IOSCO has published its final Report on Principles for the Regulation of Exchange Traded Funds (ETFs).

The report contains nine principles intended to guide regulators and industry practitioners in their assessment of the quality of regulation and industry practices concerning ETFs.

ETFs have become an increasingly popular product type for investors.  The report outlines that figures released at the end of January 2013 state that assets managed under ETF structures amounted to US$ 1.9 trillion.  This represents roughly 7% of the global mutual fund market.  This increased interest and investment in ETFs worldwide has drawn regulatory concern over their impact on individual investors and the marketplace.

The Report identifies the following nine principles:

  • Regulators should encourage disclosure that helps investors to clearly differentiate ETFs from other exchange traded products.
  • Regulators should seek to ensure a clear differentiation between ETFs and other CIS, as well as appropriate disclosure for index-based and non index-based ETFs.
  • Regulators should require appropriate disclosure with respect to the manner in which an index-based ETF will track the index it references.
  • Regulators should consider imposing requirements regarding the transparency of an ETF’s portfolio and/or other appropriate measures in order to provide adequate information concerning:
    • Any index referenced and its composition
    • The operation of performance tracking
  • Regulators should encourage the disclosure of fees and expenses for investing in ETFs in a way that allows investors to make informed decisions about whether they wish to invest in an ETF and thereby accept a particular level of costs.
  • Regulators should encourage disclosure requirements that would enhance the transparency of information available with respect to the material lending and borrowing of securities (e.g. on related costs).
  • Regulators should encourage all ETFs, in particular those that use or intend to use more complex investment strategies, to assess the accuracy and completeness of their disclosure, including whether the disclosure is presented in an understandable manner and whether it addresses the nature of the risks associated with the ETFs’ strategies.
  • Regulators should assess whether the securities laws and applicable rules of securities exchanges within their jurisdiction appropriately address potential conflicts of interests raised by ETFs.
  • Regulators should consider imposing requirements to ensure that ETFs appropriately address risks raised by counterparty exposure and collateral management.