Paul Mahoney and Adriana Robertson just posted a fascinating new paper arguing that many index providers are, in fact, investment advisers under the legal definition, and therefore should be deemed to owe fiduciary duties to the mutual funds who license their indices. 

The paper builds on Robertson’s earlier work studying index funds, including her finding that many indices are “bespoke”; they are created in order to be licensed to a single fund.  Notice how the fees work in that scenario: the fund itself can charge a low management fee for a purported “passive” fund, and then bundled with other fees is an additional fee to license the index – often created by an affiliate of the fund.  And, in fact, she finds that ETFs that call themselves passive but license an index from an affiliate charge higher fees than those that do not use an affiliated license provider.

Anyhoo, the new paper with Mahoney takes this to the next logical conclusion: in these kinds of cases, the index provider is serving as an investment adviser to the fund, and should be regulated that way.