Sale of Principal Protected Notes by Approved Persons of IIROC Dealer Members

GN-2500-21-003
Type: Rules Notice> Guidance Note
Rule connection:
IIROC Rules
Distribute internally to:
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Effective Date: December 31, 2021

  1. Background and purpose of Guidance

IIROC is issuing this Guidance Note to set out our expectations relating to the distribution of PPNs by IIROC registered individuals.

On August 30, 2012, the Canadian Securities Administrators, except the securities regulator in Quebec (CSA) issued CSA Multilateral Staff Notice 46-306, Third Update on Principal Protected Notes (CSA Notice). The CSA Notice confirms the view of the applicable CSA jurisdictions, namely that compliance with the “know your client” and suitability obligations (Obligations) is a critical aspect of investor protection and should apply to sales by registrants of principal protected notes 1 (PPNs).

The CSA Notice goes on to discuss their understanding that PPNs that are not Specified PPNs2 are generally distributed through registered dealers, which would include IIROC Dealer Members. The CSA Notice also sets out their expectation that banks or other federal or provincial deposit-taking institutions that distribute PPNs that are not Specified PPNs will do so only through registered dealers in order to ensure the application of the usual know your client and suitability obligations.

The effect of the CSA Notice is to:

  • continue to permit PPNs with a term of five years or less (Specified PPNs) to be sold by representatives of financial institutions, without the application of the SRO’s know your client and suitability obligations; and
  • to require that PPNs that are not Specified PPNs be sold only through registered dealers.

The recognizing regulators have asked the SROs to take appropriate actions to clarify the applicability of these know your client and suitability obligations to all dealings in PPNs by SRO-registered representatives.

  1. Relevant IIROC Dealer Member Rules, PPN distribution practices and IIROC expectations

Section 2554 of the IIROC Rules permits Registered Representatives and Investment Representatives to engage in another gainful occupation, provided certain conditions set out within the rule are met. The dual employment of Registered Representatives and Investment Representatives at investment dealers and affiliated financial institutions is permitted. In general, IIROC and securities regulators in Canada have accepted this practice, provided that the dual employment arrangement:

  • could create client confusion as to which entity the client is dealing with (i.e. the financial institution or the IIROC dealer), and
  • would result in the application of the know your client and suitability protections that is entirely dependent on the distribution channel.

As such, and consistent with section 2554 governing outside employment, it is IIROC’s view that all sales of PPNs, including Specified PPNs, by an IIROC registered individual must be transacted solely in their capacity as an employee or agent of the Dealer Member.

IIROC expects all IIROC Dealer Members to have policies and procedures in place to give effect to the foregoing and for there to be adequate supervision and compliance oversight of this activity to ensure that the Dealer Member’s know your client and suitability obligations to clients are complied with.

  1. Applicable Rules

IIROC Rules this Guidance Note relates to:

  • Rule 2500.
  1. Previous Guidance Note

This Guidance Note replaces Notice 12-0384 – Guidance Notice – Sale of principal protected notes by Approved Persons of IIROC Dealer Members.  

  1. Related Documents

This Guidance Note was published under Notice 21-0190 - IIROC Rules, Form 1 and Guidance.

  • 1In CSA Multilateral Staff Notice 46-306 and for the purposes of this Guidance Note a principal protected note (“PPN”) is an investment product that offers an investor potential returns based on the performance of an underlying investment and a guarantee that the investor will receive, on maturity of the PPN, not less than the principal amount invested. PPNs include, but are not limited to, instruments commonly described as market-linked or index-linked GICs and linked notes.
  • 2In CSA Multilateral Staff Notice 46-306 and for the purposes of this Guidance Note a specified principal protected note (“Specified PPN”) is a PPN with the following features: (i) a term to maturity of five years or less; and (ii) eligibility for coverage by the Canada Deposit Insurance Corporation (or a provincial equivalent).