The introduction of the KIID in place of the simplified prospectus constitutes one of the principal changes to the legislative framework governing UCITS as introduced under UCITS IV.

The simplified prospectus was originally intended to be a short, standardised document which would enhance transparency and comparability between UCITS investment products and be easy to read by the average investor.  However, in the lead up to the development of UCITS IV it had become generally accepted by European regulators that the simplified prospectus had failed to achieve many of these intended goals.  The KIID is designed to address the perceived failings of the simplified prospectus by prescribing not only the nature of the information that can be included, but also by standardising the style and format in which that information can be presented and the length of the KIID itself.  In addition, harmonised methodologies have been developed to ensure comparability as between UCITS in relation to the key areas of charges and risk profile.

Standard Length

No KIID, apart from those produced in respect of structured UCITS, can exceed two A4-sized pages when printed.  KIIDs for structured UCITS may not exceed three A4-sized pages.  No exceptions to the prescribed limits on length are permitted.

Harmonised Content and Presentation

The content of the KIID is heavily prescribed, principally by implementing Commission Regulation (EU) No 583/2010 (the “Regulation”), which specifies in an “exhaustive manner” the information which can be included in a KIID.  No other information or statements other than what is specified in the Regulation may be included in the KIID, except where the Regulation itself expressly states otherwise.
Content is required to be set out under five main headings, which must be presented in the order set out below

Investment Objective and Policy

This section must set out the essential features of the investment about which an investor should be informed.  The focus is on the retail investor and the plain language requirements pertaining to the KIID (discussed further below) will have their greatest impact on this section.  Both ESMA and the Central Bank have emphasised that the disclosure here should not be copied from the prospectus without being first assessed critically in light of the requirement that technical language and industry jargon be avoided in favour of clear language.
Only those investments that are material to the achievement of the UCITS’ objective should be mentioned.  Ancillary strategies and investments not expected to have a material impact on performance should not be detailed.  Statements to the effect that investors may redeem on demand and specifying whether dividend income is distributed or reinvested should also be included in this section.  Unlike the simplified prospectus, a separate section relating to the distribution policy does not form part of the KIID.

Risk and Reward Profile

This section introduces the synthetic risk and reward indicator (“SRRI”), one of the key innovations of the KIID format.  The SRRI ranks the relevant fund on a scale of 1 to 7 on the basis of its volatility record over a sample period in order to facilitate easy comparison between UCITS’ risk/reward profiles and must be included in every KIID together with a narrative explanation of its main limitations and of any risks which are materially relevant to the UCITS, but not adequately captured by the SRRI.  Each UCITS’ SRRI must be calculated on an ongoing basis according to a harmonised methodology developed by ESMA and all SRRI computations must be adequately documented and retained by the UCITS or its management company for a period not less than five years (and longer for certain structured UCITS).

Charges

Charges are required to be set out in a prescribed tabular format, distinguishing between the maximum fees that might be charged directly to investors on entry to or and exit from the fund (i.e.  subscription/redemption fees), charges taken from the assets of the UCITS over the course of a year (the “Ongoing Charge”) and charges taken from the fund under certain specific conditions, such as performance fees.

Each of the foregoing charges must be presented as a single percentage figure and, as with the SRRI (discussed above), the Ongoing Charge must be calculated according to a harmonised methodology developed by ESMA based either on the previous year’s expenses or, in certain circumstances, an estimate believed on reasonable grounds to be indicative of the amount likely to be charged to the UCITS in the year to come.  The harmonised methodology prescribed for calculation of the Ongoing Charge is intended to provide investors with a figure which can easily be compared against that of other UCITS and does not require to be audited, unlike the simplified prospectus’ total expense ratio.  All charges paid out of the assets of a UCITS over the course of a year must be reflected in the Ongoing Charge unless specifically excluded by ESMA’s methodology.

Past Performance

Like the simplified prospectus, a bar chart displaying performance (including performance of any benchmark referred to in the investment policy) must be included in every KIID apart from those produced in respect of structured UCITS, which are required not to include the “Past Performance” section.  Past performance must be calculated based upon the net asset value of the UCITS and on the basis that any distributable income has been reinvested and must be calculated by reference to the calendar year.  Under the simplified prospectus regime, past performance was often calculated by reference to the UCITS’ fiscal year.  This is no longer permitted unless the fiscal and calendar years match.  Past performance must be updated annually within 35 business days of the end of each calendar year.

The bar chart must provide for either 10 or 5 calendar years of performance, with years for which no performance is available included on the chart but left blank with no annotation apart from the date.  UCITS with performance of less than 5 complete calendar years must present using a chart displaying 5 calendar years.  The current calendar year must never be included on the chart.  Any material change to the UCITS’ investment objective and policy during the disclosed performance period must be clearly delineated on the bar chart and accompanied by a narrative explanation.

