certain securities.”
Pricing services such as Bloomberg’s BVAL are important, and a wide range of market participants—mutual funds, money managers, and hedge funds to name a few—use pricing services for multiple purposes. Specifically, the Order notes that BVAL prices are potentially useful for “evaluating whether to hold or sell securities or to purchase different securities, determining fund share prices and fund valuations, reporting prices of securities on investor account statements and in corporate books and records, complying with generally accepted accounting principles or other applicable obligations with respect to valuations, computing the value of securities and portfolios, and calculating advisory and asset management fees.” The information provided by pricing services like BVAL can be useful and important to securities transactions and market participants.
Section 17(a), however, does not prohibit material misstatements related to any information that is important and useful to securities transactions, or even misstatements that “impact” offers or sales of securities; it prohibits material misstatements “in the offer or sale of any securities.” Congress defined “offer” and “sale” to include “every attempt or offer to dispose of, or solicitation of an offer to buy, a security or interest in a security, for value.” The key question is whether Bloomberg’s statements to its customers describing its BVAL pricing methodologies are fairly categorized as being made “in the offer or sale” of securities. We do not believe they are.
Importantly, the Order does not claim that Bloomberg provided materially misleading prices; rather, the Order finds that Bloomberg’s description to its customers of its pricing methodologies was materially misleading. Bloomberg was not offering or selling, or attempting to offer or dispose of, the securities being priced. It was offering and selling its services—the providing of price information that, among many possible uses, might be useful to Bloomberg’s customers (or the customer’s customers) in a subsequent offer or sale of securities. Indeed, Bloomberg’s statements to customers purchasing its pricing services in no way resemble the misrepresentations before the Supreme Court when it explained that “in the offer or sale” was “expansive enough to encompass the entire selling process.” Even if the “in” of Section 17(a)(2) is not narrower than the “in connection with” of Section 10(b), Section 17(a)(2) is not broad enough to include statements that have nothing to do with the selling process. Here, Bloomberg’s statements to its customers describing how it created the BVAL prices are far removed from any offers or sales of securities.
It could be that, in light of the importance of their services, the Commission should consider whether and how providers of pricing services should be subject to oversight. Indeed, last year the Commission issued a request for comment about whether pricing services’ activities implicate the Investment Advisers Act of 1940. A one-off enforcement action that rests on a strained reading of Securities Act Section 17(a)(2) is not the right way to make regulatory policy.
 In the Matter of Bloomberg Finance, L.P., Rel. No. 33-11150 (Jan. 23, 2023), available at https://www.sec.gov/litigation/admin/2023/33-11150.pdf.
 Securities Act Section 2(a)(3).
 At best, one might argue that Bloomberg aided and abetted the violations by others who engaged in offers and sales. However, the Order does not find any material misstatements or omissions by others that Bloomberg could have aided and abetted.
 United States v. Naftalin, 441 U.S. 768, 772-73 (1979) (noting it was undisputed that “by falsely representing that he owned the stock he sold, [Naftalin] defrauded the brokers that executed his sales”).
 Exchange Act Section 10(b) makes it unlawful “to use or employ, in connection with the purchase or sale of any security . . . any manipulative or deceptive device or contrivance” in contravention to Commission rules. Securities Act Section 17(a)(2) makes it “unlawful for any person in the offer or sale of any securities” to obtain money or property by means of a misstatement of material fact, whether affirmatively or by omission. Whether “in” and “in connection with” have identical reach when it comes to sales of securities is not altogether clear and is a question left open by the Court. See, e.g., Naftalin, 441 U.S. 773 n.4 (“[W]e are not necessarily persuaded that ‘in’ is narrower than ‘in connection with.’ Both Congress and this Court have on occasion used the terms interchangeably. But even if ‘in’ were meant to connote a narrower group of transactions than ‘in connection with,’ there is nothing to indicate that ‘in’ is narrower in the sense insisted upon by Naftalin.” (citations omitted)).
 Request for Comment on Certain Information Providers Acting as Investment Advisers, 87 Fed. Reg. 37254, Rel. No. IA-6050 (June 22, 2022) (available at https://www.govinfo.gov/content/pkg/FR-2022-06-22/pdf/2022-13307.pdf).