The SEC Office of Capital Markets Trends has questioned whether short sales of exchange-traded notes ("ETNs") by broker-dealers and the closing out of short positions by borrowing ETNs from the issuer or its affiliates, as disclosed in the ETN prospectus, were registered under Section 5 of the Securities Act of 1933 (the "Securities Act"). This raises an interesting question as to whether the principles established in the registered hedging letter could be extended to cover short sales transaction in ETNs by dealers that are not affiliates of the ETN issuer. Issuers of ETNs should carefully review the plan of distribution sections of their ETN prospectuses to ensure that there is no inference that an affiliated broker-dealer is executing short sale transactions in the ETNs.

Read our article in Futures and Derivatives Law Report.