Following its bruising and protracted journey through the EU legislative process, the EU Regulation on Packaged Retail and Insurance-Based Investment Products (’PRIIPs’) (EU 1286/2014) (the ’Regulation’) and related legislation will finally take effect on 1 January 2018.
The Regulation imposes new pre-contractual disclosure requirements for the benefit of retail investors when they are considering the purchase of "packaged" retail investment products or insurance based products. PRIIPs include investment funds, insurance policies with an investment element, structured products and structured deposits. If a PRIIP is being made available to retail investors, the PRIIP manufacturer (e.g. fund manager in the case of an investment fund) must draw up a key information document (’KID’). A person advising on or selling a PRIIP must provide retail investors with a KID in good time before the retail investors are bound by any contract or offering relating to that PRIIP. AIFs being marketed to retail investors now have until 31 December 2017 to comply with the Regulation. UCITS are currently exempted from preparing a KID under the Regulation until 31 December 2019.
Is your QIAIF required to Produce KIDs?
For the purposes of the Regulation and insofar as the investment funds industry is concerned, a retail client is any investor who is not a MiFID ‘professional client’. Irish domiciled retail AIFs will fall within the definition of PRIIPs. Qualifying Investor AIFs ("QIAIFs") which do not limit investor eligibility to MiFID professional clients will also be caught by PRIIPs and will have to prepare a KID. Examples of the types of investors who might be eligible investors for the purposes of investing in a QIAIF but who would not be MiFID ‘professional clients’ are high net worth individuals and also corporate/institutional investors who are not regulated to operate in the financial markets or whose main activity is not investing in financial instruments.
KID Requirements for AIFs
In terms of its form, the KID must be a stand-alone document, completely separate from the marketing materials. It should be written in a concise manner, which promotes comparability and must focus on the key product features. When printed, the KID should comprise a maximum of three sides of A4 size paper.
The formal content of the KID is specified by the PRIIPs Regulation and further content requirements are set out in the regulatory technical standards contained in the Commission Delegated Regulation (2017/563) (the ‘Delegated Regulation’). The KID must contain the following information:
PRIIP manufacturers must review the KID regularly and revise it where the review indicates that changes need to be made. The periodic review should take place at least every 12 months and it should also be reviewed where there is a change that significantly affects or is likely to significantly affect the information contained in it.
If a KID is misleading, inaccurate or inconsistent with the relevant parts of legally binding pre-contractual and contractual documents, the PRIIP manufacturer can incur civil liability solely on the basis of the KID. A retail investor who demonstrates loss resulting from reliance on the KID when making an investment into the PRIIP for which that KID document was produced may claim damages from the PRIIP manufacturer for the loss in accordance with national law.
Recent legislative developments
In September 2016, the European Parliament controversially rejected the regulatory technical standards (’RTS’ contained in the Commission Delegated Regulation in respect of the form, content and methodology of the KID (effectively leading to the postponement of the introduction of PRIIPS by one year to 1 January 2018). These technical standards were amended and the Delegated Regulation was published on 12 April 2017.
On 4 July 2017 the European Commission adopted guidelines on the application of the Regulation seeking to smooth out potential interpretative divergences throughout the EU.
On the same day the European Supervisory Authority published a first set of Q&As on the Commission Delegated Regulation. The guidelines included commentary on the territorial application of the Regulation. The Commission confirmed that:
Manufacturers of AIFs need to consider the following questions:
Is the current offering in the AIF open to potential investors who are not MIFID professional clients?
If the answer is yes, you will need to produce a KID and generally comply with the Regulation from 1 January 2018 unless you decide to limit your offering to investors who are MiFID professional clients or unless the AIF is only made available to non-EU investors;
Does the AIF currently have any shareholders/unitholders who are not MiFID professional clients?
If the answer is yes, you may need to consider prohibiting any further investments by them if you decide that you want to limit your future offerings to investors who are MiFID professional clients only.