Regulation of Index Providers an Ongoing Conversation

An upcoming paper by academics from the University of Virginia School of Law and the University of Toronto argues that index providers may be considered advisers under the 1940 Act and the Advisers Act as interpreted by the court and that the SEC should clarify when index providers cross the line into providing investment advice by adopting a safe harbor rule or interpretation. The academics point out that most indices are not “purely mechanical.” They contend that the construction of index providers “generally involves the exercise of discretion by an index committee empowered to select among securities meeting the index criteria and to change those criteria over time.” These arguments have been raised in recent years, and the SEC has suggested that it has considered such regulation. In a 2018 speech former Investment Management Division director Dalia Blass remarked on the changing market practices around indexes and whether it was worth revisiting the status of certain index providers under the securities laws. “I understand that the question of whether an index provider is an investment adviser or a fund adviser might appear to be settled,” Blass said. “Under the Advisers Act, I believe index providers have historically concluded that, even if they are investment advisers, they may rely on the publisher’s exclusion from the definition of ‘investment adviser.’ However, recent developments appear to have moved certain index providers away from what we might think of as publishers.” Similarly, in 2019 former SEC Commissioner Robert Jackson co-authored an opinion piece in the New York Times arguing that index providers may not be as neutral as they appear to be, face conflicts of interest, and are subject to little regulatory scrutiny. The NYT opinion piece proposed that regulators and Congress might need to address what Jackson described as a lack of transparency and accountability for index providers.