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

Author: Jenna I. McCarthy


Wall Street has recently seen a shift from active management, which involves investors or portfolio managers buying and selling 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 largely unregulated, and have considerable discretion to determine the makeup of indices. This wide discretion allows index providers to exercise control over the global investment community 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. Recently, efforts have been made to create regulatory frameworks within Europe and on an international scale. This Note argues that the US investment industry should require index providers to register with the Securities and Exchange Commission and to solicit comments from the public through notice-and-comment periods when the providers add new rules or modify existing rules.


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