The Securities and Exchange Commission is requesting feedback on whether the activities of certain “information providers” constitute acting as “investment advisers” under the Investment Advisers Act.
According to the SEC’s June 15 announcement, the Request for Information (RFI) focuses specifically on index providers, model portfolio providers and pricing services, and whether under certain “facts and circumstances” these providers are giving investment advice under the definition of an investment adviser.
Explaining that investment adviser status has regulatory implications, including questions related to registration under the Advisers Act and questions under the Investment Company Act, the SEC notes that the RFI will help determine whether regulatory action is “necessary and appropriate.”
“In recent decades, the use of information providers has grown, changing the asset management industry,” SEC Chair Gary Gensler said in a statement. “The role of these information providers today raises important questions under the securities laws as to when they are providing investment advice rather than merely information.”
For example, registered funds that track indexes have grown to over $10 trillion of assets under management and these indexes have grown not only in size but also in available types, ranging from broad-based indexes for general use to specialized, narrowly focused ones designed for particular users, the SEC observes. As such, these indexes are increasingly influential, thus, an index provider’s decision to include a particular security in an index often influences users of the index to purchase or sell securities, raising questions about whether the index provider is providing investment advice.
Model Portfolio Providers and Pricing Services
In addition, model portfolio providers and pricing services have similarly grown and evolved, raising questions regarding the SEC’s oversight of investment advisers and how best to protect the public, Gensler further explains.
“Investment advisers’ use of a third party’s model portfolios may raise concerns with respect to clients’ understanding of the fees they are paying, the services being performed by each party (i.e., the client-facing adviser and the model portfolio provider), and their respective conflicts (or potential conflicts) of interest,” the RFI notes.
For example, clients may be unsure which services are being performed by a model portfolio provider and which are being performed by the adviser, as well as by whom they are owed a fiduciary duty. “This uncertainty may be increased where, for example, the client-facing adviser seeks to disclaim or limit its fiduciary duty or any other duty when implementing a model provided by a third-party model portfolio provider,” the SEC says. In addition, an adviser may invest according to a model customized by the provider for the adviser, including where, for example, the model portfolio provider may adjust the model based on input from the adviser.
Conflicts and Market Risk?
These providers’ operations also raise potential concerns about investor protection and market risk. This includes, for example, the potential for front-running of trades where the providers and their personnel have advance knowledge of changes to the information they generate and potential conflicts of interest where the providers or their personnel hold investments they value or that are constituents of their indexes or models, the SEC explains.
Moreover, some individual information providers have registered with the Commission as investment advisers (sometimes because of other business in which they engage), while others have not. Some may be prohibited (absent exemptive relief) from registration because they lack regulatory assets under management. “Depending on the facts and circumstances, however, particular information providers may have an ability, perhaps through operations of sufficient size and scope, to affect national markets or otherwise have a ‘national presence,’” the SEC notes.
“The growing prominence of information providers in the industry adds import to our consideration of whether and how the framework for registering and regulating investment advisers should apply in the context of information providers,” Commissioner Caroline Crenshaw said in a statement.
The RFI includes 40 questions addressing, among other things, how providers analyze whether they meet the Advisers Act’s definition of “investment adviser” under each element of the definition and whether model portfolio providers raise different investment adviser status issues than those raised by index providers that provide specialized indexes.
A public comment period will remain open for 60 days following publication of the request on the SEC’s website or 30 days following publication in the Federal Register, whichever period is longer.
