{"id":3813,"date":"2021-02-23T08:29:52","date_gmt":"2021-02-23T13:29:52","guid":{"rendered":"https:\/\/navesinkinternational.com\/?p=3813"},"modified":"2023-12-20T02:53:23","modified_gmt":"2023-12-20T07:53:23","slug":"should-index-providers-have-oversight","status":"publish","type":"post","link":"https:\/\/navesinkinternational.com\/2021\/02\/23\/should-index-providers-have-oversight\/","title":{"rendered":"Should index providers have oversight?"},"content":{"rendered":"
By construction, both ETFs and passive funds are tracking indices, while active funds are benchmarked against indices. ETFs now represent trillions of dollars.<\/a> They have a wide diversity<\/a> and as many reference indices. Passive funds (“index trackers”) also rank in the trillions, albeit on more traditional indices.<\/p>\n As result, index calculators have gained a significant influence on asset allocation. They do investment research. They have discretion in inclusions<\/a>. They suggest indices and strategies to asset managers. Their decisions\u00a0move markets<\/a>. When they fail to calculate correctly, investors lose millions<\/a>.<\/p>\n Should they be regulated for their de facto role as investment advisors?<\/p>\n Index providers like S&P Global, MSCI, FTSE Russell, and Bloomberg are currently treated as mere ‘data providers’ by the regulators. Their role is much larger than that. An interesting academic paper by\u00a0 Adriana Robertson and Paul Mahoney, explains why they are de facto asset managers. Here are some of the arguments:<\/p>\n Meanwhile,<\/p>\n The academic article Advisers by Another Name<\/a> by Adriana Robertson<\/a> and Paul Mahoney<\/a> suggests that the SEC specifies what will and will not make the calculators investment advisors, and who needs to be registered. It will specify the fiduciary duty owed to investors, limit the use of performance-based fees, as well as prevent hidden profits. Advisors will have disclosure and contractual obligations, with the responsibility of not respecting guidelines, as well as restrictions on excessive compensations. Fund shareholders may bring actions to recover excessive fees.<\/p>\n The article also provides a long legal analysis as to whether index providers actually match the definition of investment advisors, and if the publisher’s exemption is warranted (single-purpose indices clearly fail that clause).<\/p>\n This approach will help the SEC enforce, as well as give the market clarity and predictability. It will bring transparency and reduce conflicts of interest, while the compliance costs would be modest.<\/p>\n <\/p>\n Credits to Adriana Robertson<\/a> at the University of Toronto<\/a> and Paul Mahoney<\/a> at the University of Virginia<\/a>.<\/p>\n Keywords:<\/strong><\/span>\u00a0Index funds, passive investment, mutual funds, Investment Advisers Act, Investment Company Act<\/p>\nThe problems<\/strong><\/span><\/h3>\n
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The benefits of regulating<\/strong><\/span><\/h3>\n
Credits<\/h4>\n