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Regulatory Basis

The Obligation

Structured products are covered by the same KYP rules as everything else. What regulators in both countries have added is a clear expectation that complex products get more diligence, more training and more follow-up after approval.

1
Complex Products Get a Deeper Review
The KYP rules, the notice's depth-of-review guidance, and CIRO's product due diligence best practices

CIRO's Rule 3301 requires a dealer to assess, approve and monitor what it makes available, with the assessment covering the security's "structure, features, risks, initial and ongoing costs and the impact of those costs." Rule 3302 requires each Approved Person to take steps to understand the same elements before buying, selling or recommending it.[1] Structure and features carry most of the weight for structured products, because the payoff formula is the product.

Joint CSA/CIRO Staff Notice 31-368 says a more in-depth review "may be warranted for securities that are more complex or riskier, such as those that are novel, not transparent in structure, involve leverage, options or other derivatives, have limited liquidity or have limited disclosure available."[2] Nearly every structured product contains embedded options, and many have limited liquidity, so the deeper review is the default rather than the exception.

CIRO's best practices notice on product due diligence, originally issued by IIROC, was written for precisely this part of the shelf:

"These guidelines are not directed at listed equities and fixed income products, but to more complex and non-transparent products having features such as embedded derivatives, variable maturities, complex fee structures or opaque assets." CIRO Notice 09-0086, Best Practices for Product Due Diligence [3]

The notice frames diligence around questions including what investment need the product fulfills, what risks it carries for investors, what costs and fees are associated with it, and how complex it is in structure, function and description. It asks firms to consider whether a product requires new or refined training for registered representatives and their supervisors, and to determine the appropriate level of post-approval follow-up, including reassessing training needs and monitoring compliance with any restrictions placed on the product's sale.[3]

The 31-368 findings on KYP apply with particular force to structured products: firms that collected product documents without documenting their own analysis, and firms whose approvals lacked evidence of "meaningful consideration" of the key elements assessed.[2] A note approved on the strength of the issuer's term sheet alone, with no record of how its payoff was analyzed, meets neither expectation.

2
Understand It, Train on It, Review It
Two decades of FINRA and SEC guidance specific to structured products

FINRA's structured products notice describes them as securities "derived from or based on a single security, a basket of securities, an index, a commodity, a debt issuance and/or a foreign currency." It says a firm "must perform appropriate due diligence to ensure that it understands the nature of the product, as well as the potential risks and rewards," and sets a clear training expectation:[6]

"Members must train registered personnel about the characteristics, risks, and rewards of each structured product before they allow registered persons to sell that product to investors." FINRA Notice to Members 05-59 [6]

The notice also warns against two common misreadings of a structured product's features: that an issuer's credit rating says anything about the investment's market performance, and that a ticker symbol or exchange listing means an active, liquid market will exist.[6]

The complex products notice treats a product as potentially complex if it has "multiple features that affect its investment returns differently under various scenarios," and lists questions for firms to consider before approving one, including: "How is the product expected to perform in a wide variety of market or economic scenarios?"; "Does the product present any novel legal, tax, market, investment or credit risks?"; and "How liquid is the product? Is there an active secondary market for the product?"[7] It also expects periodic reassessment of complex products after approval.[7]

A 2011 SEC staff report on examinations of firms selling structured securities products to retail investors found that two of the three originating firms examined had no training requirements for registered representatives on these products, and none had training requirements for their supervisors. It also noted a tendency not to recognize structured products as a distinct product class with special supervisory challenges, and a case where fees were described as zero when they ranged from 1.5% to 3% of the deal.[8]

Reg BI's Care Obligation requires a broker-dealer to understand the potential risks, rewards and costs of what it recommends,[4][9] and the SEC's adviser interpretation requires a reasonable investigation into the investment.[5] For a structured product, both depend on understanding the payoff formula and its embedded costs. FINRA's May 2026 announcement of a review of worst-of structured notes signals that this remains an active examination area.[10]

KYP Expectation Canada (CIRO / CSA) United States
Depth of review More in-depth for products with derivatives, limited liquidity or limited transparency Due diligence sufficient to understand the nature, risks and rewards; scenario analysis for complex products
Training Consider new or refined training for representatives and supervisors Train registered personnel on each structured product before they sell it
Post-approval follow-up Determine the level of follow-up; monitor for significant changes more often than annually for risky products Periodic reassessment of complex products after approval
Evidence Documented analysis and meaningful consideration at approval Written supervisory procedures and records of product review
Diligence

The Framework

Every structured product, however complex its marketing, is built from the same five components. Assessing each one separately, and then testing how they interact, is what turns a term sheet into a KYP assessment.

