Platform Why Features Security Score AI Engine AI Coding KYP Hub Pricing Company About Buckler News Contact Français Book Demo →
Regulatory Basis

The Obligation

Costs are a named element of KYP in Canada and a core part of product-level diligence in the US. Rule changes on both sides of the border over the past few years have also reshaped which classes exist and how visible their costs are.

1
Costs Are Part of Knowing the Product
The KYP rules, the notice's guidance on costs, and the rule changes that reshaped fund series

CIRO's Rule 3301 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." Rule 3302 requires each Approved Person to take steps to understand the same elements.[1] NI 31-103 section 13.2.1 applies equivalent obligations to other registrants.[1]

Joint CSA/CIRO Staff Notice 31-368 addresses costs at several points in its KYP guidance:[2]

  • Individual understanding. Registered individuals must take reasonable steps to understand the securities they recommend or trade, "including their structure, features, risks, costs, and how those costs affect performance."
  • Firm assessment. Among its examples of firm practices, the notice describes dealers that set different KYP processes for different types of funds, including "requiring additional review in the case of more costly funds."
  • Monitoring. A change in "the costs/fees associated with a security" is on the notice's list of significant changes that firms monitor for.
  • Written policies. The notice expects KYP policies to describe how "the initial and ongoing costs of the security, and the impact of those costs" will be assessed, and whether there are conflicts of interest inherent in the security, including those "arising from compensation structure."
"Reasonable steps must be taken by registered individuals to understand securities they recommend to or trade for clients, including their structure, features, risks, costs, and how those costs affect performance." Joint CSA/CIRO Staff Notice 31-368, p.14 [2]

Three recent changes affect which series exist and how their costs are seen:

  • Deferred sales charges banned. Canadian securities regulators prohibited the deferred sales charge option for mutual funds effective June 1, 2022. Existing DSC holdings could continue through their redemption schedules, so legacy DSC series remained in client accounts after the ban.[3]
  • Trailers to order-execution-only dealers banned. From the same date, fund organizations may not pay trailing commissions to order-execution-only dealers.[4]
  • Total cost reporting. Amendments in force January 1, 2026 require registrants' annual cost reports to include fund expenses, including a fund expense ratio for each fund class or series, with the first reports covering the year ending December 31, 2026.[5]

The last change has a direct KYP consequence. Once clients see series-level fund expenses on their annual reports, a firm whose KYP files don't accurately capture the costs of each series it offers will be the least-informed party in the conversation.

2
Understanding the Costs of What You Offer
Product-level diligence duties, a major enforcement initiative, and a new class structure

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.[6][7] The SEC's adviser interpretation requires a reasonable investigation into the investment, sufficient not to base advice on materially inaccurate or incomplete information.[8] For a multi-class fund, the costs being understood are those of the specific class.

Share-class costs have been one of the SEC's largest enforcement themes. In March 2019, the SEC announced settlements with 79 investment advisers returning more than $125 million to investors, finding that they had placed clients in share classes that charged 12b-1 fees "when lower-cost share classes of the same fund were available," without adequately disclosing the resulting conflicts of interest.[9] The cases turned on disclosure and conflicts, but they rested on a product fact the firms knew or should have known: that the same fund was available in classes with materially different costs, and that the difference flowed to the firm.

In September 2025 the SEC announced its intention to grant exemptive relief allowing a single fund to offer both mutual fund and exchange-traded share classes,[10] and in November 2025 it issued the first such order, to Dimensional Fund Advisors. The order's conditions require the fund board to determine, initially and annually, that the structure continues to serve the best interests of both ETF and mutual fund shareholders.[11] For KYP, it adds a class type whose trading, pricing and cost mechanics differ from its sibling mutual fund classes, even though the portfolio is shared.

KYP Point Canada United States
Are costs part of the product assessment? Yes - initial and ongoing costs and their impact are named in the rules Yes - the risks, rewards and costs of what is recommended must be understood
Where are class costs disclosed? Fund Facts and ETF Facts documents, prospectus, and from 2026, annual cost reports Prospectus fee table for each class, and statement of additional information
Recent structural changes DSC ban and OEO trailer ban (2022); total cost reporting (2026) ETF share class relief (2025)
Compensation and conflicts KYP policies should address conflicts arising from compensation structure Share class conflicts a major SEC enforcement focus
Diligence

The Assessment

The fund-level assessment - strategy, manager, risk - applies to every class. What the class-level assessment adds is everything that differs between them.

