On June 15, 2022, the SEC published a request for comment on certain information providers, including index providers, model portfolio providers and pricing services, whose activities the SEC believes may cause them to meet the definition of “investment adviser” under the Advisers Act. The SEC noted the proliferation of such information providers in recent years and the potential for conflicts of interest that such information providers’ activities may present. Although previously such information providers (especially index providers) were widely considered to be excluded from the statutory definition of an investment adviser pursuant to the “publisher’s exclusion” and judicial interpretations thereof, the SEC’s request for comment indicates an interest in reexamining the continued applicability of such exclusion.

A requirement that information providers register as investment advisers under the Advisers Act would impose significant costs, prohibitions and other requirements, including, among others, Form ADV filings, recordkeeping obligations and periodic SEC examinations. In addition, if an information provider is deemed to be an investment adviser under the Advisers Act, it could also be considered an investment adviser to a fund under the 1940 Act. In such event, the relationship with an information provider would be subject to numerous requirements under the 1940 Act, including annual review and approval of the contract with the information provider by the fund’s independent board members. Below are the types of information providers that the SEC considered and a few of the key SEC requests for comments.

Index Providers
The SEC noted the development of narrowly-focused or specialized indices, and the significant discretion that index providers may have in changing the index constituents or modifying their weightings. The SEC also noted that the decision to include or exclude a particular security may have implications for the larger market for such security, including causing funds that track the index to buy or sell the security.

Model Portfolio Providers
The SEC pointed to the growth of model portfolio providers, who may design and offer allocation models in exchange for a commission or other fees. The SEC noted its concerns with respect to the transparency of fees and services provided, and the discretion such providers may exercise in designing model portfolios. Also highlighted by the SEC were the customization and model adjustments that may be made based on input from the adviser.

Pricing Services
The SEC cited its concern that pricing services may exercise significant discretion in determining valuation methodologies, developing valuation model templates, determining the sources or relevance of inputs, determining whether valuations generated are appropriate and addressing valuation challenges. The SEC referenced its own concerns about pricing service compliance issues from a 2008 compliance alert.

Summarized below are certain of the SEC’s requests for comment with respect to investment adviser status under the Advisers Act:

• Are the SEC’s descriptions of the information providers accurate, in particular with respect to the types of risks and conflicts of interest that each type of provider represents, as well as the information providers’ use of discretion in performing their services?
• Are there are other types of information providers whose activities may raise Advisers Act concerns?
• How do information providers analyze whether they meet the definition of an investment adviser, and what is the basis for their determination of whether they qualify for exemptions from such definition, including the publisher’s exclusion?
• What form of compensation do information providers receive?
• How do information providers exercise discretion in providing information? Do they customize or adjust their processes based on input from clients? How do information providers disclose adjustments or changes to their services?
• What are additional economic benefits and costs associated with registering as an investment adviser, and are there any provisions of the Advisers Act that would be impossible to comply with or that would be operationally complex and burdensome? Should information providers be exempted from certain requirements of the Advisers Act even if they meet the definition of “investment adviser?”
• For index providers, what issues are raised by the provision of specialized versus broad-based indices? Do customized or bespoke indices raise particular investment adviser status issues?
• Would requiring information providers to register as investment advisers and become subject to current Advisers Act requirements cause them to alter their business models, consolidate or exit the market?

In addition, the SEC requested comment with respect to potential 1940 Act ramifications that could arise if an information provider is classified as an investment adviser. These requests include:

• How do information service providers analyze whether they meet the 1940 Act definition of an investment adviser to a fund? What are the costs and benefits associated with meeting that standard, and would application of the standard serve as a material barrier to new entrants?
• To what extent do information providers enter into contracts with funds directly? If a fund’s adviser delegates services to an information provider, how are the duties allocated between the adviser and delegatee?
• How much time would be required for funds and information providers to come into compliance with the 1940 Act requirements for investment advisers to a fund, if those requirements are applied? Should the SEC take additional measures to assist with compliance?
• Are existing fund relationships with information providers currently subject to fund compliance programs under Rule 38a-1 under the 1940 Act, and should Rule 38a-1 be amended to incorporate oversight of information providers?

The statement and request for comment is available here. The public comment period will remain open until August 16, 2022.