The Personal Investment Authority, which regulates retail financial services, is looking at the new GT High Yield Fund's marketing literature and is likely to tell GT that it needs to make clearer the risks to investors' capital.
The PIA has asked GT for comments and the outcome is expected to be revised marketing material. The company could have to contact investors who have already signed up, to spell out the risks more fully.
The PIA's move will be embarrassing for a unit trust industry hoping that new bond-based PEPs of this kind will claw more building society savers from deposit accounts.
Philip Warland, director-general of Autif, the unit trust company trade association, said: "If companies don't get their act together [on marketing material] they invite more prescriptive regulations."
The GT fund, the first of its kind, is being heavily promoted. Offering income of 8.5 per cent, it has attracted £4m from nearly 1,000 investors since launch last month.
It follows the Budget announcement that corporate bonds will, from April, qualify fully for PEPs. Income and capital growth on investments held in PEPs are tax-free. By offering high yields from a bond portfolio in a tax-free PEP wrapper, companies hope to appeal to lower-risk investors and those living off their investments, such as pensioners. Analysts forecast sales of £2bn or more in the first year of operation.
But, unlike building society accounts, bond-based PEPs do not guarantee capital security, and many - like GT - are expected to take management charges out of the fund's capital, rather than income. This boosts the yield but puts a drag on capital performance.
The PIA has received complaints that GT's marketing material does not make sufficiently clear the danger of investors' capital being eroded or of capital growth being restrained.
A brochure for the GT fund highlights "the potential for long-term capital gains" and "a compelling alternative to bank and building society deposits for longer-term investors". Only in smaller type and on the back page does it say management charges might restrain capital growth or reduce capital.
"They should make it clear and not in the small print," said one regulator. "It's a question of what is the price of the income offered."
M&G, Britain's biggest unit trust provider, said this week that, for bond funds, "charging to capital is almost ensuring capital erosion".
Martin Harrison, of GT, defended the style of the fund's risk warnings, saying those about charging to capital appeared under the heading "Important Information" in the brochure.