New federal regulations governing the issue of principal protected notes (PPNs), along with other regulatory efforts, address most of the concerns the Canadian Securities Administrators (CSA) have with the product, according to a CSA notice issued Friday.

Back in July 2006, the CSA published a notice and an investor watch which identified a number of its concerns about PPNs, including:

> inadequate, overly complex and inappropriate disclosure in PPN information statements and marketing materials;

> compliance with know your client and suitability obligations in connection with sales of PPNs;

> the use of PPNs as a vehicle for selling alternative investment products to retail investors; and

> referrals to purchase PPNs without a determination that the referral is in the best interests of the client.

Since then, the federal Department of Finance issued a set of new regulations that apply to PPNs issued by federally regulated financial institutions, specifying disclosure requirements. It took effect July 1, and the Financial Consumer Agency of Canada is responsible for compliance and enforcement of the new regulations.

“We have reviewed the federal PPN regulations and think that they impose significant disclosure obligations for PPNs issued by federal financial institutions,” the CSA says in the notice. “Further, in light of the market data that shows federal financial institutions issue a majority of PPNs, the disclosure required by the federal PPN regulations could assist a large proportion of PPN investors.”

Additionally, the CSA says it is discussing with the Investment Industry Regulatory Organization of Canada and the Mutual Fund Dealers Association of Canada how best to ensure that Know-Your-Client and suitability obligations apply to all dealings in PPNs by reps that belong to SRO dealers.

“The improved disclosure and sales practices that should result from the changes contemplated above substantially address the concerns associated with the sale of PPNs as a vehicle for selling alternative investment products to retail investors,” it says. Also, proposed registration reform has specific requirements relating to registrant referral arrangements.

Finally, the CSA notes that the Autorité des marchés financiers intends to establish guidelines relating to disclosure, sales and sound business practices for PPNs sold by financial institutions authorized to carry on business in Quebec. The majority of linked GICs are issued by caisses populaires based in that province.