Principal Protected Notes: Your Rights And Responsibilities
A principal protected note (PPN) is a type of investment for which:
- the return is linked to another reference point, such as a stock market index or the exchange rate between two currencies.
- the money you receive at the end of its term or before is guaranteed to be at least the amount you pay to buy it.
Specific measures protect consumers who buy a principal protected note at a federally regulated financial institutions or from one of its agents (who is authorized to sell that institution’s financial products).
Throughout this section, the term “financial institution” is used to refer to a federally regulated financial institution
What financial institutions must tell you before you invest in a principal protected note
A federally regulated financial institution, or any agent selling its products, must provide the following information to you, orally and in writing, (on paper or electronically, if you agree to receive information in this format), at least two days before entering into an agreement:
- the term of the note, how and when the amount that you invest (the principal) is to be repaid, and when 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 to do this
- 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
- any other information that could reasonably be expected to affect your decision to purchase the note
The information must be provided 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 websites offering products and services in Canada. Information must also be sent, in writing, to any person who requests it.
When a principal protected note (PPN) is sold in person
The disclosure listed above can be provided any time before you enter into an agreement to purchase a principal protected note IF you (the investor) and the financial institution expressly consent to it. The disclosure still has to happen before you enter the agreement.
When a PPN is sold electronically
When a financial institution sells a PPN electronically, there are two possible scenarios for disclosure:
- Some, but not all, financial institutions have made a public commitment that they will give you (the investor) at least two days to cancel a purchase after the date the purchase was made or the date you received the disclosure statement explaining the investment.
If a financial institution has made this public commitment and sells a PPN electronically, it does not have to provide the information listed above orally. However, the financial institution must provide the information listed above in writing before it sells you (the investor) the PPN, although it may do so less than two days before the sale. The financial institution must also provide the telephone number of a person who is knowledgeable about the terms and conditions of the PPN before, or without delay after, selling the PPN.
- If the financial institution selling a PPN has not made the public commitment described above, it must provide the disclosure in writing as well as the phone number of a person who is knowledgeable about the terms and conditions of the PPN at least two days before selling you (the investor) the PPN. The financial institution does not have to provide the disclosure orally.
When a PPN is sold over the telephone
If a financial institution has made the public commitment noted in the case of electronic selling, the financial institution must provide the disclosure listed above orally before selling you (the investor) the PPN. The financial institution must also provide the disclosure listed above in writing before, or without delay after, selling you (the investor) the PPN.
What financial institutions must tell you once you have invested in a principal protected note
- Information on the value of the PPN 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 PPN that might 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 the changes in advance, it must do so as soon as possible after making the changes.
- If you request to redeem a PPN before the maturity date, a financial institution must inform you of:
- the value of the note
- the amount of any penalty or charge
- the net amount that you would receive
- when and how the value of the note will be calculated.
- If a PPN ceases to be linked to an index or reference point that would have been used to determine the interest payable, and as a result no interest will be paid, the financial institution must disclose that fact to you (the investor) without delay.
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.
What you should do if you feel your rights are not being respected
If you feel that a federally regulated financial institution is not respecting your rights, contact FCAC.