More recently, the SEC has been seeking to gather more information on the value of the derivatives the notes are tied to, according to the people with direct knowledge of the conversations, who asked not to be identified because they’re not authorized to speak publicly.
The regulator is seeking to determine whether banks should include that measure, known as the indicative value, in prospectuses, the people said.
“My experience with ETN prospectuses is that they’re very clear about the fees and the risks and the transparency,” Styrcula said. “Any investor who invests without reading the prospectus does so at his or her own peril, and that’s the way it should be.”
Approaching Zero
The offering documents for the VelocityShares Daily 2x VIX Short Term ETN, the TVIX, says on the first page that the security is intended for “sophisticated investors.” The note “is likely to be close to zero after 20 years and we do not intend or expect any investor to hold the ETNs from inception to maturity,” according to the prospectus.
While Steckbeck said a supervisor at Clermont Wealth Strategies advised him against investing in TVIX in February 2012, he bought 4,000 shares the next month from his self- managed brokerage account. The adviser, whom Steckbeck declined to name, didn’t say that the price had become unmoored from the index it was supposed to track.
David Campbell, president of Clermont Wealth Strategies, declined to comment.
Steckbeck, who found the TVIX on the Yahoo Finance website, doesn’t have time to comb through dozens of pages every time he makes an investment, he said.
‘Not Dumb’
“Engineers -- we’re not dumb,” said Steckbeck, who founded his own consulting company in 1990. “We’re good with math, good with numbers. We read and understand stuff fairly quickly, but we also have our jobs to perform. We can’t sit there and read prospectuses all day.”