1
Deconstructing the Note
Issuer, underlying, payoff, cost and liquidity - assessed one at a time
Component Key KYP Questions Typical Evidence
Issuer and credit Who owes the payments? What is the issuer's credit standing, and what happens to the note if the issuer fails? Is any principal protection or guarantee provided by the issuer alone, or backed by a third party? Issuer credit ratings and outlooks, credit spreads, the offering documents' description of ranking and guarantees
Underlying reference What drives the return - an index, a basket, single stocks? For indices, who calculates it, what does its methodology include, and is it a price or total-return index? For baskets or worst-of structures, how do the components move together? Index methodology documents, basket composition, historical data on the underlying assets
Payoff formula What exactly is paid, and when? What are the participation rate, cap, buffer, barrier, coupon conditions, observation dates and call features? Is the barrier observed only at maturity or continuously? Term sheet, pricing supplement or offering document, the payoff examples provided by the issuer
Cost What is embedded in the price - structuring fees, selling commissions, hedging costs? Where an issuer discloses an estimated value below the issue price, what is the gap? What is the firm's own compensation? Fee and commission disclosure, any disclosed estimated value, dealer compensation arrangements
Liquidity and lifecycle Is there a secondary market, and who makes it? Is the issuer the only bidder, and on what terms? What early-redemption fees apply? What happens at maturity, on an early call, or if the underlying index is discontinued or a basket stock is acquired? Secondary market provisions, early-redemption schedules, adjustment and disruption event provisions

Two components are commonly under-assessed. Cost is often invisible in the headline terms because it's embedded in the note's pricing rather than charged separately; 05-59 and the SEC's 2011 findings both point to it.[6][8] Lifecycle events - index discontinuation, a merger affecting a basket stock, a calculation-agent determination - are buried in the offering documents' adjustment provisions and rarely appear in product summaries, but they can change what the product is mid-term.

2
Scenario Analysis
Understanding a structured product means knowing what it pays in the scenarios that matter

FINRA's complex products notice asks how a product is expected to perform "in a wide variety of market or economic scenarios."[7] For structured products that question is the core of KYP: the features only mean something once their effect across outcomes is laid out. A firm's assessment should include, at minimum, the product's payoff across a range of underlying returns, and its behaviour at each feature threshold.

The table below shows the approach using a hypothetical note - a three-year, contingent-coupon, autocallable "worst-of" note on three stocks, with a 60% barrier observed at maturity. The terms are invented for illustration and don't describe any real product.

Scenario What Happens What the Assessment Should Record
All three stocks rise The note is called early at the first observation date; the investor receives principal plus one coupon Upside is capped at the coupon; the likely holding period is short, so reinvestment risk is high
Two stocks rise, one falls 30% The note is not called, because the worst performer sets the outcome; coupons may stop if the worst stock is below the coupon threshold Returns depend on the weakest stock, not the basket average; this is the defining risk of a worst-of structure
Worst stock ends down 35% Barrier not breached; principal is returned at maturity How close the barrier sits to plausible outcomes given the stocks' historical volatility
Worst stock ends down 45% Barrier breached; the investor loses 45% of principal, matching the worst stock's decline Loss is not buffered once the barrier is crossed; the investor bears the full decline of the weakest stock
Issuer default Payments depend on recovery in the issuer's insolvency, regardless of the stocks Credit risk is independent of the underlying and applies in every scenario
Sale before maturity Sold at a secondary price, if a bid exists, reflecting volatility, rates, time and the issuer's credit Early exit may realize a loss even if the note would have repaid principal at maturity

Two things make this more than an illustration. First, the assessment should test the product's specific terms, not a generic description of its type. Second, the scenarios should be informed by the underlying's actual behaviour - historical volatility and correlation for worst-of baskets in particular, since low correlation between the stocks makes it more likely that at least one of them falls far enough to set the outcome.

3
Complexity Tiers
Scaling review, training and restrictions to the product's structure

Structured products range from plain principal-protected index notes to leveraged worst-of autocallables. Treating them identically either overloads the simple ones or under-reviews the complex ones. A tiering scheme lets the firm scale diligence as the notice contemplates.[2] The tiers below are illustrative; each firm should define its own.

