PRIPs, KIDs and Listed Funds

Whose responsibility is the KID?

The “PRIIP manufacturer” must prepare the KID. The Regulation implies a distinction between the PRIIP and its manufacturer and this would suggest that the investment manager (rather than the fund itself) is regarded as the manufacturer. This interpretation would be consistent with the parallel UCITS regime, where the obligation to produce the KIID falls on the manager of the KIID.

However, this interpretation may sit uncomfortably with certain models – for example self-managed funds, which do not arise in the UCITS world. In this context, the requirement for a KID to specify the manufacturer and its national regulator is of interest – some listed funds (albeit a dwindling pool) will neither be authorised themselves nor have an authorised manager/adviser.

When and how does a KID have to be updated?

The PRIIP manufacturer must publish the KID on a website and regularly review and, if appropriate, revise, the KID. This obligation continues for as long as the PRIIP is traded on a secondary market. The European Commission will provide further details on the conditions for and frequency of the review and revision of the KID and on how to tell retail investors about revisions to the KID.

Content

Our briefing sets out the content requirements for the KID. Worthy of note for listed funds are:

• the ability to cross-refer to the prospectus in certain circumstances
• the requirement to include a recommended hold period for the investment
• the requirement to include a risk and reward profile - EIOPA and ESMA are mandated to draft regulatory technical standards on the methodology underpinning the risk/reward profile
• the requirement to disclose one-off and recurring costs and to express total aggregate costs in both monetary and percentage terms - again, more detail on the calculation of costs to be disclosed will be specified in regulatory technical standards

Who must provide a KID and to whom?

A person advising on or selling a PRIIP must provide a retail investor with the KID in good time before he is bound by any obligation to purchase the KID. The KID may be provided to a person who has written authority to make investment decisions on behalf of the retail investor (which would appear to include discretionary fund managers but not necessarily financial advisers).

Applying this part of the Regulation to listed investment companies is particularly challenging. For example:

• The “person selling a PRIIP” is defined as the “person offering or concluding the PRIIP contracts with a retail investor”. This would appear to be the fund itself (in an offer for subscription scenario) or arguably the broker (in an on-market sale scenario).
• If the fund is the person selling a PRIIP, <br/>is its obligation to provide a KID to retail investors discharged if it provides copies of the KID to financial advisers? This is not clear from the Regulation, but any other interpretation would seem to cause practical difficulties. <br/> <br/>since a KID must be standalone and cannot form part of any other document, how can the fund ensure and evidence that a retail investor receives both the KID and the prospectus/application form? <br/>
• How does the obligation to provide a KID fit with an execution-only brokerage model on the secondary markets?

Timing and application

The Regulation is expected to be adopted shortly and will come into force two years from the date of its adoption. This should allow time for some of the uncertainties outlined above to be resolved.