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ARTICLE · 10 MAY 2019

Model Risk Strikes Again: SEC Imposes $3 Million Fine Due To Error In Computer Model

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On April 19, 2019, the US Securities and Exchange Commission (SEC) published a settled administrative proceeding against Prosper Funding LLC (Pr)osper) for violating Section 17(a)(2

United StatesCorporate/Commercial Law
Reginald Goeke
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Stephanie Monaco
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Leslie Cruz
Leslie Cruz
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On April 19, 2019, the US Securities and Exchange Commission (SEC) published a settled administrative proceeding against Prosper Funding LLC (Prosper) for violating Section 17(a)(2) of the Securities Act of 1933 (Securities Act) based on an error in a quantitative model that generated inaccurate performance data.1 The SEC imposed a $3 million fine on Prosper as a result of the error.

That the SEC expects registrants to properly maintain and control quantitative models has been highlighted in prior settlements with the SEC.2 A central theme in the Prosper settlement, though, is the SEC's focus on the fact that Prosper's own personnel conceded in multiple instances that they did not understand how the code at issue operated. Although not expressly stated, the order suggests that errors arising due to lack of understanding of model functioning will likely be sufficient for the SEC to assert the negligent conduct necessary to support a claim under Section 17(a)(2).

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