Tier Typical Structures Review Depth Advisor Requirement
Tier 1 Full principal protection on a broad index, simple participation, no barrier Programme-level template review; issuance checked against template General structured products training
Tier 2 Buffered or capped notes, partial protection, single broad underlying Template review plus scenario analysis for each new term structure Training on buffers, caps and partial protection
Tier 3 Barrier notes, contingent coupons, autocallables, single-stock underlyings Issuance-level review of terms and scenarios; committee approval of each new structure Product-specific training and acknowledgement
Tier 4 Worst-of baskets, leverage, continuous barrier observation, novel underlyings or indices Full committee review of each issuance, including correlation and volatility analysis Product-specific training, certification, and authorization limited to named registered individuals
Process

The Lifecycle

Structured products create a problem other products don't: a shelf that renews itself every week. Approval, monitoring and documentation have to work at two levels - the issuer's product program and each individual issuance.

1
Approval
Approving the program once, and each issuance against it

In the KYP HubHow products are approved onto the shelf, whatever their type: Product Approval.

Because issuers bring new notes to market constantly, most firms approve structured products in two layers. The first is program approval: the issuer, the product types it offers, the underlying indices, and a set of term templates the firm is prepared to distribute. The second is issuance approval: confirming that each new note fits an approved template and tier, and escalating anything that doesn't. The 31-368 notice accepts grouped assessments for similar non-complex securities where the process is well defined;[2] for structured products, the grouping has to be narrow enough that every issuance in the group behaves the same way.

What the Firm Needs to Do
  • Approve issuers and programs. Assess each issuer's credit and the product types, underlyings and templates it offers.
  • Tier every structure. Assign each template to a complexity tier that sets its review depth.
  • Check each issuance. Confirm terms fall within an approved template; send anything outside it for full review.
  • Assess all five components. Issuer, underlying, payoff, cost and liquidity, with scenario analysis for Tier 2 and above.
  • Document the embedded cost. Including any disclosed estimated value and the firm's own compensation.
  • Train before release. Deliver training on each structure before registered individuals may offer it, and on supervisors' responsibilities too.[6][3]
  • Set conditions. Restrict higher-tier products to authorized registered individuals where warranted.
What the Individual Advisor Needs to Do
  • Offer only approved issuances. Within the tier and conditions attached to them.
  • Understand the payoff. Be able to explain what the note pays in each key scenario, including barrier breach and issuer default.[1]
  • Know the costs. Understand what is embedded in the price, not just any stated fee.
  • Understand the exit. Know how the note can be sold before maturity and what that is likely to cost.
  • Complete required training. For each structure and tier before offering it, and certification where the firm requires it.
  • Read the terms, not the summary. Confirm the specific issuance's terms rather than relying on a generic product description.
2
Monitoring
Following notes after issue, when their features start to bite

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: equities, mutual funds and ETFs, segregated funds and annuities, model portfolios and alternatives and private markets.

A structured product's risk profile changes during its life in ways a fund's doesn't. A barrier that was 40% away at issue may be 5% away a year later. The 31-368 notice expects firms to define significant change for the types of securities they offer, monitor at a frequency that reflects their risk, and not rely on issuers to report changes.[2] 09-0086 asks firms to set the level of post-approval follow-up in advance,[3] and 12-03 expects periodic reassessment.[7] Significant changes for structured products typically include:

  • the underlying moving within a defined distance of a barrier, buffer or coupon threshold;
  • a barrier breach, missed coupon, or early call;
  • a change in the issuer's credit rating or outlook, or a material widening in its credit spreads;
  • an index methodology change, index discontinuation, or a corporate action on a basket stock;
  • a calculation-agent determination or disruption event under the note's terms;
  • a change in the issuer's secondary-market practices, such as suspended bids.
What the Firm Needs to Do
  • Monitor every outstanding issuance. Not just the program, since each note's position relative to its thresholds differs.
  • Track distance to thresholds. Measure each note's proximity to its barrier, buffer and coupon levels on a defined schedule.
  • Monitor issuers. Treat issuer credit changes as significant for every outstanding note from that issuer.
  • Watch lifecycle events. Track index and corporate-action events affecting underlyings.
  • Reassess the program. Review each approved template and tier periodically, including how issued notes have actually performed.
  • Notify and update. Tell registered individuals what changed and give them the updated assessment.
What the Individual Advisor Needs to Do
  • Keep understanding current. Review notices on the issuances and issuers they deal in.
  • Know where each note stands. Understand how close outstanding notes they have offered are to their thresholds.
  • Respect restrictions. Stop offering a structure or issuer that has been suspended or restricted.
  • Re-train when structures change. Complete updated training when the firm revises a template or tier.
3
Documentation
A written process that works at program and issuance level

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 KYP process for structured products might cover. It's illustrative; processes can vary with a firm's business model and the complexity and risks of what it offers.[2]

