By Elena Eyber, J.D.
The Investment Adviser Association (IAA) and the Investment Company Institute (ICI) issued comments and recommendations on the SEC’s proposal regarding information providers acting as investment advisers. The IAA believes the SEC should address the growth of information providers without constraining the ability of investment advisers to continue to use their products and services and confirm that an information provider’s client is the investment adviser to which the service is provided and not that adviser’s end clients. The ICI does not support regulating information providers as investment advisers and strongly opposes deeming information providers to be investment advisers under the Investment Company Act. Further, the ICI recommends amending the SEC’s fund disclosure requirements related to indexes.
IAA’s recommendations. The IAA believes the SEC should take care not to raise the costs of doing business for the information providers, which would ultimately be passed through to investors, or limit access by erecting barriers to entry for or inadvertently precipitating the market consolidation of information providers. According to the IAA, the SEC should also confirm that the fiduciary relationship under the Advisers Act with its attendant obligations exists between an investment adviser and its clients and not between the adviser’s clients and any third-party information provider with which such clients have no advisory relationship.
Lastly, the IAA asked the SEC to consider the following recommendations as it assesses whether regulatory change with respect to information providers is necessary: (1) leverage existing requirements under the Advisers Act to ensure appropriate disclosure to investors; (2) conduct a thorough cost-benefit analysis and consider alternatives; (3) assess whether the Advisers Act regulatory framework fits the business models of information providers and would achieve the SEC’s objectives; and (4) clarify treatment of regulatory assets under management.
ICI’s recommendations. The ICI does not believe information providers meet the definition of “investment adviser” under the Advisers Act. Also, ICI does not believe that regulating information providers under the Advisers Act would improve the quality or cost effectiveness of their products and services. It believes the related costs likely would be substantial and passed on to clients. According to the ICI, if Congress seeks to create a regulatory structure for one or more types of information provider, it must do so in a manner that is tailored to their unique products and services.
The ICI also strongly opposes deeming information providers to be “investment advisers” under the Investment Company Act. The ICI believes that based on the products and services that they typically provide to fund complexes, they do not meet the definition’s requirements. Treating them as such would be immensely burdensome for funds and their investors, generating significant upfront and ongoing costs, impeding ordinary fund operations, and providing little investor protection. According to the ICI, bringing mutual funds into compliance with the Investment Company Act’s shareholder approval requirements would be enormously costly. Furthermore, extending to these entities the Investment Company Act’s board approval requirements, affiliated transaction limitations, and compliance obligations would impose significant additional costs and burdens.
Lastly, the ICI discussed the market for index providers’ products and services. According to the ICI, the SEC’s fund disclosure requirements related to performance reporting have limited funds’ choices in selecting indexes. The ICI recommended disclosure amendments that would save fund investors money and help improve market competition.