UCITS / NURS KIIDs – Highwire Extensions

Introduction to UCITS / NURS KIIDs

The UCITS KIID was introduced in 2012 as part of UCITS IV to replace the cumbersome and lengthy simplified prospectus that was previously required.

The UCITS KIID is a stand-alone, pre-contractual, 2-page document containing the essential features of the fund and is to be systematically provided to investors before they decide to invest.

Whilst it is a standalone document, in some jurisdictions, there is also a requirement for a Supplementary Information Document (SID); see below.

In the EU, UCITS KIIDs were replaced by PRIIPs KIDs on 3 January 2023.

However, the UK have extended the requirement to switch to PRIIPs KIDs until 31 December 2026.

Therefore, in order to sell a retail product into the UK it is still required to publish a UCITS KIID for UCITS product or a NURS KIID for non-UCITS retail schemes. Please note that the only difference is in the name. The content is the same.

KEY CONTENTS
KEY CHALLENGES

The KIID follows a prescriptive template. The key contents of the KIID are:

Identification of the UCITS.
Investment objectives and investment policy.
Risk/Reward profile (including the SRRI).
Costs and associated charges.
Past performance presentation / performance scenarios.
Practical information.

Other Considerations

Remuneration – UCITS V requires (i) the KIID to include a prescribed statement in relation to remuneration policy and (ii) the prospectus to include some remuneration-related information.
Benchmark Disclosures.

For further detail on each of these sections, click here.

The KIID production process is time and resource consuming. The key challenges of maintaining KIIDs are:

Managing the volume of documents;
Compliance with complex requirements for determination of the Synthetic Risk and Reward Indicator (SRRI);
The risk/reward profile
Ensuring clear, fair and not misleading – it is difficult to explain to the average investor terms such as: Counterparty Risk, currency risk, credit risk, interest rate risk, market rate risk, volatility risk.
Managing the update requirements
Ensuring it is given to investors before they invest
Record keeping and traceability of the information used to produce the various KIIDs.
Ensuring ongoing charges remain in line with those on the KIID

REGULATION AND GUIDELINES

Whilst the KIID is a 2 page document, there are over 100 pages of Regulation and Guidance, as set out below:

UCITS IV Directive, Directive 2009/65/EC – click here
Commission Regulation (EU) No 583/2010 of 1 July 2010 for the KIID – click here

ESMA’s Guidelines

CESR 10-1318: Guidelines – Selection and presentation of performance scenarios in the Key Investor Information Document (KII) for Structured UCITS – click here
CESR 10-1319: Guidelines – Transition from the Simplified Prospectus to the Key Investor Information Document (No Longer Relevant) – click here
CESR/10-1320 – CESR’s Guide to Clear Language and Layout for the Key Investor Information Document – click here
CESR/10-1321 – CESR’s Template for the Key Investor Information Document – click here
CESR/ESMA 10-673: Guidelines – Methodology for the calculation of the synthetic risk and reward indicator in the Key Investor Information Document – click here
ESMA UCITS Q&A – having previously was a separate Q&A document for KIIDs. This has now been merged into ESMA general Q&A on UCITS – click here
ESMA Final Report Guidelines on performance fees in UCITS and certain types of AIFs – click here
Guidelines – Methodology for calculation of the ongoing charges figure in the Key Investor Information Document (europa.eu) – Click here

For all UCITS regulations and Guidelines, click here.

Some National Authorities have also issued relevant further Guidelines and Q&A. For example:

Association of the Luxembourg Fund Industry | Key Investor Information document – Q&A – click here

THE VOLUME OF KIIDs

There is a challenge of dealing with the volume of KIIDs as:

A KIID must be produced for every shareclass, even where the shareclass is only made available to institutional investors;
A KIID must be produced in the business languages of each jurisdiction in which the shareclass is distributed; and
KIIDs must be updated at least annually. See below for the Updating requirements.

To reduce the number of KIIDs, it is possible to have:

Representative shareclasses approach – one shareclass is representative of multiple other shareclasses. However, the different shareclasses need to have sufficient similarities.
On an ongoing basis, the benefit of having representative shareclass KIIDs is diluted by the need to monitor them against all the represented shareclasses. In addition, there is no provision for the use of representative shareclasses in the EPT or EMT. Therefore, should the production of those Templates be required to assist in the distribution of the product, then the information in a stand-alone KIID is effectively being produced in Template format. Also, there is reduced provision for using representative shareclasses when it comes to producing PRIIPS KIDs.

It is the responsibility of the UCITS to select the most appropriate representative share class.

However, ESMA also make clear that, where charging structures differ between classes, the share class with the highest overall charge is the most appropriate representative share class to avoid the risk of understating charges.

