Your Rights and Responsibilities: Principal protected notes

Principal protected notes

• What financial institutions must tell you before you invest in a principal protected note
• Buying a principal protected note by electronic means and telephone
• Additional disclosures
• Advertising of principal protected notes

Specific measures protect consumers who buy a principal protected note at a bank, a trust and loan company, or a retail association that operates under federal law, or from one of its agents (who is authorized to sell that institution's financial products). These measures apply only to federally regulated banks, trust and loan companies, and retail associations. The information in this section does not necessarily concern other financial institutions.

What financial institutions must tell you before you invest in a principal protected note

Banks, trust and loan companies, and retail associations that operate under federal law, or any agent selling their products, must provide the following information to you, orally and in writing, at least two days before entering into an agreement:

• the term of the note, and how and when the amount that you invest (the “principal”) is to be repaid and the interest, if any, is to be paid;
  
  
• any charges and their impact on the interest payable;
  
  
• how interest is calculated, and any limitations concerning the interest payable;
  
  
• any risks associated with the note, including (if applicable) the risk that no interest will be paid;
  
  
• the distinction between principal protected notes and fixed-rate investments with respect to the levels of risk and return;
  
  
• the circumstances in which a principal protected note could be an appropriate investment;
  
  
• if the investment is not eligible for deposit insurance coverage by the Canada Deposit Insurance Corporation, the fact that it is not eligible;
  
  
• whether the note may be redeemed before the end of the term and, if so, the fact that you may receive less money than the amount you invest;
  
  
• the terms and conditions of any secondary market offered by the institution;
  
  
• whether you may cancel the purchase of the note and, if so, how the purchase may be cancelled;
  
  
• whether the institution is allowed to amend the note and, if so, in what circumstances;
  
  
• whether the manner in which the note is structured or administered may place the institution in a conflict of interest; and
  
  
• any other information that could reasonably be expected to affect your decision to purchase the note.
  
  

Any disclosure must be made in language that is clear and simple, and in a manner that is not misleading. Detailed information about the note must be disclosed by the financial institution on its Web sites offering products and services. Information must also be sent to any person who requests it.

Buying a principal protected note by electronic means and telephone

In the case of a principal protected note purchased by electronic means, the financial institution is not required to provide oral disclosure. However, in addition to the information listed in the previous section, it must provide the telephone number of a person who is knowledgeable about the terms and conditions of the note.

In the case of a principal protected note purchased over the telephone, the financial institution must provide both oral and written disclosure before or without delay after entering into the agreement.

As part of a public commitment, some (but not all) banks and trust and loan companies will give the investor at least two days to cancel a purchase after receiving the disclosure statement explaining the investment. This period starts from whichever is earlier – the time the disclosure statement was actually received by the investor or the time it is deemed to have been received. If the disclosure documents are sent by mail, the investor is deemed to have received them on the fifth day after they were mailed, and the two-day period starts from that date.

Additional disclosures

Information on the value of the note and how that value is related to the interest payable under the note must be disclosed without delay to an investor who requests it.

Before making any changes to a principal protected note that may have an impact on the interest payable under the note, the financial institution must send the investor a notice in writing. If it is not possible for the institution to provide notification of these changes in advance, it must do so as soon as possible after making the changes.

If you request to redeem or purchase a principal protected note before its maturity, an institution must provide you with the value of the note, the amount of any penalty or charge, the net amount that you would receive, and when and how the value of the note will be calculated.

Advertising of principal protected notes

• Any advertisement by an institution about a principal protected note must disclose how the public may obtain information on the note.
  
  
• Any advertisement that refers to features or interest payable on the note must disclose the following:
  
  
  • It must explain the manner in which interest is to be calculated, and any limitations concerning the interest payable.
    
    
  • If the advertisement gives an example of a situation in which interest would be paid, it must also give an example of a situation in which no interest would be paid.
    
    
  • If the advertisement gives an example of a situation in which additional interest would be paid, it must also give an example of a situation in which only the minimum interest would be paid.
    
    
  • If the investment is not eligible for deposit insurance coverage by the Canada Deposit Insurance Corporation, the advertisement must state that it is not eligible.
    
    
  • The advertisement must explain that past market performance is not an indicator of future market performance.
    
    
  • It must explain how to obtain information about the note.