Benchmarking the World: A Proposal for Regulatory Oversight of Stock Market Index Providers

Abstract

Wall Street has recently seen a shift from active management, where investors or portfolio managers buy and sell stocks, towards passive management, where investors invest in funds that seek to match the returns of an underlying index. As the popularity of index funds has grown, questions have arisen regarding the role of the index providers that produce the underlying indices. Unlike the funds themselves, these providers are currently not regulated by the U.S. Securities and Exchange Commission. This wide discretion may allow index providers to take control of the market, since they have the ability to control investors’ exposure to different countries’ markets. The role of index providers also raises concerns about investor transparency and market manipulation in the wake of the 2012 LIBOR manipulation scandal. This Note argues that the U.S. investment industry should require index providers to register with the SEC and to solicit comments from the public through notice-and-comment periods when the providers add new rules or modify existing rules.