CR05/12 Principles for the Regulation of Exchange Traded Funds

Principles for the Regulation of Exchange Traded Funds Consultation Report TECHNICAL COMMITTEE OF THE INTERNATIONAL ORGANIZATION OF SECURITIES COMMISSIONS CR05/12 MARCH 2012 This paper is for public consultation purposes only. It has not been approved for any other purpose by the IOSCO Technical Committee or any of its members. ii Copies of publications are available from: The International Organization of Securities Commissions website www.iosco.org © International Organization of Securities Commissions 2012. All rights reserved. Brief excerpts may be reproduced or translated provided the source is stated. iii Foreword The Technical Committee (TC) authorized the Standing Committee on Investment Management (TCSC5) to proceed with a project on Exchange Traded Funds (ETFs) designed to: (1) highlight the experience and key regulatory aspects regarding ETFs and related issues across SC5 members;1 (2) identify the common issues of concern; and (3) if appropriate, develop a set of principles or best practices on ETF regulation. Accordingly, TCSC5 has developed some proposed common investor-protection principles or guidelines on ETFs.2 In addition, the report touches on certain market structure and financial stability issues. The proposed principles have been developed to provide guidance for markets and market authorities. This does not mean, however, that a one-size-fits-all approach is being advocated. The principles need to be of such a nature that they are adaptable to different regulatory frameworks. They should, for example, be relevant regardless of the predominant distribution model. In addition, some of the principles may be better suited to industry best practice as opposed to regulatory requirements. How to Submit Comments Comments may be submitted by one of the three following methods on or before 27 June 2012. To help us process and review your comments more efficiently, please use only one method. Important: All comments will be made available publicly, unless anonymity is specifically requested. Comments will be converted to PDF format and posted on the IOSCO website. Personal identifying information will not be edited from submissions. 1. Email  Send comments to ETF@iosco.org.  The subject line of your message must indicate Principles for the Regulation of Exchange Traded Funds.  If you attach a document, indicate the software used (e.g., WordPerfect, Microsoft WORD, ASCII text, etc) to create the attachment.  Do not submit attachments as HTML, PDF, GIFG, TIFF, PIF, ZIP or EXE files. 1 For more information about the different regulatory structures in SC5 member jurisdictions, see Appendix C. 2 SC5 established a working group chaired by the U.S. SEC and AMF France of which the members are the AMF Québec, FINMA, BaFin, HK SFC, CONSOB, CSSF, Central Bank of Ireland (CBI), CNMV and UK FSA. iv 2. Facsimile Transmission Send by facsimile transmission using the following fax number: + 34 (91) 555 93 68. 3. Paper Send 3 copies of your paper comment letter to: Mohamed Ben Salem General Secretariat International Organization of Securities Commissions (IOSCO) Calle Oquendo 12 28006 Madrid Spain Your comment letter should indicate prominently that it is a “Public Comment on Principles for the Regulation of Exchange Traded Funds.” v vi Contents Chapter Page 1 Executive Summary 1 2 Principles related to ETF Classification and Disclosure 4 3 Principles related to Marketing and Sale of ETF Shares 12 4 Principles related to the Structuring of ETFs 16 5 Issues Broader than ETFs 22 Appendix A – List of Proposed Proposals 30 Appendix B – Comparison of ETF Characteristics in the United States and Europe 32 Appendix C – Regulatory Structure for ETFs and ETPS in TCSC5 Member Jurisdictions 35 vii 1 Chapter 1 - Executive Summary The Technical Committee (TC) authorized the Standing Committee on Investment Management (TCSC5) to proceed with a project on Exchange Traded Funds (ETFs) designed to: (1) highlight the experience and key regulatory aspects regarding ETFs and related issues across SC5 members;3 (2) identify the common issues of concern; and (3) if appropriate, develop a set of principles or best practices on ETF regulation. Accordingly, TCSC5 has developed some proposed common investor-protection principles or guidelines on ETFs.4 In addition, the report touches on certain market structure and financial stability issues. The proposed principles have been developed to provide guidance for markets and market authorities. This does not mean, however, that a one-size-fits-all ap