When an index provider selects a basket of stocks that becomes the benchmark that investment advisers use to measure the performance of a client’s portfolio, is that an act of advising? What about the model of portfolio creators, whose investment choices turn into real funds for clients for real registered investment advisers?
“The role of these information providers today raises important questions in accordance with securities laws about when they give investment advice, not just information,” said Gary Gensler, chairman of the U.S. Securities and Exchange Commission.
Al Drago / Bloomberg
The Securities and Exchange Commission is considering a potentially significant extension of its advisory regulations to include various market participants who do not directly advise retail investors, but whose decisions may materially affect the client’s portfolio structure - and ultimately its success or failure.
The Commission has requested comments on the role of index suppliers, model portfolio providers and pricing services - as they are broadly referred to as information providers - and whether they should be subject to any part of the regulatory framework of the 1940 Investment Advisers Act. regulating advisors.
“In recent decades, the use of information providers has increased, changing the asset management industry,” SEC President Gary Gensler said in a statement. “The role of these information providers today raises important questions in accordance with securities laws about when to give investment advice, not just information.
The call for comment, Gensler explained, aims to help the SEC “determine when - and under what facts and circumstances - these providers give investment advice.”
This raises a number of questions, including whether index vendors and others should be required to register with the SEC as investment advisers do, and whether they should be subject to similar codes of conduct, primarily a fiduciary standard.
The move expands the already ambitious agenda in the SEC and has caught some longtime observers of the commission unprepared.
“This request seems to be coming from the left - a very surprise because I have seen and heard very little about problems in this area or the activities of the implementation committee,” said Duane Thompson, president of the consulting firm Potomac Strategy.
The request for comment states that physical clients who work with an advisor who uses the services of a portfolio model creator could be confused about conflicts of interest, sources of fees they pay, who performs which service and who is bound by a fiduciary obligation. .
“This uncertainty may be exacerbated when, for example, a client-oriented advisor seeks to waive or limit his fiduciary or any other duty in implementing a model provided by a third-party model portfolio provider,” the commission said in a call for comment.
Excessive reliance? The Commission expressed concerns about market risk or harm to investors that could result from the advisers’ increasing reliance on information providers, including “the potential for advance management in which providers and their staff are aware in advance of changes in information and potential conflicts of interest when service providers or their staff hold investments that value or are an integral part of their indices or models. ”
The SEC also suggested that the information provider could be interpreted as an investment adviser to a fund or other investment company, which could challenge regulatory requirements set out in the Investment Companies Act 1940.
Commission officials supporting the request for comment noted that information providers, as the SEC broadly defines the term, have begun to play a major role in market activities and investment advice. Commissioner Caroline Crenshaw pointed to a “dramatic increase” in index funds, which amount to trillions of dollars related to any of the approximately 3 million indices used today.
Thompson suggested that the commission could try to “skip the growing problem with service providers in the advisory industry”, although he is skeptical about the scope of the problem. He also warns that the commission could take on more than it could handle. The dramatic expansion of the registered population, as happened in the 1980s with the regulation of financial planners, Thompson noted, could stretch the agency so much that it could not meet its survey frequency targets.
He also raises the question of where the commission would draw the line if it decides to extend registration and regulatory requirements to some of the information providers it evaluates.
“This could be a slippery slope for firms that offer analysis of data on different value products, but not in any finished‘ product ’in the form of a portfolio or index,” Thompson said. “Shouldn’t it be up to asset managers, as fiduciaries, to evaluate data and be responsible for their own due diligence in deciding what to use in formulating their own prudent portfolios and indices?”