The (Mis)Uses of the S&P 500

The S&P 500 is widely used as (i) a means of directing investor capital through “passive” investing, (ii) a benchmark for evaluating the performance of investment portfolios and managers, and (iii) a means of evaluating the performance of firms and corporate managers. Each of these uses is allowed, encouraged, and sometimes even required, under current securities law and regulation. In this Article, I argue that the way that the securities regulatory regime engages with each of these uses is fundamentally flawed. I show that, far from being neutral or constant, the index represents substantial amounts of discretionary decision-making, and is simply one particular large cap index whose composition changes substantially over time. In light of these facts, I argue that an “S&P 500 fund” is not meaningfully passive, the mutual fund prospectus benchmark requirement is flawed, and the rule requiring S&P 500 constituents to compare their performance to that of the index in their 10-Ks is nonsensical. For each context, I propose changes to the current regulatory regime to correct these misuses