The U.S. Securities and Exchange Commission is asking whether banks are adequately explaining the risks of exchange-traded notes, a step toward its first new guidance for the market in almost eight years, according to people familiar with the matter.
The agency sent banks a letter earlier this month that focuses on fees they charge when issuing the notes, the values of the securities and how they are marketed, according to the people, who asked not to be identified because they weren’t authorized to speak publicly.
ETNs are a type of bank debt traded on exchanges that use derivatives to wager on everything from gold and stocks to volatility indexes.
The regulator has been targeting the $22.7 billion ETN market since at least last year when Amy Starr, head of the SEC’s capital markets trends office in Washington, said in a speech at a December industry conference that disclosures may not be easy for investors to understand. Kevin Callahan, a spokesman for the SEC in Washington, declined to comment.
Regulators are asking banks for details both technical and broad, one of the people said. While one question focuses on how the debentures trade relative to their net asset values, another asked if notes that use the word “shares” in their names could be misleading investors, the person said. They also asked why some fees, like those for hedging, are separate from others, such as the cost to track an index.
Structured Notes
Starr’s office asked banks in April 2012 to boost their disclosures for structured notes, which aren’t traded on exchanges, including their own estimates for the securities’ market value at the time of sale. The figures, which typically are now included on the front page of a prospectus, show that issuers value most securities between 96 cents and 98 cents on the dollar, Bloomberg data show.
While the 2012 letter was first published on the regulator’s website, the questions on ETNs were sent through private correspondence.
The Financial Industry Regulatory Authority warned investors in a July 2012 letter that an ETN’s indicative price, which is calculated by the issuer, could differ “sometimes significantly” from the market value.
The notice came after Credit Suisse Group AG stopped issuing shares of an ETN tied to the Chicago Board Options Exchange Volatility Index, or VIX, which trades under the ticker TVIX. It later sold at a premium of as much as 89 percent before losing more than 50 percent of its value over two days in March 2012.