Reuters reports today that the Financial Industry Regulatory Authority is taking a close look at exchange-traded notes, the booming investment option that has suddenly gotten everyone’s attention. The self-regulatory organization launched its probe after the Credit Suisse-managed VelocityShares Daily 2x VIX Short-Term ETN lost half its value in two days earlier this month. Massachusetts' top securities regulator, William Galvin, has also written to Credit Suisse asking questions about the VelocityShares volatility ETN, Reuters said. (A Credit Suisse spokeswoman reportedly said the firm "is cooperating with regulatory authorities.")

The growing popularity of ETNs has raised concerns among regulators that retail clients, and even advisers, may be buying the notes without fully understanding them. Hmm….a complex financial instrument becomes the flavor of the month, attracts a range of investors who may or may not understand the risks it entails and how it operates, then problems arise whereupon these investors lose a ton of money. Sounds familiar? There are no accusations of wrongdoing by anyone involved in the sector, but it’s worth noting that FINRA has been looking at a range of complex instruments in sweeps and as a focus of examinations (Complianceintel.com, 1/23). The SRO also has a new suitability rule that goes into effect July 9 (Complianceintel.com, 1/12). With that deadline looming, chief compliance officers are already looking at how their firms sell to clients, but the new ETN focus should only increase the urgency and intensity of this work. No one wants history to repeat itself.