In a speech given on December 3, 2019, Ms. Dalia Blass, Director, Division of Investment Management ("DIM") of the Securities and Exchange Commission ("SEC"), raised concerns about adequate risk factor disclosure by funds that track indices with significant exposure to emerging and frontier markets.1 Director Blass raised issues prevalent in foreign markets, such as less publicly available information about index constituents, less regulatory oversight in those markets (which may lead to unreliable information being used by index providers), and weaker rights and remedies available to a fund against index constituents located in such markets.

Director Blass suggested that funds address the following risks in their disclosure documents:

  • What are the risks in using unreliable or outdated information when assessing if a constituent should be included in an index?
  • What if the issue is not just the quality of the information but that the index provider has access to partial or very limited information?
  • What are the limitations, if any, in assessing the index provider's due diligence process?
  • What are the limitations, if any, to the rights and remedies available to the fund?

Director Blass noted that each of these risks potentially affect index data reliability, index construction and index computation, and that the DIM Staff would apply a heightened review to these disclosures.

Many of these concerns have been addressed in offering documents for structured notes. For example, structured notes linked to the iShares® MSCI Emerging Markets Index ETF contain risk factors that address most of the risks raised by Director Blass. Also, both structured notes and funds, when linking to any index, including an index of constituents issued by emerging or frontier markets, would ensure, as part of their diligence, that the index complies with IOSCO and EU standards relating to index governance and data reliability. Nonetheless, Director Blass' comments serve as a useful reminder in preparing and reviewing indexrelated risk factor disclosures.

Originally published in REVERSEinquiries: Volume 2, Issue 11.
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1. Director Blass's speech is available at:

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