Index providers brace for tougher regulations

Jun 22nd, 2022 | By | Category: ETF and Index News

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Index providers may be subject to stricter regulatory standards as the US Securities and Exchange Commission considers whether to exert greater control over an increasingly influential segment of the financial ecosystem.

Index providers brace for tougher regulations

The SEC is consulting on whether index providers should be subject to similar regulations as investment advisers.

The SEC has published on its website a request for public comment on whether index providers should be reclassified from “information providers” to “investment advisers”.

The SEC notes that such a move would have significant regulatory implications including questions related to registration under the Advisers Act and the Investment Company Act of 1940.

Gary Gensler, Chair of the SEC, commented: “In recent decades, the use of information providers has grown, changing the asset management industry. The role of these information providers today raises important questions under the securities laws as to when they are providing investment advice rather than merely information.

“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.”

Index providers’ clout has risen over the past two decades due to the surge in popularity of low-cost index-tracking investment funds such as ETFs. This trend has led to trillions of dollars being directly linked to the performance of indices across equities, fixed income, commodities, and other alternative asset classes. Data from Bloomberg Intelligence, as of the end of Q1 2022, shows that the average S&P 500 company had more than 21% of its stock owned by passive vehicles.

The ascent of passive investing is not showing signs of abating either – assets across the global ETF industry increased 28.5% in 2021 from $7.99 trillion to $10.27 trillion, according to London-based ETF industry consultant ETFGI. During the same period, index providers collected a record $5 billion in global revenues, representing an increase of 23.1% from the previous year.

Power in the indexing industry is concentrated amongst the three largest providers – MSCI, FTSE Russell, and S&P Dow Jones Indices – which collectively account for around two-thirds of total revenues generated. The SEC will likely be closely scrutinizing the impact these firms have on financial markets when considering future regulatory changes.

Areas the SEC may examine include how capital flows are impacted by index governance decisions such as the reclassification of countries between developed and emerging market status or the rules determining how stocks are assigned to specific sectors.

Market participants have 60 days following the publication of the SEC’s request to return their comments for consideration.

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