The Financial Industry Regulatory Authority has lifted the ban on backtested data on exchange traded funds for institutional use as the fund industry increasingly engineers customized indices without long track records.

According to a public announcement, FINRA permitted the use of “Pre-Inception Index Performance” in communications for certain exchange traded products distributed solely to “institutional investors.”

“For the past 3 years, FINRA did not permit the use of backtested performance information to market newly created index funds and is now allowing this, which is an important development in the ETF market as a number of ETFs are based on newly created indexes,” according to a guidance note.

The old rules that prohibit the dissemination of the PIP data to retail investors still hold as FINRA deemed that institutional investors are sophisticated enough to interpret the data.

Specifically, the PIP data would reflect a minimum of ten years since the inception of the index. The data would be released as the most recent quarter.

The PIP data is based on a new product, and any performance prior to the index’s inception is hypothetical. Consequently, the data would not be used as a definitive indicator for future performances as some of the data may be flawed. For instance, interest rates could be a changing factor on performance, de-listings or changes to an index over time, transaction costs and market liquidity, among others.

For more information on the ETF industry, visit our current affairs category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.