Practical Information

Information as to the UCITS’ service providers and where and how to obtain further information about the UCITS, including the latest prices, must be set out in this section along with certain other statements prescribed by the Regulation.

Other

In addition to the foregoing, particular additional content requirements are prescribed in respect of funds-of-funds, feeder funds, and in relation to KIIDs produced in respect of an umbrella UCITS and KIIDs issued in respect of a particular share class or classes or in respect of a ‘representative’ share class within a sub-fund.

Cross References

Cross-referencing to information included in other documents, such as a UCITS’ prospectus, is permitted, but not as a means of by-passing the KIID page-limit or as a means of covering information which should be addressed directly in the KIID itself- i.e.  information which is material to an investor’s understanding of the investment.

Plain Language

The information included in the KIID must be presented in language which may be easily understood by retail investors.  Those charged with drafting KIIDs are required to move away from legal and technical language and to avoid using jargon in favour of concise and understandable disclosure focused only on the key information that investors need.
The plain language requirements are widely recognised as one of the principle challenges presented by the KIID, particularly when considered within the constraints on document length and the principle of consistency with the relevant UCITS’ prospectus.
Industry commentators have observed that the KIID plain language requirements are likely to initiate changes to prospectus documentation in order to allay concerns regarding consistency between documents.  The Central Bank has confirmed, however, that any decision to redraft prospectus disclosure on this account is a matter for each individual UCITS and is not a requirement of the Central Bank.

The Central Bank also confirmed that KIIDs will be spot-checked for compliance with plain language requirements and re-drafts will be requested where thought necessary.

Updating the KIID and the Central Bank Filing Process

Every KIID must be revised and made available no later than 35 business days after 31 December in each year.

Additional updates may be required throughout the year in order to ensure that the essential elements of the KIID such as, for example, the SRRI and charges information are kept up-to-date.

The KIID will not be subject to review by the Central Bank except on a spot-check basis as mentioned previously.  However, the UCITS or its legal advisor will be required to confirm in writing to the Central Bank that the KIID complies in full with the requirements of the Regulation, the Irish implementing legislation, all related ESMA Guidelines and with the Central Bank’s Guidance Note 1/11.  This confirmation will also be required to state that the information in the KIID does not conflict with the UCITS’ prospectus, where relevant.

Filing will be effected electronically with automatic noting by the Central Bank.

Transition Timetable from the Simplified Prospectus to the KIID

Every UCITS authorised on or after 1 July 2011 must adopt the KIID as and from the date of its authorisation by the relevant national competent authority.

For UCITS authorised before 1 July 2011, Member States may allow the KIID to be introduced during the course of a transitional period ending no later than 30 June 2012.  The simplified prospectus must be replaced by the KIID throughout the EU by 1 July 2012.  It is up to each Member State whether to allow for this transitional period, either in whole or in part, when transposing UCITS IV into national law.  Ireland has adopted the full one-year permitted period.  Accordingly, Irish UCITS authorised before 1 July 2011 are not required to introduce the KIID until 30 June 2012, but may begin to do so as and from 1 July 2011.  Any new sub-fund or new share class established by such UCITS during the transitional period may adopt either the KIID or the simplified prospectus, but the UCITS must be able to justify the adoption of a KIID in such circumstances if the other sub-funds/share classes of that UCITS continue to use the simplified prospectus.

UCITS which are marketed within multiple EU jurisdictions must use the same document, be it the KIID or the simplified prospectus, in every such jurisdiction.  No Member State into which a UCITS is marketed can require the KIID in circumstances where the UCITS’ home Member State has allowed for a transitional period and the UCITS has elected to retain the simplified prospectus.

Providing the KIID to Investors

The KIID must always be provided to investors free of charge.

The KIID is intended to be a pre-contractual document and must accordingly, be provided to investors in advance of an initial investment being made.  Where a UCITS is selling through an intermediary rather than directly to the investor, it is the responsibility of the UCITS or its management company to provide the KIID to the intermediary, who must in turn provide the KIID to its clients.

As a pre-contractual document, updated KIIDS do not need to be provided to existing investors in a UCITS.  Every updated KIID must, however, be made available on the website of the UCITS or that of its management company.  A paper copy KIID must be delivered to investors where requested.

It is a matter for each individual UCITS as to whether investors should be requested to confirm receipt of the KIID, although it is likely that most UCITS will require this confirmation to be made in the context of the subscription form, whether as a check-box option or otherwise.

Liability for Content of KIID

The UCITS or its management company is responsible for the content of the KIID.

Civil liability cannot be incurred solely on the basis of the KIID, including any translation thereof, unless the KIID can be shown to be misleading, inaccurate or inconsistent with the relevant parts of the prospectus.

Governing Measures

Set out below are the current Level 2 and Level 3 measures concerning the KIID: