Canadian regulators may step up regulatory requirements for structured investment notes after voicing concerns they are being sold without adequate disclosure or explanation. The Canadian market-linked business was valued at USD18.6 billion last year, according to Investor Economics, and is regarded as more sophisticated than its U.S. equivalent.
The move is expected after the Canadian Securities Administrators issued a notice highlighting its concerns. The CSA co-ordinates regulation across Canada's provinces, led by the Ontario Securities Commission, home to Canada's financial services industry. And while the warning is directed at issuers of complex investment notes in Canada, it may also affect U.S. and European dealers that use local distributors to sell into the lucrative market.
Increasing disclosure means extra legal costs for dealers writing prospectuses as well as the cost of educating the whole sales chain. While many firms may already have disclosure procedures in place, increased regulator scrutiny extends the time taken to launch a product.
In the July 7 notice, the CSA announced its intention to consult with the industry on principal-protected notes before deciding what additional regulation may be necessary. The CSA did not respond to messages by press time and officials at the OSC, the country's lead regulator, declined comment on the precise timing of the consultation period. Katherine Darras, assistant general counsel at the International Swaps and Derivatives Association, said it is talking to members about the notice.
The CSA's main concern seems to center on dealers applying regulatory exemptions designed for guaranteed debt to some structured notes, meaning the issuer does not have to provide a detailed prospectus for the note. The CSA also highlights concern the guaranteed debt exemptions are being used to distribute principal-protected hedge funds and funds of funds to retail investors. It notes that investors currently may not be fully aware of the fees, liquidity, or detail of how a structured product's payout is structured.
The notice is a particular blow to hedge fund-linked products, noted one Canadian structured salesman. After two hedge fund-related financial crises in one year, there were some signs the market was slowly recovering. "But there's only so much of a beating you can take," he said, adding, "After a while you just want to move."
Jim McGovern, chairman of Canada's Alternative Investment Management Association, said AIMA is looking to work with the CSA on its concerns and is still hopeful the Canadian securities regulators will eventually settle on a way for allowing sales of hedge fund-linked investment products more widely, but there is no clear time frame for this.
