The Investment Dealers Association of Canada (IDA) today released “Due Diligence Guide on Principal-protected Notes”. The Ggide will assist investment dealers in meeting their know-your-product requirements as they relate to principal-protected notes, a market which has experienced rapid growth in Canada.

The guide will assist investment dealers, their registered representatives and investors to evaluate the merits and risks of a principal-protected note. The guide addresses due diligence questions such as evaluating the issuer and structurer of a principal-protected note, its product features and liquidity, fees and expenses and investor risks. Appendix II provides a comprehensive due diligence questionnaire.

The guide was developed to implement a recommendation made in “Regulatory Analysis of Hedge Funds”, a special study produced by the IDA in May, 2005 which had found that principal-protected notes at that time accounted for 50% of the $14.1 billion of hedge fund assets in Canada.

As securities, hedge funds and principal-protected notes fall within the ambit of IDA regulations as to suitability. Because an important component of suitability is due diligence, the study called on the IDA to issue guidelines to help firms and registrants make suitable recommendations to clients regarding these highly complex products.

The guide was prepared for the IDA by André Fok Kam and builds partly on the research work he performed for the IDA-sponsored 2006 Task Force to Modernize Securities Legislation in Canada.

“The guide will help IDA member firms and their registrants make suitable recommendations to their clients regarding these highly complex products”, said IDA senior vp, member regulation, Paul Bourque.

The study is available on the IDA website at www.ida.ca.