A structured product is a debt security whose return is set by a formula tied to something else: an index, a basket of stocks, a single share, a commodity or a rate. Principal-protected notes, buffered notes, barrier notes, autocallables, contingent-coupon notes and "worst-of" notes all fall under the label. They're issued in large numbers, often weekly, each with its own terms.
That combination - a new product every week, and a return that depends on a formula most people can't evaluate by reading it - is what makes structured products a hard KYP problem. The product's risks sit in the interaction of its features: a barrier that looks remote until markets fall, a cap that limits the upside the note was sold on, a coupon that stops if one of three stocks drops, an issuer whose credit stands behind all of it. Regulators have flagged structured products as a category where diligence has to go deeper for exactly this reason. In May 2026, FINRA announced a review of firm practices for non-principal-protected "worst-of" structured notes.[10]
This paper sets out a KYP framework for structured products: what the firm and the individual advisor each need to understand, how to take a note apart into components that can be assessed, how to test its behaviour across scenarios, and how to approve and monitor a product line that produces new securities every week.
Its scope is the product. Decisions about individual clients are outside it. For the general approach to detecting and escalating changes, see Material Change: When to Reopen a KYP Assessment; for other complex, less transparent products, see Alternatives & Private Markets.
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.
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:
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.
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]
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 |
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.
| 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.
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.
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 |
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.
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.
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:
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]