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Statement on Request for Comment on Certain Information Providers Acting as Investment Advisers

June 15, 2022

Today, we have issued a request seeking comment on the activities of “information providers” – namely, index providers, model portfolio providers, and pricing service providers – and how our framework for registering and regulating investment advisers should apply to those providers (if at all). I want to encourage market participants to comment.

Index providers, model portfolio providers, and pricing services have come to play prominent roles in today’s asset management industry.[1] Take index providers as an example. In 2020, there were approximately 3 million indexes, ranging in type, from broad-based and widely-used, to narrow, customized or bespoke indices for specific users.[2] With the dramatic ascent of index funds, some have noted that index providers are responsible for directing trillions of dollars’ worth of investments.[3] And, the indexes that they create and maintain often form the benchmarks that serve as the measuring stick for fund or manager performance or compensation, or as guideposts in academic research.[4]

Many information providers appear to exercise significant discretion in the performance of their services.[5] As an example, index providers may exercise significant discretion by determining what securities go into the bucket of an index, what weight each should be given, and how often those buckets should be reconstituted or rebalanced. Ultimately, what index providers choose to include (or not include) in their index often determines what securities go into a fund, or how investors perceive manager or fund performance. Model portfolio providers similarly may exercise significant discretion in creating investment models for their users, making adjustments to those models, reconstituting or rebalancing the portfolios, and by providing varying degrees of customization. And, pricing services, in providing valuations to their users, appear to exercise discretion in determining what valuation methodology to use, what weight to give various inputs, how and whether to adjust valuations based on market color.

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.[6]

Today we are only asking questions. But, they are important questions and I urge the public to comment.

[1] Request for Comment on Certain Information Providers Acting as Investment Advisers, Release Nos. IA-6050, IC-34618, at 3 (June 15, 2022) (“Request for Comment” or “RFC”); see generally John C. Coates, “The Future of Corporate Governance Part I: The Problem of Twelve,” Harvard Public Law Working Paper No. 19-07 (discussing the rise of indexation).

[2] See Index Industry Association, Fourth Annual IIA Benchmark Survey Reveals Significant Growth in ESG Amid Continued Multi-Asset Innovation & Heightened Competition (Oct. 28, 2020) (noting that in 2020, the overall number of indexes climbed by approximately three percent to 3.05 million); see also RFC at 5. That number grew by an additional 5% in 2021. See Fifth Annual Benchmark Survey Shows Record Growth in Number of ESG Indices, Alongside Broadening of Fixed Income Indices (Oct. 25, 2021).

[3] See, e.g., Adrianna Z. Robertson, “Passive in Name Only: Delegated Management and ‘Index’ Investing,” 36 Yale Journal on Regulation 795, at 2 (2019); cf. Coates, “The Future of Corporate Governance Part I,” at 13 (“The bottom line is that indexed funds now own more than 20% and perhaps 30% or more of nearly all U.S. public companies.”).

[4] Robertson, “Passive in Name Only,” at 7-8.

[5] RFC at 4-5 and n.4 (citing Paul G. Mahoney & Adriana Robertson, “Advisers by Another Name,” Virginia Law & Economics Research Paper No. 2021-01 (Jan. 2021)).

[6] The Advisers Act defines an “investment adviser” as “any person who, for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing, or selling securities, or who, for compensation and as part of a regular business, issues or promulgates analyses or reports concerning securities . . . .” 15 U.S.C. 80b(a)(11).

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