Wall Street’s top watchdog is examining whether to impose stricter rules on providers of financial indices that now guide trillions of dollars of investments globally.
The Securities and Exchange Commission on Wednesday formally requested information from the market on whether to impose tougher standards on companies such as S&P Global, MSCI and FTSE Russell, which are considered data publishers at present.
The changes proposed by the SEC could mean that index providers, which have developed into some of the most influential power brokers in modern financial markets, would be treated as investment advisers and held to the same standards as fund managers.
“The role of [index providers] in today’s markets raises important questions under the securities laws as to if they are providing investment advice rather than merely information,” said SEC chair Gary Gensler.
These companies, which also include Wilshere and Bloomberg, have quietly grown into some of the most powerful and profitable companies on Wall Street. They calculate more than 3mn performance benchmarks worldwide for stocks, bonds and other securities that are followed by thousands of low-cost tracker funds. Exchange traded funds and other index tracking vehicles own at least one-fifth of all US public companies, according to the SEC.
Some academics have criticised the lack of specific US regulations covering index providers, arguing they were effectively unregulated investment advisers, given their critical role in designing portfolios of securities.
Adriana Robertson, a professor at the University of Toronto, said it was “excellent news that the SEC will now consider whether the classification of index providers is consistent with the current regulatory regime”.
The SEC indicated last year it would revisit the rules after it settled charges with S&P that the index provider published incorrect or stale data that had contributed to a tumultuous trading session in February 2018, when volatility surged higher as US stocks fell sharply.
SEC commissioner Hester Peirce last year said the enforcement action against S&P hinted at a “deeper, unspoken concern” that there was no US regulatory framework tailored to index providers.
The SEC has also asked for feedback regarding whether providers of model portfolios and suppliers of other pricing services should also be classified as investment advisers. Model portfolios, which use ETFs and index trackers as their main building blocks, are widely used by US wealth managers and financial advisers.
S&P Global’s share price fell 5.3 per cent in early trading in New York on Thursday while MSCI’s stock was up 1.6 per cent.
Decisions by index providers also have a meaningful impact on capital flows around the world depending on which companies and countries are included or deleted from their benchmarks.
Following the invasion of Ukraine, Russian stocks and bonds were removed by MSCI and JPMorgan from all their emerging market benchmarks that had helped to funnel billions of dollars into Russia’s economy.
European rules covering transparency and disclosure standards for index providers were introduced in 2016 and have since been adopted as global standards.