As the Securities and Exchange Commission takes a closer look at complex securities, exchange traded notes could fall under the microscope next.
Amy Starr, head of the Securities and Exchange Commission’s capital markets trends office in Washington, remarked that lenders may not be adequately explaining how they value ETNs, reports Kevin Dugan for Bloomberg.
ETNs are a type of debt security issued by an underwriting bank and use derivatives to track a range of assets. An issuing financial institution promises to pay ETN investors a return on a benchmark index before the ETN matures. [What Are ETNs?]
Colbrin Wright, assistant professor at Brigham Young University, argues that disclosures for the securities should be simplified as the indices they are linked to become more complex.
“When you’re talking about disclosure regulation, you have to be thinking about the unsophisticated investor,” Wright said in the article. “It’s simply a matter of making sure that investors go in with their eyes wide open.”
Back in 2012, during the height of market volatility, the Financial Industry Regulatory Authority warned investors that an ETN’s indicative price could differ “sometimes significantly” from the market value. [TVIX Washout Raises Questions Over ETNs]
According to Bloomberg data, ETN assets rose to $22.1 billion this year, up 37%. There are 208 U.S.-listed ETNs on the market.
For more information on exchange traded notes, visit our ETNs category.