Brooklyn Law Review


When investment funds track the S&P 500, the index becomes more than just a list of 500 companies. The focus then becomes the financial and regulatory issues that arise from the discretionary decision-making power of the Index Committee that governs the S&P 500. Based on our empirical research and analysis, this article recommends a new principal risk disclosure under SEC Form N-1A, which we refer to as “selection risk,” to be included in the statutory and summary prospectuses of investment funds that track the S&P 500. This type of risk results when the Index Committee uses its discretionary decision-making power to exclude stocks or groups of stocks that may outperform the index and not allow S&P funds to create portfolios of stocks that most accurately represent the market risk and expected returns of large cap, Blue Chip America. This new disclosure will provide investors with the necessary information to evaluate whether index funds that track the S&P 500 are appropriate for their investment needs. Moreover, this article argues that the S&P 500 index is no longer an appropriate broad-based securities market index for purposes of Form N-1A benchmarking.