Principal Protected Notes: know your rights

A principal protected note (PPN) is a type of financial instrument that is issued in Canada by an institution to an investor and provides that:

• the money an investor earns links to an index or reference point. This could be a stock market index or the exchange rate between 2 currencies
• there’s a guarantee that the money (the principal) the investor gets back will be at least the amount invested

Your right to information before you buy a PPN

Federally regulated financial institutions must disclose certain information to you before entering into an agreement with you. They must do so verbally and in writing (paper or electronically, if you agree to receive information this way).

They must disclose the information at least 2 days before entering into the agreement with you.

They’ll disclose information such as:

• the term
• how and when they’ll repay the amount you invested (the principal)
• when they’ll pay the interest, if any
• any charges that apply and their impact on the interest they would pay
• how they calculate interest and any limitations concerning the interest payable
• any risks, including the risk that interest wouldn’t accumulate, if that’s the case
• the difference between PPNs and fixed rate investments in the levels of risk and return
• the circumstances in which case a PPN could be an appropriate investment
• the fact that the deposit for the PPN is not insured by the Canada Deposit Insurance Corporation (CDIC), if applicable
• if you can redeem the PPN before the end of the term. If so, they must tell you that you may receive less money than the amount you invested
• the terms and conditions of any secondary market (where they can trade your investments) they offer
• if you can cancel the purchase and if so, how to do it
• if the institution may makes changes to the PPN and, if so, under which circumstances
• if the way the PPN is structured or administered may place the institution in a conflict of interest
• any other information that could affect your decision to buy it

They must provide the information in a manner, and using language that is clear, simple, and not misleading.

They must disclose the information by making it available:

• at each of their branches in Canada and points of service where they offer PPNs (only banks)
• on each of their websites through which they offer PPNs in Canada
• in writing, upon request

Exceptions to information if you buy a PPN in person

If a federally regulated financial institution other than a bank issued your PPN they can provide the information listed above any time before you enter into an agreement to purchase a PPN. That’s if you and the institution expressly consented to it.

Exceptions to information if buy a PPN electronically

When a federally regulated financial institution enters into an agreement for a PPN electronically, there are 2 scenarios for providing information:

1. Some institutions have made a public commitment to give you 2 or more days to cancel the purchase. This may be after the date of purchase or after you received the disclosure statement that explains the investment.

In this case, they don’t have to provide the information verbally, only in writing. They may do so anytime before entering into the agreement.

They must provide the telephone number of a person who is knowledgeable about the terms and conditions. This is before entering into the agreement, or without delay after.

2. Some institutions didn’t make this public commitment. They don’t have to provide the information verbally either, only in writing. They must do so at least 2 days before selling the PPN, depending on the institution you’re dealing with. 

They must also provide the telephone number of a person who is knowledgeable about the terms and conditions

Exceptions to information in you buy a PPN over the phone

Your institution may have made the public commitment noted above. If so, they must disclose the information listed above to you verbally before entering into an agreement for a PPN. They must disclose it to you in writing without delay after entering into the agreement.

Your right to information after you enter into an agreement for a PPN

Once you’ve entered into an agreement for a PPN with a federally regulated financial institution, they must disclose to you:

• on the day specified by you:
  • information on its value
  • how that value relates to the interest they would pay under the note
• one day before the day you specified:
  • the last measure of the index or reference point used to calculate your interest
  • how it relates to the interest payable
• any change to a term or condition of a PPN that may impact the interest they would pay. They must do so before making the change and disclose that information to you in writing. If they can’t provide notice in advance, they must do so as soon as possible after making the change
• the following if you ask them to redeem it before its end date:
  • its value on the last business day before you make the request, or the value based on the last available measure of the index or reference point to determine its value
  • the amount of any penalty or charge
  • the net amount that you would receive for the redemption after deducting any penalties or charges
  • when and how they’ll calculate its value and the fact that its value may differ from the day you asked them to buy it back
• if it stops being linked to a reference point they used to determine the interest payable, and as a result, you won’t get any interest

Information about advertising PPNs

A federally regulated financial institution that advertises PPNs must disclose to the public how it can get information about it.

If an advertisement refers to features of the product or interest payable under it, the institution must disclose:

• how they calculate the interest, and any limits on the interest payable
• the fact that the investment isn’t eligible to be insured by the CDIC, if that’s the case
• if an advertisement gives an example of a situation where interest would be payable, an example where no interest would be payable
• if an advertisement gives an example of a situation where interest would be payable, in addition to any minimum interest that is guaranteed, an example of another where only the minimum interest would be payable
• if it uses past market performance in an advertisement for a principal protected note:
  • a fair representation of that performance
  • if hypothetical examples are used, the assumptions underlying those examples must be realistic and disclosed in the advertisement
  • that past market performance is not an indicator of future market performance

Learn more about other types of investment and the basics of investing.

When these rights apply to you

These rights apply when you’re dealing with a federally regulated financial institution like a bank or federal credit union.

Find out if your financial institution is federally regulated.

Learn more about how your banking rights are protected.

Related links

• Canadian Foundation for Advancement of Investor Rights