Canadian regulators are worried that hedge fund-linked principal protected notes (PPNs) are being sold to investors who do not fully understand the associated risks. We guessed as much back in September when we published a feature on the subject in the magazine (click here to read the article). The Canadian Securities Administrators (CSA) – an umbrella organisation for Canada's provincial securities regulators – says it will continue to investigate, but I have to admit I’m confused.
The CSA says it officially views PPNs linked to hedge funds as an “area of concern.” In fact “registrants selling PPNs may not be meeting their know your client (KYC) and suitability obligations” according to CSA Staff Notice 81-316 Hedge Funds, a sample-based review of hedge funds in Canada. If this is the case why is nobody acting? If issuers really are ignoring KYC rules then action is urgently needed now.
On the one hand CSA says it is concerned and hints at new rules; on the other hand it has failed to act after almost six months of ‘consultations.’
A few of my contacts have openly laughed at what they call “empty threats of tighter regulation.” The CSA concerns and sporadic papers are simply a reaction to the Portus scandal which occurred almost two years ago (click here for an article on the Portus debacle), they say. PPNs are selling well and there have been no investor complaints, they add.
Do you think the CSA will actually act on its concerns? Have other regulators examined the marketing of hedge fund-linked products for as long as the CSA? Let me know…
Comments (2)
As you say Portus sent shockwaves through the Canadian market, but two years on few investors are worried.
Hedge funds are much more accessible at the retail level here than in the US for example. And rightfully so. As long as explanations are clear - which i believe they are - why are hedge fund linked PPNs any different to commodity linked products?
After all, does the average retail investor truly understand the economics of oil any better than he or she understands the risks of hedge funds?
I don't imagine the rules will change. Issuers already take pains to make sure they adhere to KYC rules and suggestions they don't are off the mark.
Posted by Josh A | January 18, 2007 11:19 AM
Posted on January 18, 2007 11:19
It's about time the industry took matters into their own hands. Other markets, such as Finland, have successfully proposed 'self regulation' to regulators...upping disclosure to investors etc etc. This would probably allay any CSA concerns.
Posted by GS | January 18, 2007 12:06 PM
Posted on January 18, 2007 12:06