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August 17, 2022

Better Markets Supports SEC Scrutiny of Information Providers To Determine If They Should Be Regulated as Investment Advisers

Better Markets filed a comment letter in response to the Securities and Exchange Commission’s request for comment about “information providers,” whose activities may warrant regulation as investment advisers.

Why It Matters.  Information providers are a specialized group of market participants that don’t draw much attention but have a large and growing impact on investors and our securities markets.  There are several different types, but among the most significant are “index providers,” the firms that compile, create, sponsor, and administer market indexes that track groups of stocks. Those indexes include not just familiar names such as the S&P 500 but also specialized indexes that are personalized for a particular user and require the provider to make highly tailored decisions in selecting the constituent securities and designing the index.  Information providers influence not just their clients but also other investors and the markets more widely.  For example, the provider’s decision to include a particular security in an index will often induce other investors that track or rely on that index to purchase or sell securities in response. Information providers also raise investor protection concerns.  For example, they have advance knowledge of forthcoming changes to the information they generate and therefore are positioned to engage in front-running.  In addition, they may have conflicts of interest if they hold the same investments that they include in an index, model portfolio, or valuation. The number and variety of indexes has grown steadily over time, resulting in millions of indexes that influence trillions of dollars in investor money.

What We Said.  We applaud the SEC’s decision to examine information providers more closely. In light of the nature of the work they perform, the risks they present, and their increasingly broad impact on investors and the markets, it is certainly appropriate for the Commission to revisit the regulatory treatment of these market participants, including whether they should be subject to the same requirements that are applicable to others who perform fundamentally the same functions. All three types of providers, including the more specialized or “special purpose” index providers, clearly appear to be engaged “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.” Similarly, many providers would be hard-pressed to invoke the “publisher’s exclusion” from the Advisers Act, since in many cases they are providing personalized advice about the value of securities or providing analyses or reports in response to their clients’ requests and needs, rather than disseminating purely disinterested or impersonal advice through a publication of general circulation.

The Bottom Line.  Many information providers clearly appear to be acting as investment advisers and should be regulated as such.  It is without question appropriate to closely examine the issue and to solicit input. Ultimately, we would expect the SEC to develop reforms that will increase transparency, protect investors from the conflicts of interest and other threats inherent in the information provider business model; promote fair competition among all those who act as investment advisers by regulating them similarly; and protect the overall integrity of the securities markets.

Read our full Comment Letter here or click the button below.

Comment Letters
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