On June 11, 2008, the federal government published the new Principal Protected Notes Regulations (the Regulations), which are intended to come into force on July 1, 2008.
The Regulations were introduced in response to the growing variety and complexity of principal protected notes currently being offered by financial institutions and build on the existing Index-linked Deposits Interest Disclosure Regulations, which will be repealed with the adoption of the new Regulations. The new requirements seek to ensure that investors in PPNs are adequately informed by improving the manner, content and timing of disclosure for these types of investments.
The Regulatory Impact Analysis Statement, which accompanies but does not form part of the Regulations, states that the new requirements are intended to implement a "more principles-based approach to regulation, which focuses on outcomes rather than prescriptive check-lists." To that end, section 2 of the Regulations sets out the underlying principle of the new scheme, requiring disclosure be made in language that is "clear and simple and in a manner that is not misleading." Specific requirements, however, are also prescribed. Section 3 specifies the information that must be disclosed to investors, which includes, inter alia, information regarding the term of the note, how interest is accrued and limitations in respect of interest payable, any risks associated with the note, the distinction between PPNs and fixed-rate investments with respect to levels of risk and return and any other information that could be reasonably expected to affect an investor's purchasing decision. Institutions must provide the information orally and in writing at least two days prior to selling the notes to an investor, however, exceptions are available if the agreement for the issuance of PPNs is completed in person or electronically. The Regulations also require that information be available on the institution's website and in written format on request.
The value of PPNs on any specific day must also be disclosed on request, and such information must include the net asset value of the note or the last available measure of the index or reference point on which the interest is determined, as well as information with respect to how the value of the note or relevant measure is related to the interest payable on the note. The Regulations also specify the information to be disclosed to investors prior to early redemption and regulate the marketing of PPNs by requiring certain information be included in any advertisements.
As mentioned above, the Regulations are expected to come into force on July 1, 2008.
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