Financial Times Interactive Data (FT Interactive Data) will be anxious to dispel any industry disquiet caused by its settlement this month with the U.S. Securities & Exchange Commission (SEC). FT Interactive Data was named in the SEC’s civil fraud action against mutual fund company Heartland Advisers, allegedly for allowing Heartland to influence FT Interactive Data’s municipal bond valuations.
The incident, which took place three years ago, isn’t significant in and of itself. Published reports, though, have suggested that it could complicate FT Interactive Data’s efforts to market its so-called Fair Value Information Service, which is designed to take advantage of the ongoing regulatory scrutiny of pricing in the mutual fund industry.
However, the Heartland case didn’t involve FT Interactive Data’s Fair Value Information Service, but rather its pricing service for helping mutual funds calculate net asset values soon after markets close.
FT Interactive Data is taking great pains to explain how it has modified its procedures for valuing obscure securities, such as some international stocks and junk bonds. Indeed, as part of its settlement with the SEC – in which it neither admitted nor denied the charges against it – FT Interactive Data was ordered “to comply with certain undertakings regarding the pricing of securities for which market quotations are not readily available.” FT Interactive Data also agreed to pay a civil penalty of $125,000, and has reached agreement in principle to settle claims advanced by shareholders of the Heartland funds involved, according to a statement.
In an interview, Ian Blance, vice president of evaluation services at FT Interactive Data, says the company has agreed to more rigorous procedures and better documentation relating to its pricing practice for the kinds of illiquid securities involved in the Heartland case. The procedures, Blance says, are aimed at alowing FT Interactive Data to substantiate the methods by which it arrived at prices for these types of security, in which there is often no trading activity.
Blance distances the vendor’s Fair Value service from the incident. He says the Fair Value service relies on stastistical principles, in contrast to the fund pricing service, which indures a lot of human interaction.
The SEC settlement documents say FT Interactive Data has agreed not to assign valuations to securities in response to “special circumstances or needs” of its mutual fund clients. It has also agreed not to price high-yield municipal bonds on the basis of information received from a single investment firm contributor.
Hot on the case
Partly as a result of the ongoing mutual fund scandals, the SEC has been hot on the case of fair pricing. In response, FT Interactive Data, Reuters and others have introduced pricing services to help financial institutions meet their so-called ‘fair value’ obligations.
Fair value
Along with its competitors, FT Interactive Data has put great stead in its Fair Value Information Service, which it announced in February 2002 in response to an SEC letter a year earlier stressing the importance of fair value procedures for mutual fund companies.
FT Interactive Data launched the Fair Value service in August 2002 and has since signed up more than 20 clients, including Safeco Mutual Funds, Delaware Investments, ING Funds, Eaton Vance, J.P. Morgan Fleming Asset Management and Westcore Funds.
The Heartland case centred on deliberate mispricing of securities by Heartland senior executives. These executives, the SEC filings say, continued to uphold the value of six bonds held by two of Heartland’s funds, “despite numerous indications that the bonds … could only be sold at substantial discounts to their carrying values.” The executives apparently were attempting to disguise the worsening performance of the funds as the value of the bonds dropped.
According to reports, the Heartland executives approached FT Interactive Data in early 2000 to secure a gradual markdown of the bonds’ value, in order to correct the deliberate mispricing in a smooth – and hopefully unnoticeable – manner. As a result of these discussions, the value of these bonds – held in the Heartland High-Yield Municipal Bond Fund and the Heartland Short-Duration High-Yield Municipal Fund – was reduced by FT Interactive Data in increments of 0.5 percentage point of their par value.
Between March 7 and May 8, 2000, the reports say, the bonds were marked down from 87% and 98% of par, respectively, to 80% of par. By allow-ing this gradual markdown, the SEC found that FT Interactive “caused and willfully aided and abetted Heartland Advisors’ violations of the antifraud provisions of the Investment Advisers Act and the fund pricing provision of the Investment Company Act.”
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