On June 24, 2013, the International Organization of Securities Commissions (IOSCO) published its final report (the Report) outlining nine principles against which, in its view, the quality of regulation and industry practices concerning exchange-traded funds (ETFs) can be measured.
IOSCO is an international organization that brings together the world’s securities regulators in order to set global standards for the securities industry. IOSCO develops, implements, and promotes adherence to internationally recognized standards for securities regulation. As noted in the Report, increasing interest and investments in ETFs worldwide has drawn regulatory concern over their impact on individual investors and the marketplace. The Report was therefore developed in order to assist in guiding the regulation of ETFs.
Principles Related to Disclosure
The Report is divided into two parts. The first part describes principles for addressing ETF disclosure standards in four areas:
- Appropriate Classification – the Report suggests disclosure which allows investors to clearly differentiate between ETFs and other types of exchange-traded products. Disclosure should also assist investors in understanding an ETF’s investment strategy – particularly whether index based or not.
- Methodology of Index Tracking and Portfolio Transparency – for index based ETFs, disclosure should provide details on the manner in which the applicable index will be tracked and the associated risks with whatever methodology is used. The Report also suggests consideration be given to disclosing index composition, as well as the operation of performance tracking.
- Fees and Expenses – disclosure should allow investors to make informed investment decisions based on clearly described expense structures.
- ETF Strategies – as ETF investment objectives and strategies have become increasingly diverse and complex, the Report encourages issuers to assess the adequacy and completeness of their disclosure, including whether it is comprehensible and addresses applicable risk factors.
Principles Related to Structure
The second part of the Report addresses principles related to the structure of ETFs in the following two areas:
- Conflicts of Interests – the Report encourages regulators to ensure applicable rules are adequate to address situations where inherent conflicts of interests are present. For example, in circumstances where an index provider is also affiliated with an ETF sponsor or, for synthetic ETFs, where affiliates act as counterparties.
- Counterparty Risks – for synthetic ETFs seeking to achieve their investment objective through the use of a derivative, requirements should be considered that address counterparty credit risk and collateral management.
Please find the full text of the Report here.