1
What Differs Between Classes
The features a class-level KYP assessment needs to capture
Feature What to Capture Examples
Sales charges Any charge on purchase or redemption, its schedule, and any waivers or breakpoints Front-end load; US contingent deferred sales charge; legacy Canadian DSC schedules still running off
Ongoing fund costs Management fee, administration and operating expenses, and the total expense ratio or MER Canadian MER; US total annual fund operating expenses from the prospectus fee table
Embedded distribution payments Any trailing commission or distribution fee paid out of the class, and to whom Canadian trailing commissions; US 12b-1 fees
Trading costs Portfolio transaction costs, and for exchange-traded classes, bid-ask spreads and premiums or discounts to NAV Trading expense ratio; ETF spreads
Eligibility and minimums Who can buy the class, through what type of account or platform, and minimum investments Fee-based series; institutional classes; advisory-platform classes
Distribution features Payout policies and their character Canadian T-series paying a fixed monthly distribution that may include return of capital
Conversion and exchange features Automatic conversions and exchange privileges between classes US C shares converting to A shares after a set period; switches between Canadian series
Compensation to the firm What the firm and its registered individuals receive from each class Trailers, 12b-1 fees, revenue sharing

The last row is where KYP and conflicts meet. The notice expects KYP policies to address conflicts "arising from compensation structure,"[2] and the SEC's share class cases arose from exactly that.[9] A class-level KYP file that records costs to the investor but not payments to the firm is incomplete.

2
The Impact of Costs
KYP requires understanding what costs do, not just what they are

The rules don't stop at listing costs. They ask for "the impact of those costs,"[1] and the notice asks individuals to understand "how those costs affect performance."[2] For share classes, the clearest way to show impact is to compare classes of the same fund side by side over a meaningful period.

The table below uses a hypothetical fund returning 6% a year before costs, with $100,000 invested for ten years and costs deducted annually. The expense levels are illustrative and don't describe any real fund.

Hypothetical Class Annual Cost Value After 10 Years Reduction Due to Costs
Before any costs 0.00% $179,085 -
Class with embedded distribution fee 2.00% $146,325 $32,760
Fee-based or advisory class 1.00% $161,961 $17,124
Institutional or ETF class 0.25% $174,658 $4,427

Two cautions keep this honest. First, classes aren't always directly comparable: a fee-based series excludes a trailer but is typically held in an account that charges a separate advisory fee, which a fund-level comparison doesn't show. The assessment should record what each class's cost includes and excludes. Second, the figures are mechanical; they illustrate the scale of cost differences, not expected returns. What KYP requires is that the firm and its people understand that scale for the classes they actually offer.

3
The Class Inventory
Knowing every class that exists, not just the ones on the shelf

Many firms maintain their approved list at the fund level. That's not enough for share classes. A class-level inventory records, for every fund the firm offers or holds:

  • Every class the fund offers, including those the firm doesn't make available, so the firm knows what alternatives exist within the same fund;
  • Which classes the firm has approved, and on which platforms or account types they are available;
  • Legacy classes still held, such as DSC series in Canada that remain in accounts after the 2022 ban, or classes that have since been closed to new investment;[3]
  • Classes held through transfers, which the notice expects to be assessed and brought into monitoring even if not approved for the shelf;[2]
  • Each class's cost and compensation data, with its source document and the date it was last confirmed.

The inventory is what makes class-level monitoring possible. Without it, a fee change in one series, a new lower-cost class, or a class closure can happen without anyone at the firm connecting it to what's on the shelf.

Process

The Lifecycle

Share classes need to be approved, monitored and documented at the class level, with responsibilities at both the firm and the individual level.

1
Approval
Approving the fund, then deciding which of its classes the firm makes available

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

Approval for a multi-class fund has two layers. The fund-level approval covers what every class shares: strategy, manager, portfolio and risk. The class-level approval decides which classes the firm makes available, on which platforms, and records the cost and compensation features of each. The notice expects approval documentation to show "meaningful consideration" of the key elements assessed;[2] for classes, the key elements are costs, compensation and features.

What the Firm Needs to Do
  • Approve the fund once. Assess the portfolio, strategy, manager and risk shared by all classes.
  • Assess each class separately. Record the sales charges, ongoing costs, distribution payments, trading costs, eligibility, distribution and conversion features of every class it makes available.
  • Record compensation. Document what the firm and its registered individuals receive from each class, and assess the conflict it creates.
  • Decide availability deliberately. Record which classes are available on which platforms, and why a class that exists is or isn't made available.
  • Apply more review to higher-cost classes. In line with the notice's example of additional review for more costly funds.[2]
  • Give advisors class-level information. A cost comparison across the fund's classes, not just a fund summary.
What the Individual Advisor Needs to Do
  • Know the classes, not just the fund. Understand which classes of each fund they offer exist and are approved.
  • Understand each class's costs and their impact. Including sales charges, ongoing costs, and embedded payments.[2]
  • Know what they are paid. Understand the compensation each class generates for them and the firm.
  • Understand the features. Distribution policies, conversion features and, for ETF classes, how trading and pricing differ from the mutual fund classes.
  • Use approved classes only. Offer only the classes the firm has approved for the relevant platform.
2
Monitoring
Class-level changes that a fund-level monitoring process will miss

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, structured products, segregated funds and annuities, model portfolios and alternatives and private markets.

