Equities are the security most firms never put on a shelf. A full-service investment dealer typically lets clients buy almost any stock listed on a Canadian or US exchange, and accepts whatever clients transfer in. That can mean thousands of issuers. Nobody approves each one by name, and few people at the firm think of a common share as a "product" at all.
The Know-Your-Product rules don't carve them out. CIRO requires a dealer to assess the securities it makes available, including their "structure, features, risks, initial and ongoing costs and the impact of those costs," and requires each Approved Person to understand the same elements.[1] In the US, Reg BI's Care Obligation requires a broker-dealer to understand the risks, rewards and costs of what it recommends, whatever the security.[3][4] A common share is simple in structure, but the risk across a universe of listed issuers runs from a senior bank to a pre-revenue venture issuer trading under a dollar.
This paper sets out how a firm can meet KYP for equities without pretending to approve thousands of names one at a time. It covers the regulatory basis in Canada and the US, what to assess in a listed equity, how to tier the universe by risk, and what approval, monitoring and documentation look like when the population is defined by criteria rather than by a list.
Its scope is listed and over-the-counter common and preferred shares, including foreign shares and depositary receipts. ETFs are covered in the mutual funds and ETFs guide and private placements in the alternatives guide. Whether a particular stock suits a particular client is a separate decision and isn't covered here.
Neither jurisdiction exempts listed securities from product-level diligence. What differs is how the obligation is framed and where the extra rules for low-priced and over-the-counter shares sit.
CIRO's Rule 3301 requires a dealer to assess the securities it makes available, and Rule 3302 requires each Approved Person to take steps to understand them.[1] NI 31-103 section 13.2.1 applies equivalent obligations to other registrants.[1] None of these provisions distinguishes between a fund that is approved onto a shelf and a stock that is simply available to trade.
Joint CSA/CIRO Staff Notice 31-368 accepts that the depth of review can vary, noting that "more complex or higher risk securities may require a more detailed consideration."[2] For equities, that is the basis for a tiered approach: a lighter, criteria-based review for large, liquid senior-exchange issuers and a closer look at the names that carry more risk.
The notice is direct on this point: "Registrants must assess securities transferred into the firm or resulting from client directed trades within a reasonable time,"[2] and it doesn't accept trade size or frequency thresholds as a reason to leave them out. For equities this is the main way unreviewed names enter the firm. A client moves an account in with a handful of small-cap holdings, or asks to buy a venture issuer the firm has never looked at, and those names now need a KYP assessment.
The notice recognizes that "when investing solely in exchange-listed securities with uniform trading commissions, costs at the security level may have minimal impact."[2] That lightens the cost work for most listed shares, but doesn't remove it. Bid-ask spreads in thinly traded names, currency conversion on US and foreign shares, and depositary fees on ADRs are all costs that differ from one equity to the next.
Most of the notice's examples of significant changes are issuer events, which makes them a natural fit for equities:
The first component of Reg BI's Care Obligation requires a broker-dealer to understand the potential risks, rewards and costs associated with a recommendation.[3][4] The SEC's adviser interpretation requires a reasonable investigation into the investment, sufficient not to base advice on materially inaccurate or incomplete information.[5] For recommendations that fall outside Reg BI, FINRA Rule 2111's reasonable-basis obligation requires "a reasonable basis to believe, based on reasonable diligence, that the recommendation is suitable for at least some investors."[6]
Amendments to Exchange Act Rule 15c2-11, adopted in September 2020, require that information about an issuer and its security be current and publicly available before a broker-dealer can begin quoting it.[7] For KYP, the practical consequence is that an OTC issuer that stops publishing current information can lose public quotation. That is a significant change for any client who holds it.
The SEC's penny stock rules apply to low-priced equity securities that don't meet the exclusions in Rule 3a51-1. Before effecting a penny stock transaction, a broker-dealer must provide a standardized risk disclosure document under Rule 15g-2 and, under Rule 15g-9, approve the customer's account for penny stock transactions and obtain a written agreement to the transaction.[8] These are transaction and account requirements, but a firm can't apply them unless its product data identifies which names are penny stocks.
