SEC considers whether to increase oversight of model portfolio, index, pricing service providers

Financial advisers often use model portfolios and index investments. The SEC is assessing whether providers of those products should be regulated as investment advisers themselves.

The Securities and Exchange Commission released a request for public comment on June 15 that seeks information and input about the activities of “information providers,” such as those who develop and sell model portfolios and indexes, and offer pricing services.

“The role of these information providers in today’s markets raises important questions under the securities laws as to if they are providing investment advice rather than merely information,” SEC Chairman Gary Gensler said in a statement. “In order to help the Commission determine when — and under what facts and circumstances — these providers are giving investment advice, the Commission seeks information and public comment to help guide our approach.”

If index funds or model portfolios are driving investment decisions in certain directions and are in effect serving the same purpose as an adviser, then the SEC is considering whether to require them to register as investment advisers or investment companies, or take other actions that would increase oversight of them.

Gensler pointed to the example of funds that track indexes, which have more than $10 trillion in assets under management. They’ve become “increasingly influential” as they’ve grown in size and scope, he said.

“Thus, an index provider’s decision to include a particular security in an index often influences users of the index to purchase or sell securities,” Gensler said in a statement. “This raises questions about whether the index provider is providing investment advice.”

When advisers utilize model portfolios, it can cause confusion for clients regarding fees, services and conflicts of interest, the SEC said.

“For example, clients may be unsure which services are being performed by a model portfolio provider and which are being performed by the adviser, as well as by whom they are owed a fiduciary duty,” the SEC comment request states. “This uncertainty may be increased where, for example, the client-facing adviser seeks to disclaim or limit its fiduciary duty or any other duty when implementing a model provided by a third-party model portfolio provider.”

The public comment period will be open for 60 days following its posting on the SEC website or 30 days following its publication in the Federal Register, whichever is longer, the SEC said.