Canadian securities regulators are demanding that principal protected notes (PPNs) be sold through registered dealers, ensuring they are subject to know-your-client (KYC) and suitability rules.
The Canadian Securities Administrators (CSA) published a new staff notice on Thursday, following up on their ongoing efforts to oversee the sales of PPNs.
The CSA notes that the securities industry’s self-regulatory organizations (SROs) have confirmed that their KYC and suitability rules apply to all dealings in PPNs by reps that are transacted through their member firms. However, if reps deal in PPNs outside of their firms, the SROs’ rules may not apply.
So, the notice says that the Investment Industry Regulatory Organization of Canada (IIROC) and the Mutual Fund Dealers Association of Canada (MFDA) will soon issue guidance indicating that their reps’ sales of PPNs must be carried out through their dealer.
The CSA’s notice also sets out its expectation that banks and other deposit-taking institutions will use registered dealers (and registered reps acting on behalf of those dealers) to distribute most of the PPNs they issue, so that KYC and suitability obligations apply to those sales, too. The exception includes notes that they distribute directly, which generally includes notes with a maturity of five years or less, that are eligible for coverage by the Canada Deposit Insurance Corp. (or a provincial equivalent).
“We will continue to monitor the distribution of PPNs. If we become aware that the sales practices of any deposit-taking institution do not accord with our above-noted expectation, we will take appropriate action,” the notice says.