FINRA has warned members about ramp-and-dump schemes in small-capitalization IPOs, typically involving issuers valued at less than $100 million, and set out red flags such as coordinated orders from newly opened accounts.[9] A recently listed small issuer is exactly the kind of name a criteria-based universe can let in without a second look.
| KYP Point | Canada | United States |
|---|---|---|
| Are listed equities subject to KYP? | Yes - the rules cover every security the firm makes available | Yes - the risks, rewards and costs of any recommended security must be understood |
| Can depth vary by security? | Yes - higher-risk securities may require more detailed consideration | Diligence must be reasonable for the security and the recommendation |
| Transfers and unsolicited trades | Must be assessed within a reasonable time | Care Obligation attaches to recommendations; unsolicited trades are handled under firm policy |
| Low-priced and OTC shares | No separate penny stock regime; handled through KYP depth and firm restrictions | Rule 15c2-11 for quotation; penny stock disclosure and account approval rules |
A single equity has a simple structure. The diligence problem is the size and range of the universe, so the assessment has to be built from data that can be applied to thousands of issuers at once.
| Factor | What to Capture | Why It Matters |
|---|---|---|
| Listing venue and status | Exchange and tier, or OTC market tier; any listing deficiency or continued-listing notices | Listing standards differ sharply between senior exchanges, venture exchanges and OTC markets |
| Issuer fundamentals | Business, revenue stage, profitability, leverage, going-concern language in the audit opinion | "Operations of an issuer" and "financial ratios" are on the notice's list of significant changes |
| Liquidity | Average daily value traded, bid-ask spread, free float | Illiquid names are costly to enter and hard to exit; liquidity is a named significant change |
| Price level and volatility | Share price, historical volatility, large drawdowns | Low-priced shares carry more risk, and in the US can fall under the penny stock rules |
| Share structure | Share class and voting rights, depositary receipts, foreign issuer status, trading currency | Subordinate voting shares, ADRs and foreign listings have features a plain common share doesn't |
| Ownership and control | Insider and significant holders, controlling shareholders, recent changes in control | "Management or significant ownership of an issuer" is a named significant change |
| Credit | Issuer credit rating where one exists | The issuer's credit rating is a named significant change, and matters most for preferred shares |
| Regulatory status | Trading halts, cease trade orders, trading suspensions, OTC quotation eligibility | Determines whether the security can be traded at all |
| Costs | Commission, spread, currency conversion, depositary fees | Initial and ongoing costs and their impact are a named KYP element in Canada |
Every factor in the table can be sourced from market data, exchange notices and regulatory filings. That matters because the assessment has to run across the whole universe and be refreshed as the data changes, which isn't possible if it depends on someone writing a memo for each issuer.
A workable equity KYP process sorts the universe into tiers using the factors above, and sets a different depth of review for each. The example below is illustrative. The thresholds behind each tier are the firm's own decisions, and should be written down and applied consistently.
| Illustrative Tier | Typical Characteristics | Depth of Review |
|---|---|---|
| Core | Senior exchange listing, market capitalization and liquidity above the firm's thresholds, no regulatory flags | Approved as a group by documented criteria; automated monitoring against the tier's thresholds |
| Elevated | Venture exchange listing, smaller or less liquid issuers, recent IPOs, foreign shares with limited disclosure | Criteria plus a name-level screen when the name first enters the firm; tighter monitoring triggers |
| Restricted | OTC or grey-market shares, low-priced shares, going-concern issuers, names under a halt or cease trade order | Name-level review before any recommendation; may be limited to unsolicited trades or blocked |
Tiering is how the firm shows proportionality. The notice expects more detailed consideration of higher-risk securities,[2] and a tiered process makes it possible to show where that extra consideration happened, for which names, and why.
Firms that approve funds keep a shelf register. The equivalent for equities is a universe file: the criteria that define what the firm makes available, plus a record for every name actually held or traded. For each name it records:
The file is what makes the rest of the process provable. Without it, a firm can say it approves "all TSX and NYSE stocks" but can't show which names it actually assessed, when, or what it did about the ones outside the criteria.
Equities need to be approved, monitored and documented like any other security, with the work done at the level of the universe and the tier, and at the level of the name when the risk calls for it.
In the KYP HubHow products are approved onto the shelf, whatever their type: Product Approval.
Approval for equities happens in two layers. The firm approves the criteria that define each tier and what each tier permits. Names that fall outside the approved criteria, along with every transfer in and client-directed trade, get a name-level assessment within a reasonable time.[2]
In the KYP HubHow monitoring rules, the engine and alerts work: Material Change. What happens when an alert fires: From Alert to Decision. When a change should reopen KYP: Material Change: When to Reopen a KYP Assessment. The same lifecycle for other security types: mutual funds and ETFs, structured products, segregated funds and annuities, model portfolios and alternatives and private markets.
Equity monitoring is largely event-driven. Typical significant changes, grouped against the notice's categories,[2] include:
In the KYP HubWhat the KYP file must show: KYP Documentation: What Your File Must Show. How supervision tests it: Supervising a KYP Program.
The example below shows what a written process for equity KYP might cover. It's illustrative; processes can vary with a firm's business model and the markets it offers.[2]