BNY Mellon’s NAV Snafu: What Was and Wasn’t Learned

When technology glitches take place, cleanups can be embarrassing and messy to say the least. When it comes to critical applications they can be downright dangerous as well.

The recent case involving the possible mispricing of over one thousand mutual funds and exchange-traded funds valued at over US$400 billion by BNY Mellon using SunGard Financial’s  InvestOne software shows that even brand-name technology isn’t foolproof. And the fallout is just beginning: with the cleanup completed, at least according to BNY Mellon, just who will pay for potential damages to investors or potential regulatory fines remains unanswered. The far bigger question, how such a fiasco can be prevented in the future, also needs to be addressed.

Mutual fund complexes typically rely on their custodian or fund administrator to strike their daily NAVs for individual funds and SunGard’s InvestOne is the most popular platform used. Retail and institutional investors, in turn, depend on accurate final NAVs to make trading decisions.

So far, the Securities and Exchange Commission has said nothing about the glitch, but Massachusetts Secretary of the Commonwealth William Galvin has asked BNY Mellon and six of the mutual fund complexes impacted by the computer glitch to explain how it affected individual investors and the corrective action taken to prevent any harm. Given that Massachusetts is home to several of the affected mutual fund and ETF complexes, the muscle-flexing by the regulatory watchdog could be nothing more than political propriety. However, it is also possible that BNY Mellon could be fined if it is found guilty of any wrongdoing, such as insufficient internal controls or oversight of external contractors.

SunGard has offered a mea culpa in a released statement, but understandably fell short of explicitly stating it would make financial amends if necessary should either investors or a regulatory agency sue BNY Mellon. “We are committed to restoring the trust placed in us by BNY Mellon and all of our valued customers,” said SunGard’s president and chief executive officer Russ Fradin at the end of a one-page statement issued on August 27. Neither BNY Mellon nor SunGard responded to inquiries from FinOps Report on the issue of compensation for potentially harmed investors. The computer glitch, which developed on August 22, was solved on August 31.

SunGard hosts the InvestOne fund accounting and backup environment for BNY Mellon. Based on SunGard’s account, the production environment for striking net asset valuations for BNY Mellon’s US fund accounting clients was “corrupted,” as was the backup environment, when a new operating system was installed by SunGard on August 22. “The maintenance was successfully performed in a test environment, per our standard operating procedures and then replicated in SunGard’s US production environment for BNY Mellon,” says Fradin, who characterized the computer glitch as an “unforseen complication.” No other SunGard customers were affected by the glitch.

In a later statement issued to FinOps Report, a spokesman for SunGard says “We are conducting a root-cause analysis of what happened and have engaged a third-party to do an independent review. We are confident that this was an isolated incident.”

Whatever the reason, BNY Mellon was unable to provide accurate net asset valuations for mutual fund and exchange traded funds for about 66 fund complexes including Federated Investors, Goldman Sachs Asset Management, Invesco, PowerShares, Guggenheim Partners, Voya Investment Management, Deutsche Bank, First Trust Investors and Prudential Investment Management. Just how was the problem corrected? From what fund accounting experts tell FinOps, BNY Mellon must have manually created fair value — or synthetic pricetags — when it could not immediately calculate the correct NAV for a fund. When it could finally strike the final NAV, BNY Mellon would have had to decide whether to keep using the synthetic NAV or use the recalculated NAV, depending on the size of the discrepancy between the two.

In what way could investors have been damaged? Simply, it would be if they lost money selling shares priced at a synthetic NAV which turned out to be significantly lower than the correct NAV.  According to several legal experts, losses by investors will not be known until they seek compensation from their mutual funds or, worst case, they take it to court. Voya Investment Management has publicly said some checks were delayed while they checked the NAVs. In the statement announcing the Massachusetts investigation, Galvin said that the manual calculations of some NAV’s were incorrect by more than one percent. He has sent inquiries to Goldman Sachs, Deutsche Bank, First Trust Advisors, Guggenheim, Prudential and Federated.

Legal experts contacted by FinOps declined to comment on the potential extent of SunGard or BNY Mellon’s financial liability, saying the answer was entirely dependent on the terms of the contract between the two parties. “As a rule of thumb, software providers do not take financial responsibility for glitches, but fund administrators likely do,” explains Gary Kaminsky, a reporting and compliance consultant in New York. “Mutual fund complexes will be the first line of defense for investors who may feel damaged, as long as damages can be proven. It will then be up to the mutual fund complex to determine whether it seeks compensation from the fund administrator, which in turn may seek compensation from the software provider.”

Even if BNY Mellon’s contract with SunGard doesn’t call for SunGard to compensate BNY Mellon in the event of any unforseen computer glitches which affected its ability to do its job, BNY Mellon could still seek damages. It could even decide to replace SunGard as has been suggested in some media reports. The damage to Sungard’s reputation might be a smaller issue, at least to users of its InvestOne software, than the damage to BNY Mellon’s among fund managers who could jump ship for competitors such as State Street and US Bancorp.

Regardless of who decides to compensate whom for any damages, no fund administrator or mutual fund company ever wants to face what BNY Mellon and its clients experienced. Some fund compliance experts say that mutual fund complexes are likely to be asking their fund accounting agents to take even further precautionary steps. “A tertiary back up site for any technology used, and sufficient insurance on the part of the service provider and any technology firm might be in order,” says Gary Swiman, a partner in the compliance and regulatory services practice of EisnerAmper in New York. “Some mutual fund complexes might even go as far as to require their service provider to use secondary software.” Of course, some mutual funds might resort to taking the work in-house.

BNY Mellon’s pricing woes also appear to have more far-reaching implications. Compliance managers at three unaffected US mutual fund complexes say they have been asked by their board of directors to review all of their contracts with third-party service providers for the sole purpose of determining disaster recovery plans and liability in the event of a software glitch. “The BNY Mellon scenario has opened a Pandora’s of reevaluation of vendor contracts,” says Swiman. “Potential software vulnerabilites which might have never been given a thought before have now taken center stage.”