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Advisors, Take Note: SEC Eyes Definition of ‘Investment Advice’


The Securities and Exchange Commission (SEC) is requesting public input on whether “information providers” – specifically, index providers, model portfolio providers and pricing services – may act as “investment advisers” under the Investment Advisers Act of 1940. Some industry watchers contend that these financial businesses aren’t adequately regulated considering the influence they have on others’ investment decisions. Placing these providers under this designation could open the door to new regulatory scrutiny. It could also impact how financial advisors and consumers engage with these businesses. Financial professionals should take note.

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SEC Considers the Regulatory Status of Index Providers, Model Portfolio Providers and Pricing Services

The SEC announced Wednesday that members of the public can weigh in on whether certain kinds of investment information providers are acting as “investment advisers” – the SEC favors the “e” spelling for this specific term – when executing various aspects of their businesses, including developing and refining the models with which they make investment decisions.

According to the SEC, such information providers “exercise significant discretion in the performance of their services.” Their analysis and influence may edge them toward the territory of providing investment advice.

Placing these groups under the “adviser” umbrella could have a regulatory impact on them. It could also affect the financial professionals who work closely with – or within – them. “Investment adviser status has regulatory implications, including questions related to registration under the Advisers Act and questions under the Investment Company Act of 1940,” according to a statement from the SEC.

How Information Providers May Offer ‘Investment Advice’

This images shows a financial advisor. Advisors should eye the SEC comment period regarding the regulation of investment information providers. Typically, providers disseminating general and impersonal information aren’t considered “advisers.” For example, index providers may be considered “publishers” and excluded from the Advisers Act. Examples of index providers include S&P Global and FTSE Russell.

But in practice, they may act as “advisers,” the SEC says. For example, when an index provider opts to include a security in an index, it may influence users of the index to purchase or sell securities. “This raises questions about whether the index provider is providing investment advice,” said SEC Chair Gary Gensler in a statement.

Model portfolio providers, which offer premade suites of investments to clients, are also under consideration in this SEC comment period. And the SEC is eyeing pricing services. These companies provide valuation resources to users.

“Each of these providers’ activities raises questions regarding our oversight of investment advisers and how we best protect the public, ” Gensler said.

The Definition of ‘Investment Adviser’

An investment adviser is a firm or person who is compensated and “engaged in the business of” providing investment advice or in issuing reports or analyses regarding securities.

Money managers, financial planners and other investment professionals may be regulated as “investment advisers” under the U.S. Investment Advisers Act of 1940. That means they must adhere to certain regulatory requirements, including registration with the SEC.

Other groups, such as publishers, banks and credit rating agencies, may be exempt from those regulations.

Bottom Line

Advisors, Take Note: SEC Eyes Definition of 'Investment Advice'

While an open comment period is an early step on the road toward any change in regulation, financial advisors may want to keep an eye on this move from the SEC. If it moves ahead, prepare for a debate on what constitutes “investment advice” and how the regulatory changes would impact financial companies going forward.

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