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By Marc Shoffman | Published Mar 22, 2012

Regulatory body proposes new global ETF principles

Intermediaries should bear more responsibility for information and advice they provide on exchange-traded funds, the International Organisation of Securities Commissions has claimed.

Outlining a 44-page consultation on principles for the regulation of ETFs, the Iosco policy forum said regulators should consider who has control over information provided on ETFs.

It said: “In general, responsibility for providing ETF product information will tend to rest primarily with the product producers; and disclosure of information relating to intermediary services will rest primarily with the intermediary.

“Nevertheless, regulators will need to consider several complicating factors in implementing this principle, particularly when seeking to avoid duplication of disclosure obligations if the intermediary provides or alters product information, it may need, in some jurisdictions, to take additional responsibility for that information.

“While a product producer may be generally responsible for the content of the disclosure, the intermediary is responsible in many jurisdictions for explaining the features of the product to a client.”

The document suggested that intermediaries should establish a compliance function to manage and highlight any risks and benefits of ETFs and ensure the product meets a client’s needs.

It said: “The compliance system to be established should include training about the terms, features and risks and benefits of all ETFs that the intermediaries sell, as well as the factors that would make such products either suitable or unsuitable for certain investors.”

Other proposals include requiring providers to ensure their documents are easily understood, differentiated from other exchange traded products, and disclose all fees, expenses, strategies and type of borrowing.

A statement from Iosco said: “There is increasing interest in ETFs worldwide as evidenced by the significant amount of money invested in these types of products.

“The dynamic growth of ETFs has also drawn the attention of regulators around the world who are concerned about the potential impact of ETFs on investors and the marketplace.

The consultation ends on 27 June.

It follows warnings from the FSA, Bank of England and SFO on the risk and use of synthetic ETFs last year.

Nick Lincoln, director of Hertfordshire-based Values to Vision Financial Planning, said: “Anybody who puts together a sales presentation should be liable, whether you are selling an ETF, a car or a holiday.

“I use plain-vanilla ETFs that track an index. They are the same as index trackers for investors. I see issues with derivative-based ETFs but there are plenty of straightforward ETFs.”

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