In July the Securities and Futures Commission (SFC) issued a consultation paper intended to promote the protection of investors using exchange-traded funds (ETFs). This followed the pioneering launch in May of two Hong Kong ETFs relating to the Taiwan and Korea markets, and the anticipated future listing of other ETFs. The consultation paper's key recommendations include:
- the index underlying the index fund must be one acceptable to the SFC, with a clearly defined objective and/or market;
- the construction, maintenance and review rules of the index should be consistent, transparent and well-documented;
- the index should be broadly based with no single constituent weighing more than 40%, or no top five constituents weighing more than 75%;
- the index should be transparent and conveniently accessible by investors;
- material events such as the change in methodology for compiling the index should be reported to the SFC, which will determine if notification to holders/investors is required;
- the offering document of an index fund must contain 16 stipulated disclosures and all other information relevant and material for investors to make an informed investment decision; and
- the name of the fund must reflect its nature with the inclusion of such words as "index" or "tracking".
The consultation paper shows the SFC's determination to maintain a fair balance between promoting market development and investor protection. Although the absence of specific regulatory standards in many overseas jurisdictions and the diversity of index rules do not help in this regard, they should not prevent the SFC from building a better regulatory regime based on broad principles and full disclosure.