SEC seeks comment on whether certain service providers are investment advisers


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Practices: Asset Management

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On June 15, 2022, the SEC issued a Release (the “Statement”) focused on index providers, model portfolio providers and pricing services (“Information Providers”) whose activities may cause them to meet the definition of “investment adviser” by under the Counselors Act.

The statement said that “information provider operations also raise potential investor protection and market risk concerns, including, for example, the potential for high-profile operations where providers and their staff have a prior knowledge of changes to the information they generate and potential conflicts of interest when providers or their staff hold investments that they value or that form part of their indices or models. The release then discusses other legal issues that may arise from each type of information provider’s business with respect to matters relating to the status of an investment adviser.

The following summarizes the contents of the Disclaimer with respect to the three types of Information Providers.

Index providers

The release notes that once an index is designed and its methodology created, index providers “determine the level (or measurement) of the index in accordance with that methodology. These activities leave a lot of room for manoeuvre. For example, an index provider usually has the ability to make changes to the index by adding or removing particular constituents. . . or change their weighting within the index. . . in some cases without publicly disclosing their indexing methodologies or rules. Additionally, the release notes that some indexes “are broad and widely used, while others are more narrowly targeted, including specialized indexes designed to be followed by a particular user.”

The SEC believes that index providers have historically concluded that, even if they meet the definition of an investment adviser in Section 202(a)(11) of the Advisors Act, they can rely on the “publisher exclusion” in section 202(a)(11)(D), which excludes from the definition any “publisher of any bona fide newspaper, newsmagazine, or commercial or financial publication of general circulation and regular”. Any entity that relies on the publisher exclusion is not required to register with the SEC and is exempt from all provisions of the Advisor Act, including the anti-fraud provisions of Section 206.

Model Portfolio Providers

The release notes that model portfolio providers include brokers, asset managers, third-party strategists, asset allocators and advisers. These providers, among other things, “may design allocation models, update or rebalance them over time, provide varying degrees of customization, and may or may not offer this information on a discretionary basis.” Additionally, the release states that “there is a growing demand for specialized models that focus on a particular industry or strategy, for example, models that focus on sustainable or ‘ESG’ (environmental, social and of governance).”

The statement said investment advisers’ use of third-party model portfolios “may raise concerns about clients’ understanding of the fees they pay, the services provided by each party (that’s to saythe client-facing advisor and the model portfolio provider), and their respective conflicts of interest (or potential conflicts). »

Pricing Services

The release notes that the SEC discussed pricing for services when enacting Rule 2a-5 under the 1940 statute.1 In this discussion, the release states that the SEC “recognized that pricing services play an important role in the fair value process, while noting the potential risks and conflicts of interest that pricing services may present in the fair value process. ‘assessment of titles by registrants’. Citing a 2008 “Dear CCO” letter from SEC staff, the release also says staff observed “compliance issues related to registrant interactions with third-party pricing services, including risks of misleading disclosure as to whether these services provide ‘ independent values ​​and the possibility of outdated or otherwise inaccurate valuations. »


The release asks for feedback on dozens of Information Provider issues, starting with basic questions like “Are our descriptions of each Information Provider accurate and complete?” and “What types of potential risks and conflicts of interest does each type of supplier present?

Thereafter, the release poses a wide range of questions intended to elicit information to facilitate the SEC’s understanding of information provider practices, for example, how information providers analyze whether they meet the definition of “Investment Advisor” of the law on advisers under each piece of the law definition and how each type of information provider customizes the services it offers.

The release appears to be a fact-finding document intended to establish a basis from which the SEC can propose that certain information providers (or specific activities or agreements of information providers) meet the definition of “adviser”. investment” under the Advisers Act. This is consistent with the public opinion of President Gary Gensler statement accompanying the statement in which he observed:

The application seeks comments. . . whether such information providers provide investment advice in particular facts and circumstances, and thereby act as “investment advisers” under securities laws. Additionally, as some information providers may not fit neatly into the Commission’s current regulatory structure for investment advisers, the statement seeks feedback on how the existing rules should apply to them.

It follows that information providers who are not currently registered as investment advisers can benefit from:

  • Review the processes and analytics they now rely on to avoid registration under the Advisors Act; and
  • Submit a comment letter in response to specific questions in the release to emphasize that the information providers’ activities or arrangements (i) do not involve the investor protection concerns of the Advisors Act and/or (ii) could be better addressed by specific regulatory measures that are less burdensome (and therefore more cost-effective) than the full application of the Advisors Act to such activities and arrangements.

Comment deadline

The release states that responses should be received no later than 30 days after the date of publication of the release in the Federal Register or August 16, 2022, whichever is later. The press release was published in the Federal Register on June 22, 2022. Accordingly, responses to the release must be received by the SEC no later than August 16, 2022.

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If you would like to know more about the issues in this alert, please contact your usual contacts at Ropes & Gray.

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