Example: Written KYP Process for Structured Products
Illustrative
1
Scope. Applies to all structured notes, principal-protected notes and market-linked securities the firm makes available, and to any held in client accounts through transfer.
2
Issuer and program approval. The Structured Products Committee approves each issuer, its product types, eligible underlyings and term templates. Each template is assigned a complexity tier (1 to 4). Issuer approval is reviewed at least annually and on any credit event.
3
Template assessment. For each template, the product analyst documents the five components (issuer, underlying, payoff, cost, liquidity) and a scenario analysis covering the payoff across underlying returns, each feature threshold, issuer default and early sale.
4
Issuance approval. Before each issuance is offered, the analyst confirms its terms fall within an approved template and records the check. Tier 3 issuances require analyst sign-off on the specific terms and scenarios. Tier 4 issuances, and any issuance outside an approved template, require full Committee approval.
5
Cost disclosure. Every assessment records embedded fees and commissions, any issuer-disclosed estimated value and its difference from the issue price, and the firm's compensation.
6
Training and authorization. Registered individuals complete tier-specific training before offering any product in that tier. Tier 4 products may be offered only by individuals named on the Committee's authorized list after certification. Supervisors complete the same training.
7
Monitoring. Every outstanding issuance is evaluated daily for distance to barrier, buffer and coupon thresholds, and for issuer credit and underlying events. Defined proximity thresholds and events are significant changes.
8
Response. Significant changes are assessed and recorded by the analyst within three business days. The Committee decides any change to issuer, template or tier status, and all affected registered individuals are notified with the updated assessment.
9
Programme review. Each template is reassessed at least annually, including a review of how issued notes under it have performed against the scenario analysis.
10
Records. Issuer and template assessments, issuance checks, scenario analyses, training and certification records, monitoring evaluations (including those with no change), decisions and notifications are retained and linked to each issuance.
Five Questions to Test Structured Products KYP
  1. Is every issuance checked against an approved template and tier before it's offered, with anything outside escalated?
  2. Does each assessment include a scenario analysis based on the product's actual terms and underlyings?
  3. Are embedded costs documented, not just stated fees?
  4. Are registered individuals and their supervisors trained on each structure before it can be offered?
  5. Is every outstanding note monitored for distance to its thresholds and for issuer credit changes?
A note on scope: This paper covers Know-Your-Product and product due diligence obligations for structured products under regulatory requirements and published guidance in Canada and the United States as of its publication date. It does not address decisions about individual clients. It is general information, not legal or compliance advice. The components, scenario example, tiers and example process are illustrations, not prescribed requirements; the hypothetical note does not describe any real product. Each firm's approach should reflect its own products, business model and legal advice. Where rules and guidance are quoted, the quotation is from the source cited.
References
  1. CIRO. Investment Dealer and Partially Consolidated Rules, Rule 3300 series (Product Due Diligence and Know-Your-Product), including Rules 3301 and 3302. Parallel requirements for other registrants: NI 31-103, section 13.2.1. Source document (PDF)
  2. Joint CSA/CIRO Staff Notice 31-368, Client Focused Reforms: Review of Registrants' Know Your Client, Know Your Product and Suitability Determination Practices and Additional Guidance, December 10, 2025. KYP firm assessments, pp.10-13; approval, pp.15-16; monitoring for significant changes, pp.16-18. Source document (PDF)
  3. CIRO Notice 09-0086 (originally issued by IIROC), Best Practices for Product Due Diligence. Source document
  4. U.S. Securities and Exchange Commission. Regulation Best Interest: A Small Entity Compliance Guide. Source document
  5. U.S. Securities and Exchange Commission. Commission Interpretation Regarding Standard of Conduct for Investment Advisers, Release No. IA-5248, June 5, 2019. Source document (PDF)
  6. FINRA (then NASD). Notice to Members 05-59, Structured Products, September 2005. Source document
  7. FINRA. Regulatory Notice 12-03, Heightened Supervision of Complex Products, January 2012. Source document
  8. U.S. Securities and Exchange Commission staff. Staff Summary Report on Issues Identified in Examinations of Certain Structured Securities Products Sold to Retail Investors, July 27, 2011. Source document (PDF)
  9. U.S. Securities and Exchange Commission. Regulation Best Interest: The Broker-Dealer Standard of Conduct, 17 C.F.R. § 240.15l-1, effective June 30, 2020. Source document (PDF)
  10. FINRA. FINRA Announces Review of Higher-Risk Structured Products, May 20, 2026. Source document