The Securities and Exchange Commission (SEC) has issued a report cautioning exchanges and investment professionals to monitor the composition of indices used in offering financial instruments to determine if they are complying with federal securities laws. The SEC identified a foreign derivatives exchange that was offering and selling futures to U.S. customers on what was initially a broad-based index not subject to the registration requirements of the federal securities laws.  The index later transitioned to a narrow-based security index, leaving it without a valid exemption from the securities laws.

The SEC’s report recommends establishing policies and procedures to consistently monitor the composition of indices on which futures are based to establish whether or not they are offering security futures products.