Under measures proposed in Monday’s federal budget, many principal-protected notes will no longer be able to slip through the regulatory cracks.

The government announced plans to introduce new disclosure requirements for PPNs that are sponsored by federally regulated financial institutions. A Finance department official indicated that the regulations, which will only apply to FRFIs issuing PPNs, will be principles-based, and that they will include both primary and ongoing disclosure requirements.

The budget document indicates that the existing disclosure requirements are detailed, rules-based requirements that no longer meet the requirements of the market as these products have grown increasingly complex. PPNs have become controversial in the past couple of years, as they have evolved into the primary vehicle used by small retail investors to gain exposure to exotic investments such as hedge funds. And because they are considered exempt securities, they have largely managed to evade the scrutiny of securities regulators.

The budget indicates that the proposed regulations are intended to “ensure that consumers are informed of the fees, returns, risks, and cancellation and redemption rights associated with principal protected notes. A principle stating that this information be clearly disclosed by qualified individuals will ensure that investors have the information they need to make more informed investment decisions.”

The budget adds that the regulations will also require ongoing disclosure to “aid investors in monitoring and tracking their investments.”

The Finance official indicated that the details of the regulations have yet to be finalized, but that the government hopes to issue the new rules for comment soon. “We want to get it done, and we want to get it done quickly, but we want to get it right,” he said.

Although the new regime should help close some of the loopholes enjoyed by PPNs to date, it will not apply to PPNs that may be issued by financial institutions that aren’t federally regulated.