The EU’s new PRIIPs regulation will come into force on 1 January 2018, requiring many firms to prepare a “key information document” for certain financial products that are sold to EU retail investors. Given that most hedge funds are not aimed at the retail market – and with the PRIIPs regulation arriving just two days before MiFID 2 – the industry’s attention has understandably been focused elsewhere. But the PRIIPs regulation will catch many hedge fund managers, and it is worth taking a moment to understand how it works.
What is a PRIIP?
PRIIPs are “packaged retail and insurance-based investment products”. The term encompasses, among other things, any investment where the amount repayable fluctuates with the performance of underlying assets. It therefore includes interests in open-ended investment funds, such as a typical hedge fund.
What does the PRIIPs regulation require?
The PRIIPs regulation is short (by some standards), and has two primary obligations:
- A manufacturer of a PRIIP (which is generally its investment manager) must prepare a key information document (a “KID”) before a PRIIP is made available to retail investors in the EU.
- A person advising on or selling a PRIIP must provide EU retail investors with the KID in good time before they invest.
The rest of the PRIIPs regulation, along with detailed regulatory technical standards, is mainly concerned with the contents of the KID.
While a UCITS is a PRIIP, there is a transitional period for UCITS extending to 1 January 2020. Until that date a UCITS will continue to use its own key investor information document (KIID).