A class-action complaint was filed last week in the Southern District of New York that could have a ripple effect on the retirement industry’s infrastructure, and, at least potentially, the costs of operation.
The suit involves CUSIPs—those unique identifiers that are used to identify U.S. and Canadian registered stocks, U.S. government and municipal bonds, exchange traded funds and mutual funds—and it alleges that S&P Global, Cusip Global Services (CGS) and the American Bankers Association (ABA)—not to mention an entity called FactSet, which recently took over as GS’ new operator—“have conspired for decades to eliminate competition” in the use of CUSIP numbers. Moreover, the suit asserts that the big licensing fees that S&P and CGS have for years charged financial institutions to use the numbers are “based on bogus and malleable claims that a copyright owned by the ABA allowed them to impose these restrictions.”
One might well think that CUSIPs, like ticker symbols, are just something you file for, register, and then use. But you’d be wrong—at least that’s not how it’s been set up.
The suit is filed as a class action, with broker-dealer Dinosaur Financial Group LLC and Swiss Life Investment Management Holding AG acting as the named plaintiffs. But the class they are seeking to represent is everyone (save data vendors) who paid a license fee to S&P or FactSet pursuant to CGS’ subscription agreement and use of services statement at any time beginning at least four years prior to the complaint’s filing.
The issue has been lumbering along for some time now—and was even the topic of a Securities and Exchange Commission advisory committee meeting last fall.
According to the suit, in the early days, S&P and CGS had a direct relationship with financial institutions, which purchased physical books containing all CUSIP numbers in use—until the 1980s, when data vendors in the financial services industry (such as Bloomberg LP) began providing “rich sets of value-added data services, including CUSIPs, directly to Financial Institutions.”
‘Uncontrolled Use’
As a result, the suit notes, S&P and CGS lost their contractual relationships with Financial Institutions and “therefore could no longer control the Financial Institutions’ use of the CUSIPs they received from their Data Vendors”—“uncontrolled use” that the suit alleges threatened S&P’s monopoly power over the CUSIP Use Market. In response, the suit notes that S&P and CGS inserted a new clause in their agreements with the Data Vendors—one that “purported to give S&P and CGS control anew over the use of CUSIPs by the Financial Institutions” by prohibiting (or, as the suit states “purported to prohibit”) data vendors from providing CUSIPs to any financial institution that did not sign a “license agreement” directly with S&P. That “license agreement,” in turn, prohibited Financial Institutions from using the CUSIPs they received from their data vendors in any way not specifically allowed by S&P and CGS. “That contract—which they called a license agreement—also required Financial Institutions to pay hefty ‘license fees’ to S&P based on bogus and malleable claims that a copyright owned by the ABA allowed them to impose these restrictions.”
Said another way, in order to use the data—as advisory firms and recordkeepers routinely do—they were told they had to sign a license agreement that was designed to create at least the appearance (if not the reality) of an understanding that S&P and CGS did, in fact, have a copyright, and in the process perhaps “creating” one, at least in the acknowledgement of a significant number of using entities.
The suit outlines the very interesting history and evolution of the CUSIP market—back to the origins of the development of the numbering system and creation of an entity to maintain the real-time listing completed in 1966, and introduced to the financial markets way back in 1969. Since then, the embrace of that standard, and its utilization by the industry, but more significantly by the U.S. government and agencies (notably the SEC and Treasury Department) means that, “by effectively adopting them as a standard, the United States government gave CUSIPs a significant advantage over the development of any competing numbering system for United States financial instruments.
“Issuers and Financial Institutions that were required to use the CUSIPs in their regulatory reporting had an absolute need for the CUSIPs and correspondingly had no need or use for any rival numbering system.” That said, the suit maintains that “while financial regulators in the United States government have mandated the use of CUSIPs in regulatory filings, the Defendants did not and do not have legal authority to control Financial Institutions’ use of CUSIPs after CGS issues them.”
Creative Works
The suit acknowledges the existence and importance of copyright protections over “creative works,” but distinguishes CUSIPS as not resulting from “artistic, literary, or any other esthetic or subjective consideration,” but rather a “convention established more than 50 years ago” which “strictly determines the format of the CUSIP and each digit within it.” A structure the suit says is “so rigid and predictable that an issuer knows the CUSIP number of its next issue before it receives the CUSIP and with no need to hear from CGS. Indeed, injecting novelty, creativity, or subjectivity into the CUSIP would destroy its utility because electronic trading systems could no longer identify financial instruments from the CUSIP.”
The suit asserts that this consideration “exerts decisive force over Defendants’ putative claim of copyright.” Ultimately, the plaintiffs here “…do not challenge the legality of the CUSIPs as the numbering system for financial instruments in the United States, nor do they challenge S&P’s, CGS’, or FactSet’s right to issue CUSIPs for new financial instruments. Plaintiffs’ challenge focuses on Defendants’ leveraging their control of the issuance of CUSIPs into their unlawful control of the use of CUSIPs thereafter and their unlawful collection of ‘license fees’ from Financial Institutions.”[i]
Numbers ‘Game’?
Basically, their argument is that a number is not copyrightable. “CUSIPs would lose their utility were S&P, CGS, or FactSet to inject any subjectivity, originality, or creativity into them because electronic systems could not then read and process CUSIPs to identify the underlying financial instruments.” They are not challenging the possibility of charging for the production of a CUSIP—just not for the ongoing use of that CUSIP by—well, everyone.
“The CUSIP Use Market … is not competitive because S&P, CGS, and the ABA excluded all actual and potential competitors from that market, which in turn allowed them to impose the so-called ‘license’-based restrictions and ‘license fees’ on Financial Institutions. These Defendants could not have engaged in this exploitive conduct and charged these monopoly rents in a competitive market.”
How much are we talking about? The suit concludes that, “on information and belief, the amount of the overcharge the Financial Institution Class is paying amounts to more than $100 million dollars [sic] per year.”
As for the impact of these charges, Todd Kading, CEO of LeafHouse Financial and InvestGrade, notes: “We have witnessed a lot of effort spent overcoming artificially imposed barriers from closed data systems. Energy and resources could be better deployed improving outcomes for investors. Extremely large licensing fees have stifled innovation and caused confusion in the industry.”
Stay tuned.
[i] The suit outlines the process utilized by the defendants to coerce payment of the fees: “If a target Financial Institution initially refused to pay the fees, the sales employees threatened the Financial Institution that it would be cut off from the CUSIPs to the extent that it did not pay. This threat was sufficient to browbeat virtually all holdouts to sign a license and pay the license fees.” It also notes that “most interesting” was the third tier of escalating threats: “If the sales employees determined that a particular target financial institution would challenge the need for a license in court rather than pay, the employees were trained to back off and reengage with that target at a later time. This course of conduct confirms that S&P and CGS had no confidence in their claims of copyright. It gave S&P and CGS time to determine the optimum time and method of reengaging, which S&P and CGS did as they pursued the conspiracy to eliminate competition in the CUSIP Use Market.”
