Russell Investments

RESPONSE TO CONSULTATION DOCUMENT ON THE REGULATION OF INDICES Frank Russell Company (d/b/a “Russell Investments” or “Russell”) is a leader in constructing and maintaining securities indices and is the publisher of the Russell Indices (indices are also referred to herein as “benchmarks” pursuant to Section 1.5 of the Consultation, although Russell believes that there are differences between benchmarks and indices). Russell operates through subsidiaries worldwide and is a subsidiary of The Northwestern Mutual Life Insurance Company. The Russell Indices are constructed to provide a comprehensive and unbiased barometer of the market segment they represent. All of the Russell Indices are reconstituted periodically, but not less frequently than annually nor more frequently than monthly, to ensure new and growing equities and fixed income securities are reflected. Over the past 25 years, Russell's innovative methodology has helped the Russell Indices become the benchmarks most used by U.S. institutional investors. Investment professionals use Russell Indices as benchmarks for over $3.9 trillion in portfolio assets. Russell Indices represent over 99% and 98% of the investable U.S. and global equity universes, respectively. Our modular index construction allows users to track current and historical market performance by specific market segment supporting a broad spectrum of sub-indices based on country, region, sector and capitalization size covering over 10,000 securities in 50 countries. Russell Indices are objective, comprehensive, and built according to transparent rules. Industries and sectors are represented by a wide variety of securities, rather than samples found in other indexes. Russell Indices are rigorously maintained. Rules dictate additions to the Russell Indices every quarter, ensuring constant coverage. Member securities are not selected by panels, surveys or committees. Russell owns the Russell Indices and develops each Russell Index based on its own proprietary model employing its intellectual property (patented property as well as trade secrets and other intellectual property) and industry expertise. Russell Indices may be based on the intellectual property of certain third parties under contractual arrangements with Russell. In establishing each Russell Index, Russell has developed a set of clearly defined inclusion/exclusion criteria for determining when a security should be included or excluded from an Index. Certain Russell personnel use this proprietary, rules-based methodology to determine, amongst other things, the composition of each Russell Index, the policies and procedures to be followed by Russell personnel in calculating and maintaining each Russell Index, the method and frequency of reconstitution and the daily treatment of corporate actions. Russell’s response to the Consultation follows: In order to assist us in evaluating your contributions, we would appreciate if you could maintain the structure and numbering of this questionnaire in your replies and indicate clearly the question you are responding to. In replying to these questions, please indicate the expected impact described in each section of this paper on your activities or the activities of firms in your jurisdiction, including estimates of administrative or compliance costs. Please also state the reasoning behind your answers and any evidence supporting your views. It is possible to request that a submission remains confidential. In this case, the contributor should explicitly indicate on the first page of their response that they do not want their contribution to be published. You are invited to send your contributions until 29 November 2012 to: MARKT- [email protected]. Responses will be published on the following website unless requested otherwise: http://ec.europa.eu/internal_market/consultations. Box 1 (1) Which benchmarks does your organisation produce or contribute data to? Russell calculates thousands of indices using modular index construction that allows users to track current and historical market performance by specific market segment supporting a broad spectrum of sub-indices based on country, region, sector and capitalization size covering over 10,000 securities in 50 countries. (2) Which benchmarks does your organisation use? What do you use each of these benchmarks for? Has your organisation adopted different benchmarks recently and if so why? Russell is an investment manager as well as an independent index provider. As an investment manager Russell uses benchmarks for portfolio construction and performance attribution; formulation of investment strategies and portfolio implementation; creation of investment products; capital markets research; and investment manager research. Unless otherwise required due to the facts and circumstances of an investment management assignment Russell uses the Russell Indices for its investment management activities. (3) Have you recently launched a new benchmark or discontinued existing ones? Russell invests heavily in continuous benchmark research and innovation. Russell calculates thousands of indices daily, but our most frequently used indices and their construction methodology is attached to this Response as Exhibit A. (4) How many contracts are referenced to benchmarks in your sector? Which persons or entities use these contracts? And for which purposes? Investors and financial professionals worldwide trade thousands of investment products linked to Russell’s benchmarks including passive investment funds, structured products, futures and options. They also use Russell’s benchmarks to judge the performance of their investment portfolios. However, Russell’s position as an independent benchmark provider and the excellence of its governance and production processes virtually eliminate conflicts of interest that could (as they have in the case of LIBOR) harm investors, consumers and financial markets. As an independent benchmark provider Russell constructs and maintains its benchmarks according to objective rules. Russell’s personnel implement these rules 2 in an unbiased, systematic process that assures the integrity and accuracy of each benchmark Russell publishes. The integrity and accuracy of Russell’s benchmarks helps assure investors, consumers, financial professionals and regulatory authorities that investment products linked to Russell’s benchmarks are unaffected by conflicts of interest, illegal or unethical behaviour. This is in stark contrast to other benchmarks and the financial products that incorporate those benchmarks where the benchmarks themselves and the relationships between the benchmark provider and the financial product creator are subject to conflicts of interests that can result in, and in the case of LIBOR have resulted in, fraud, market manipulation and grave ethical failures of certain organizations and the people that operate those organizations. Russell and its processes are a model for objective and ethical benchmark design, development, construction, production and publication. (5) To what extent are these benchmarks used to price financial instruments? Please provide a list of benchmarks which are used for pricing financial instruments and if possible estimates of the notional value of financial instruments referenced to them. See answer to Question (4). (6) How are benchmarks in your sector set? Are they based on real transactions, offered rates or quotes, tradable prices, panel submissions, samples? Please provide a description of the benchmark setting methodology. Russell’s benchmarks utilise actual transaction data (end of day and real time for benchmarks requiring real time calculation). Russell sources this data direct from securities exchanges as well as their authorized data distributors. Russell thinks that actual transaction data is a fundamental input to accurate, objective benchmarks and a key feature in mitigating potential conflicts of interest in the production and publication of benchmarks. (7) What factors do you consider to be the most important in choosing a reliable benchmark? Russell believes that benchmarks should be set using methodologies that are 100% rules based and completely transparent. We believe that using prices based on actual transactions is the best way to provide investors the most accurate information possible on the holdings of an index. Box 2 (8) What kinds of data are used for the construction of the main indices used in your sector? Which benchmarks use actual data and which use a mixture of actual and estimated data? Russell utilises securities pricing data as well as security level statistical data that we source direct from securities exchanges, their authorized data distributors and other reputable data distributors. (9) Do you consider that indices that do not use actual data have particular informational or other advantages over indices based on actual data? 3 No, Russell thinks the use of data other than actual data negatively impacts the integrity and accuracy of benchmarks and the financial products build upon them and increases the likelihood for conflicts of interest that can harm investors and consumers. (10) What do you consider are the advantages and disadvantages of using a mixture of actual transaction data and other data in a tiered approach? As stated above, Russell prefers the use of actual transaction data as the input to an objective, accurate and reliable benchmark. However, Russell acknowledges that certain data critical to the production of a benchmark might not be readily

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