Alert
December 27, 2017

The EU PRIIPS Regulation: What EU and Non-EU Managers Need to Know

Many managers may have assumed that the EU PRIIPS Regulation (the Regulation) does not apply to them because they do not generally raise capital from retail investors. Because, however, of the wide definition of “retail investor” and the scope of application of the Regulation, this will not necessarily be so, and all managers will need to consider the Regulation before offering any investment opportunity to EU retail investors.

What is the purpose of the Regulation?

So that retail investors are able clearly to understand and compare the risks of different investments, the Regulation requires persons who “manufacture” a PRIIP to make “available” to retail investors in the EU a key information document (a KID) in standard form before those retail investors invest. Unlike under the Alternative Investment Fund Managers Directive ( the AIFMD), there is no exemption for reverse solicitation. The manager of a fund is likely to be a manufacturer for these purposes.

The obligation comes into force on 1 January 2018 and will apply to sales of both newly created investments and existing investments that continue to be offered from this date onwards.

What is a PRIIP?

The Regulation defines a PRIIP as:

an investment where the amount repayable to the retail investor is subject to fluctuations because of exposure to reference values or to the performance of one or more assets which are not directly purchased by the retail investor

The Regulation applies to sales to any retail client in the EU, irrespective of the location of the manager.  Sales of a PRIIP to EU persons by non-EU persons will therefore be covered.

For these purposes, a PRIIP clearly includes funds. It also includes carry and co-invest vehicles except where there is no financial commitment on behalf of the investor. It also covers offers to employees and friends and family.

What is a retail investor?

This definition follows the definitions used in both the Markets in Financial Instruments Directive and the AIFMD. In broad terms, every EU individual and small company will be a retail investor unless it can be upgraded to a professional investor meeting any two of the following three criteria:

  • the investor has carried out transactions, in significant size, on the relevant market at an average frequency of 10 per quarter over the previous four quarters.
  • the size of the investor’s financial instrument portfolio, defined as including cash deposits and financial instruments, exceeds €500,000.
  • the investor works or has worked in the financial sector for at least one year in a professional position which requires knowledge of the transactions or services.

Local authorities have a special, but substantially similar upgrading regime.

What is a KID?

If the Regulation applies, a KID must be produced in standard form. The format, sections and headings of the standard KID template must not be amended. In addition, it must be:

  • no longer than three pages of A4; 
  • in the language of the EU member state in which the PRIIP is being distributed, or a translation must be made; and
  • be referred to in the PPM but must also be a stand-alone document. In other words, unlike the Article 23 AIFMD disclosure statement, it cannot simply cross-reference other marketing material.

Where a PRIIP is offered to retail investors, the KID must be provided before any sale, giving enough time for the investor to make an informed decision. A copy should be uploaded to the manufacturer’s website, although presumably it should be acceptable to maintain this in a password-protected part of the site where interests are not being publicly offered.

Firms must review the KID periodically, at least annually, and, when a material change in the nature of the investment occurs, update accordingly. Although there is no guidance on this point, it would not seem to be necessary to update the KID in relation to closed-ended funds where no additional investment can be made.

The standard text for the KID is in Annex 1 to the Commission Delegated Regulation, which is available here.

Is completing the KID difficult? 

For the most part, completion of the KID is not difficult, but there are some challenging areas that require the compilation of significant amounts of data and some complex mathematical calculations, in particular in relation to performance scenarios and stress testing, and in relation to summary risk indicators.