Passive index tracker funds under threat

Proposed insider trading laws could be the death knell of passive index tracker funds, the stock exchange claims.

In a submission on the Securities Legislation Bill presented to Parliament's commerce select committee yesterday, NZX says provisions aimed at combating insider trading are too broad.

It wants an exception included for people who trade on behalf of passive index tracking funds, otherwise such vehicles may be unable to operate.

"We fail to see how that could be a desirable outcome of the insider trading review regime," said NZX.

Fund managers who tracked an underlying index through the provisions of trust deeds, investment statements, prospectuses and Inland Revenue binding rulings could be caught by the legislation.

And it could not be the bill's purpose to capture funds trading shares in line with the explicit terms of fund documents. These are passive investment instruments whereas insider trading must involve an active decision.

"As drafted, this legislation may end the promotion of these products in an environment where more savings instruments should be promoted by Government, given its savings policy," NZX said.

The situation was "particularly exacerbated" for NZX, which operates a number of passive index tracking funds.