Multiple Shareclasses approach, where multiple shareclasses are displayed on the one KIID document. This is difficult in practice as you need to be able to display all the objectives, SRRI, Risks, charges, past performance (possibly vs. benchmarks) etc. of the different shareclasses on the same 2-page document; this is also needs to be sufficiently clear in black and white.

A class would not be regarded as representative for example when its currency of exposure is different e.g. A USD class should not be used to represent a GBP class unless the GBP class is hedged to USD.

THE UPDATING REQUIREMENTS

The KIID can be updated as frequently as a UCITS wishes. However, it must be updated:

prior to or following any material change to static data e.g. manager name, address
prior to or following any material change to dynamic data e.g. to SRRI, to Ongoing Charge)
prior to a proposed change to the fund rules, instrument of incorporation or prospectus; or;
at least annually, and within 35 business days of each calendar year end.

In accordance with Article 82 of the UCITS Directive, a UCITS is required to keep the essential elements of key investor information up-to-date.

The Annual Update – In accordance with Article 23 of Commission Regulation (EU) No 583/2010, a KIID with duly revised presentation of past performance of the UCITS shall be made available no later than 35 business days after 31 December each year.

The SRRI of a fund should be revised and the KIID updated if it risk category has changed on each weekly or monthly data reference point over the preceding 4 months.

FILING AND NOTING

KIIDs for funds selling into the United Kingdom must be filed with the FCA. The new KIID shouldn’t be made available until the FCA confirms noting of the KIID.

FORMAT AND CONTENT

The KIID must be in a consistent standard template which is harmonised across all Member States.
Click here for the Template.
It is a 2 page document. The exception is for structured funds which can have 3 pages.
There are rules for layout and for content and use of clear language – see below.

Layout:

The CESR Guide to Clear Language and Layout, includes the following Guidelines:

2 Pages A4
Typeface: Arial or Times New Roman (or similar)
Minimum Font size: 10-11
headings and sub-headings
Can be in colour, but needs to be understandable to investor in monochrome!
Maximise white space:
– Small paragraphs
– Bulleted lists
– Clear gaps between section

Content and use of clear language:

The CESR Guide to Clear Language and Layout includes the following requirements for KIIDs:

Plain Language
Clear, succinct
No jargon or technical terms
CESR refer to Oxford Guide to Plain English
This applies to the translation also!
It is not about dumming down

CESR provides the following examples of jargon and technical terms: allocation date, appreciation, denominated equity, erosion establishment, expire, exposure, liquid, negative growth, redemption, repurchase, volatile.

CESR provides the following example of unclear language:

“Where, in the Manager’s judgement, there is significant uncertainty that a bond holding will be redeemed at par; the amortised capital component for that holding is retained in the fund’s capital and not distributed. This has the effect of reducing the estimated redemption, distribution and underlying yields and the actual distribution rate.”

DELIVERY TO INVESTORS

KIIDs must be provided to investors before they decide to invest.

An updated KIID does not need to be provided to existing investors unless they are making additional subscriptions. Investors always have the right to be provided with the KIID on request.

Note, KIID need also to be provided to:

Existing investors making additional subscriptions, except where unit holders in a UCITS invest through a regular savings plan
Investors making additional subscriptions through a regular savings plan, where there is a change is made to the subscription arrangements, for example, increases or decreases in the subscription amount, which would require a new subscription form.
Existing investors within a UCITS umbrella fund, who switch or exchange units in one sub-fund for units in another, be provided with the KIID for the sub-fund in which they are going into.
Professional investors.

SRRI NUMBER

Synthetic Risk Reward Indicators (SRRI) calculations are required for UCITS KIIDs.

The SRRI translates the volatility of the returns into an SRRI classification. Depending on the result of the volatility calculations, the fund is allocated into one of the seven SRRI risk classes between 1 (low) and 7 (high).

The SRRI of a fund should be revised and the KIID updated if it risk category has changed on each weekly or monthly data reference point over the preceding 4 months. Therefore, the SRRI of the fund should be monitored and controlled on an ongoing basis.

Click here for more details.

PRODUCTION COSTS

KIID is a regulatory document and therefore can be charged to the fund.

Technology etc required to support its production can also be charged.

This may provide an opportunity to invest in Enterprise Content Management / Document Management / Translation and reporting tools.

SUPPLEMENTARY INFORMATION DOCUMENTATION

In the UK, there is also a requirement for an additional document containing supplementary information to be supplied with the KIID — the “Supplementary Information Document” (SID).

The SID provides supplementary information not contained in the KIID.

This includes information such as how to buy or sell investments, how to get more information about an investment, details of cancellation rights, how to complain, entitlements to compensation in the event that a firm cannot meet its liabilities and data protection policies.

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