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SEC Scrutinizing Exchange Traded Notes is reporting that the Office of Capital Markets Trends of the Securities and Exchange Commission (SEC) is looking into the details of exchange traded notes (ETNs). The office, headed by Amy Starr, is looking into the fees and the disclosure of risks and formulas used to determine ETN indicative values according to statements made by Starr at the Structured Products conference in Washington, DC on December 10.

ETNs have been a frequent subject on the blog and regulators have issued warnings over these instruments in the past. ETNs are unsecured debt usually issued by banks and other financial institutions. ETNs report indicative values on a daily basis based on a calculation and these values may deviate from the market value of the notes. ETNs differ from exchange-traded funds (ETFs) in important ways, which we discuss in our introduction to ETFspost. Issuers use creations and redemptions to keep the indicative value in line with the market value, but when these mechanism are halted by the issuer large premiums or discounts can surface--see our discussion of TVIX for an example.

According to Starr, investors need "to know exactly what the investment is, what it's doing and how it's doing". We couldn't agree more with the SEC. Investors need to have a clear idea of what they're investing in and, if they don't understand it, then they should probably not be investing. We're interested in seeing what the SEC comes up with for additional disclosure guidance for ETNs.