Valuation of Odd-Lot Holdings of Securities by ETFs


The SEC did not pursue its investigation into the ETFs’ valuation of certain odd-lot holdings.

Cornerstone Research was retained by counsel for a financial institution to address SEC questions regarding the valuation of certain odd-lot holdings of securities held in its exchange-traded funds (ETFs).

The securities at issue were purchased as odd lots by certain funds sponsored by the financial institution. As odd-lot transactions, the securities were purchased at a slight discount to the market price. However, the end-of-day valuation of the securities was based on prices provided by a third-party vendor, which were based on round-lot transactions and did not include a discount. This resulted in a price increase between purchase and end of day, with a corresponding increase in the net asset value (NAV).

We analyzed data from FINRA and Bloomberg to estimate the size of the odd-lot discount. We recalculated the NAV assuming that the odd lots were valued at purchase price on the date of purchase and allowing for different scenarios of subsequent price changes. We examined simultaneous purchases of the same security by other funds of the same institution and analyzed the effects of accounting for the combined holdings of the securities, potentially resulting in an aggregate round-lot position.

The SEC did not pursue the investigation based on the financial institution’s explanation, which included the results of our analyses.

For more information on this case, contact Nari Subramanian or Ellen Paulus.