Yesterday, the SEC announced that it is seeking public comment on the activities of certain “information providers” — such as index providers, model portfolio providers and pricing services — including whether, under particular facts and circumstances, they are acting as “investment advisers” under the Investment Advisers Act of 1940.
The 32-page request for comment identifies 40 specific questions on which the Commission is seeking feedback, but the SEC welcomes comments on other relevant issues as well. It was accompanied by statements from SEC Chair Gary Gensler and Commissioner Caroline Crenshaw that highlight the growing influence of index providers and model portfolio providers. Chair Gensler noted:
Registered funds that track indexes have grown substantially to over $10 trillion of assets under management. 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. Having evolved in size and scope, 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. This raises questions about whether the index provider is providing investment advice. Model portfolio providers and pricing services have similarly grown and evolved.
This request for comment directly follows a big hubbub over Tesla dropping out of the S&P 500 ESG Index due to a routine rebalancing — which Lawrence blogged about on PracticalESG.com. But this issue has been brewing for years. In 2017, there was a ton of hand-wringing over whether broad-based indexes would exclude companies that had dual-class capital structures. Eventually, BlackRock came out and said that it didn’t think index providers should be wielding such influence. Everyone seemed to fall in line with that position … but the rise of ESG and specialized indexing is bringing the issue back to the fore.
— Liz Dunshee, TheCorporateCounsel.net, June 16, 2022