The issuer call provisions in many exchange traded notes (ETN) work like this: Once the call notice is issued, the "valuation date" for the ETN will be next business day, and the ETNs will be redeemed on the third business day after the valuation date. All well and good, and all will be fine if the person who drafted the underlying documents for the ETN took into account the indenture provisions relating to redemptions. If not, there may be a few obstacles to overcome before the ETN issuer may send out its call notice.
Indenture Redemption Provisions
The minimum standard notice timing under a typical open-ended indenture is 30 days from the date of the call notice to the redemption of the notes. Consequently, prior to issuing redeemable notes with a shorter time period requirement, such as ETNs, attention should be given to overriding this default provision.6
If the note is part of an existing series of notes under the indenture, such as a series of medium-term notes, then the issuer will be relying on its existing board resolutions, rather than having a special meeting to issue the redeemable note. Under a typical indenture, the place to specify the terms of the note and to clarify the required redemption timing would be in an officers' certificate. When drafting that certificate, one should avoid simply defaulting to the indenture redemption provisions by including a statement such as "the notes are subject to redemption as provided in Article [ ] of the indenture." That type of drafting may immediately set up a conflict between the indenture redemption timing provisions and any shorter timing requirement included in the note itself. Most officers' certificates will have a "savings clause," under which, in the event of a conflict between the terms of the note as set forth in the prospectus and the terms of the officers' certificate, the prospectus will control. The neater solution is to match the redemption timing requirements in the officers' certificate to those in the note (or prospectus), thus avoiding reliance on the savings clause.
Under the redemption provisions in the indenture, the trustee will require receipt of either the board resolutions authorizing the redemption or the officers' certificate governing the terms of the note. If the note is listed, the relevant exchange will also require a copy of the board resolutions. With the board resolutions in hand, the trustee can determine whether the officers' certificate was properly executed by authorized officers under the board resolutions, and the exchange will be able to determine if the redemption has been duly authorized.
Most board resolutions for a shelf registration statement covering a continuous offering program under which many redeemable notes are issued are drafted very broadly, and authorize designated officers to take any actions deemed necessary or appropriate with respect to the securities. When preparing board resolutions, care should be taken not to limit the authority to actions in connection with the offer, issuance, and sale of the securities, as a trustee or the relevant exchange may question where a redemption fits into that formulation. That is, a redemption may be considered something occurring subsequent to the "offer, issuance and sale."
Of course, the answer to that argument will be that the redemption was contemplated when the terms of the notes were approved by an authorized officer at the time of their issuance. If the trustee requests an opinion of counsel in connection with the redemption, as they are authorized to do under the indenture, there will be less trepidation on the part of the opinion-giver if the redemption concept is more clearly set out in the board resolutions. This could be accomplished by authorizing, in the board resolutions, the authorized officers to take any actions deemed necessary or appropriate with respect to, or under the terms of, the notes.