SEC Request For Comment On "Information Providers"

• Published date: 27 June 2022
• Subject Matter: Finance and Banking, Corporate/Commercial Law, Financial Services, Listing Rules & Flotation, Commodities/Derivatives/Stock Exchanges, Corporate and Company Law, Securities
• Law Firm: Mayer Brown
• Author: Mr Bradley Berman, Adam Kanter, Marla Matusic, Stephanie Monaco and Anna T. Pinedo

SEC Request for Comment on "Information Providers"

On June 15, 2022, the Securities and Exchange Commission (the "SEC") issued a request for comment to "help determine which 'information providers,' such as index providers, model portfolio providers, and pricing services, might come under the SEC's definition of an investment adviser."¹ The request for comment (the "RFC") discusses the roles played by these entities in, for example, the construction and calculation of indices, and analyzes the factors used to determine whether an entity is providing investment advice within the meaning of the Investment Advisers Act of 1940 (the "Advisers Act"). Among other things, the SEC is concerned about what it terms "significant discretion" in index methodologies.²

The RFC is an Advisers Act and Investment Company Act of 1940 (the "1940 Act") release, and is mainly concerned with Advisers Act issues. However, the potential effect of any rulemaking in response to this RFC will reach beyond Advisers Act issues and, in the context of index providers, affect other securities linked to indices, such as structured notes, as well as derivatives that reference indices. Consequently, this article discusses these potential effects on the broader market and not just in the context of, for example, registered funds or variable annuities.

Who are the Information Providers?

The RFC focuses on three industry players, which together comprise the information providers:

• "Index providers," which "compile, create the methodology for, sponsor, administer and/or license market indices."³ This group is broad enough to run the gamut from large, well known index providers like S&P Dow Jones Indices LLC, Bloomberg, and FTSE Russell, and also include an arm of an investment bank creating custom, proprietary indices. The term index is not defined, either in the RFC or elsewhere in the federal securities laws. Given the discussion elsewhere in the RFC it is likely that the SEC may mean "index" in a broader sense than it is sometimes used in practice - potentially including, for example, embedded strategies or stock baskets.
• "Model portfolio providers," which design custom portfolios of assets (mutual funds and exchange traded funds ("ETFs") are used in the RFC as an example) "designed to achieve a particular return, with corresponding risks." These model portfolios may be rebalanced or have constituent changes over time, and offer various degrees of customization.⁴
• "Pricing services," which provide "prices valuations, and additional data about a particular investment (e.g., a security, derivative, or another investment), to assist users with determining an appropriate value of the instrument." Pricing services may...