On August 31, the Investment Industry Regulatory Organization of Canada (IIROC) released findings and recommendations deriving from its 2009 compliance review of principal protected notes (PPNs). The review, based on a representative sample of dealers, considered, among other things, the adequacy of the selling firm's knowledge of the product and the firm's training for sales personnel and whether appropriate point of sale disclosure was provided to investors.
Ultimately, IIROC made a number of findings and recommendations regarding the obligations of dealers to their clients with respect to PPNs, including the following:
- The dissemination of required disclosure to clients was inconsistent among members. On this point, IIROC reminded dealers that they are required to have a "new product due diligence" policy and are required to implement procedures to ensure that any clients purchasing a PPN receive the required appropriate disclosure.
- The majority of dealers appeared to rely on product issuers to distribute the monetization notices directly to unit holders without the benefit of a contractual agreement requiring issuers to distribute on the dealer's behalf. IIROC stated that all dealers should review their contractual agreements with issuers to ensure that responsibility for the distribution of notices is clearly delineated.
- Most dealer marketing material was inadequate and missed key information. On this point, IIROC reminded dealers of their obligations regarding sales literature under IIROC Rule 29.7(1) regarding the fair presentation of potential risks.
- IIROC found that some dealers' registered representatives did not understand all the features of the PPN products they were recommending to clients. In response, IIROC stated that dealers must take a proactive approach to reviewing and monitoring products, which should include a written policy for the due diligence of new products.
- IIROC found the PPN products to be suitable for the accounts tested.
- There was no uniformity in the level of training to registered representatives regarding PPNs. IIROC stated that dealers must ensure their registered representatives and sales staff are educated and understand the important features of products being marketed to clients.
- IIROC found deficiencies in the information included on monthly statements, which should be clear and informative.
See IIROC Notice 10-0233.