The ETN market is dwarfed by that for exchange-traded funds, which appeared in the U.S. 21 years ago and make up about $2.4 trillion in assets.
The SEC’s probe intensifies pressure after the regulator asked banks last year to increase disclosures on prospectuses for privately traded securities known as structured notes.
Banks had to include the securities’ estimated initial value, which is typically two to four percent less than what investors paid for them, data compiled by Bloomberg show. They were also asked to use a narrative rather than mathematical explanation of the derivatives included.
‘More Exotic’
There are about $82.7 billion of outstanding structured notes in the U.S., according data compiled by Bloomberg tracking the securities sold since January 2010.
“All of a sudden there are a lot more issuers approaching the SEC, becoming issuers of ETNs,” Keith Styrcula, chairman of the Structured Products Association, an industry group, said in a telephone interview. “There’s been a plethora of new ETNs and some of them are getting a little bit more exotic with leverage or access to certain illiquid asset classes. I see it as a healthy thing as long as there’s not over-reach.”
The SEC is asking banks to make revisions to their ETN prospectuses, according to a letter sent to lenders in February from Amy Starr, head of the agency’s office of capital markets trends in Washington.
Some ETNs, particularly those with the word “shares” in the title, may be ambiguous enough for investors to think they’re buying stocks or exchange-traded funds, the letter says.
Ambiguous Wording
Some fail to adequately explain that banks can bet against the very notes they’re selling or suspend new offerings or take other actions that can affect their value, according to the letter.