A change in costs or fees is on the notice's list of significant changes.[2] For multi-class funds, most of those changes happen at the class level and won't show up in fund-level monitoring of performance or risk. Typical class-level significant changes include:

  • a change in a class's management fee, expense ratio, trailing commission or 12b-1 fee;
  • the launch of a new class, particularly a lower-cost or ETF class of a fund already on the shelf;
  • the closure, merger or redesignation of a class;
  • a change in eligibility or minimums;
  • a change in distribution policy, such as a T-series payout rate;
  • a conversion event, or the end of a legacy sales charge schedule.
What the Firm Needs to Do
  • Monitor at the class level. Track cost and feature data for every class in the inventory, not just the fund.
  • Watch for new classes. Assess any new class of an approved fund, and decide whether to make it available.
  • Reconcile cost data. Compare the firm's cost records with the fund's current disclosure documents, and from 2026 in Canada, with the data used in annual cost reports.[5]
  • Track legacy classes. Keep closed and legacy classes that are still held in the monitoring population.
  • Document and notify. Record each significant change and the firm's response, and inform registered individuals.
What the Individual Advisor Needs to Do
  • Keep cost knowledge current. Review class-level change notices for the funds they offer.
  • Note new classes. Be aware when a new class of a fund they offer becomes available.
  • Respect availability changes. Stop offering a class the firm has withdrawn or restricted.
  • Report discrepancies. Flag differences between the firm's cost data and what fund documents or client reports show.
3
Documentation
A written process for class-level KYP

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 share-class KYP might cover. It's illustrative; processes can vary with a firm's business model and the funds it offers.[2]

Example: Written KYP Process for Fund Classes and Series
Illustrative
1
Scope. Applies to every class or series of every mutual fund and exchange-traded fund the firm makes available or holds in client accounts, including legacy, closed and transferred-in classes.
2
Class inventory. Product Management maintains a class inventory listing every class of each fund, whether it is approved and on which platforms, and its cost, compensation and feature data, with the source document and date confirmed.
3
Fund and class approval. The Product Committee approves each fund on its shared characteristics, then approves each class separately. The class assessment records sales charges, ongoing costs, embedded distribution payments, trading costs, eligibility, distribution and conversion features, and firm and advisor compensation.
4
Availability decisions. Where a fund offers classes the firm does not make available, the Committee records the reason. Classes with higher ongoing costs or embedded compensation receive additional review, including an assessment of the conflict of interest.
5
Cost impact. Each class assessment includes a standardized comparison of the impact of costs across the fund's classes over a ten-year period, stating what each class's cost includes and excludes.
6
Advisor information. Registered individuals receive a class comparison for each fund they may offer and acknowledge it before offering the fund.
7
Monitoring. Class cost and feature data are reconciled with current fund disclosure documents at least quarterly and whenever a fund files an amendment. New classes, fee or trailer changes, closures, mergers and conversions are significant changes.
8
Response. Each significant change is assessed and recorded within five business days. The Committee decides any change in class availability, and registered individuals are notified with the updated class comparison.
9
Records. Class assessments, inventory versions, cost reconciliations, decisions, notifications and acknowledgements are retained and linked to each class.
Five Questions to Test Share-Class KYP
  1. Does the firm's approved list work at the class level, not just the fund level?
  2. Does every class assessment record costs to the investor and compensation to the firm?
  3. Can the firm show the impact of cost differences across a fund's classes?
  4. Are legacy, closed and transferred-in classes in the monitoring population?
  5. Would the firm know within days if an approved fund launched a lower-cost class or changed a class's fees?
A note on scope: This paper covers Know-Your-Product obligations for mutual fund and ETF classes and series under regulatory requirements and published guidance in Canada and the United States as of its publication date. It does not address the selection of a class for any individual client. It is general information, not legal or compliance advice. The cost figures are hypothetical and illustrate mechanics only; they do not describe any real fund. The feature list and example process are illustrations, not prescribed requirements. 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; registered individuals' KYP, pp.13-14; approval, pp.15-16; monitoring for significant changes, pp.16-18; KYP policies and procedures, pp.33-34. Source document (PDF)
  3. Ontario Securities Commission. OSC to implement ban on deferred sales charge option, harmonizing rule across Canada. Deferred sales charge option prohibited effective June 1, 2022. Source document
  4. Canadian Securities Administrators. Canadian securities regulators adopt ban on trailing commissions for order-execution-only dealers, September 17, 2020 (effective June 1, 2022). Source document
  5. Canadian Securities Administrators and CIRO. Total cost reporting amendments to NI 31-103 and CIRO rules (enhanced cost reporting), effective January 1, 2026. Source document (PDF)
  6. U.S. Securities and Exchange Commission. Regulation Best Interest: A Small Entity Compliance Guide. Source document
  7. 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)
  8. 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)
  9. U.S. Securities and Exchange Commission. SEC Share Class Initiative Returning More Than $125 Million to Investors, Press Release 2019-28, March 11, 2019. Source document
  10. U.S. Securities and Exchange Commission. Commissioner Mark T. Uyeda, A Return to Principles: Statement on ETF Share Class Relief, September 29, 2025. Source document
  11. Seward & Kissel. SEC Issues Order for DFA Exemptive Application, Opening the Door to ETF Share Classes, describing the SEC's November 2025 exemptive order to Dimensional Fund Advisors. Source document