EUROPEAN UNION: MiFID II and PRIIPs Information

Tuesday November 14 2017

Dechert have published a document regarding the upcoming changes in MiFID II and PRIIPs.

PRIIPs Regulation

The PRIIPs Regulation will apply to alternative investment funds (AIFs) which are made available for investment by EU retail clients (as defined in MiFID II, see below) after 31 December 2017. UCITS funds are also in scope but will benefit from a transitional exemption until 31 December 2019. Where it applies, the PRIIPs Regulation will require that a three-page, standardised key information document (KID) is made available to EU retail investors pre-investment. The PRIIPs KID must include projections of future performance in four specified market scenarios, as well as information on costs, but it is prohibited from including any past performance information. Accordingly, firms which currently make their alternative investment funds (AIFs) available for investment by EU retail investors – including indirectly through IFAs or other intermediaries – will need to decide whether to close their funds to EU retail investors after 31 December 2017 or prepare KIDs for use from 1 January 2018.

MiFID II scope and application to UCITS and private fund managers

Whilst neither UCITS management companies (ManCos) nor full-scope alternative investment fund managers (AIFMs) (including hedge fund and private equity/debt fund managers) are authorised under MiFID, where they conduct certain MiFID “top up” activities (e.g. managing a separately managed account), then certain MiFID II provisions apply. In addition, UCITS ManCos and AIFMs which distribute their products through MiFID firms will be indirectly impacted by MiFID II’s new product governance rules. In such instances, it is necessary to update prospectus language to include information to help MiFID-regulated distributors comply with the MiFID II product governance regime, including information on the target market and costs and charges. In many cases these will represent new disclosures for firms. In addition, UCITS ManCos and AIFMs may also wish to consider whether any additional updates are required with regard to their ‘know your distributor’ (KYD) diligence procedures and any potential impact on business plans.

Finally, AIFMs may also wish to consider updating investment management agreements to include provisions which are applicable as a result of national regulators gold-plating certain requirements. Further consideration will need to be given with respect to how MiFID II should specifically apply to the business model. Primarily, this would include provisions relating to best execution, independent investment advice, inducements, product governance, client classification and telephone taping requirements. It will be necessary to update relevant documentation and internal processes with regards to these requirements, whilst taking into account that not all activities may necessarily fit squarely into the box of regulatory guidance provided, consequently requiring more specificity in internal compliance material reflecting your business model.

Please click on the above link for more information.