The Canadian Securities Administrators has issued a staff notice concerning linked note prospectuses, detailing its disclosure concerns, and the procedure it is following to review these prospectuses.

The notice provides guidance to issuers that intend to qualify linked notes for distribution by way of a shelf prospectus. It includes: regulators’ concerns about the quality of disclosure; things an issuer of linked notes should consider in deciding how to comply with the requirement for a prospectus to provide full, true and plain disclosure; notice to issuers of linked notes that, before receipting a base shelf prospectus that qualifies linked notes, they will ask the issuer to file an undertaking to pre-clear prospectus supplements; and an explanation of the pre-clearance process the CSA will follow.

The substantive details of linked note offerings are not typically contained in the base shelf prospectus, often those details are set out in a lengthy prospectus supplement, which isn’t reviewed until after the distribution has occurred.

“Since summer 2006, we have asked issuers filing base shelf prospectuses to file interim undertakings to pre-clear certain prospectus supplements pertaining to linked notes before exercising our discretion to receipt the base shelf prospectus. As a result, we have reviewed and pre-cleared most of the prospectus supplements qualifying linked note distributions since that time,” regulators say. “In many of these cases, our review resulted in the inclusion of additional disclosure that we think was necessary for the shelf prospectus, the prospectus supplement and documents incorporated by reference to comply with the full, true and plain disclosure requirement.”

Among other things, the CSA stresses that the full, true and plain disclosure requirement requires a clear and full explanation of fees that an investor will be paying. “An issuer should clearly disclose any direct or indirect fees, expenses, costs or other charges that may be imposed on investors in linked notes. This would include any charges embedded in the formula used to determine payment at maturity, or in the offering price of the linked notes,” it says.

“Issuers should consider what format the disclosure could take that would make the information easy to understand. For example, including all applicable fees, charges and expenses an investor would pay in a single table might be a useful format for this disclosure. This would allow investors to more easily determine the total cost of investing in a linked note without having to refer to various sections of the prospectus supplement,” the notice adds.