On 20 July 2012, the German Ministry of Finance (BMF) published the draft of a bill (Draft AIFM Act) to implement the Directive 2011/61/EU on Alternative Investment Fund Managers (AIFMD) into German law. Within the framework of implementing the AIFMD, the Draft AIFM Act provides, in particular, for the repeal of the German Investment Act (Investmentgesetz — InvA) that, among other things, implemented the UCITS Directive 2009/65/EC (UCITS Directive). In addition, 26 other acts and regulations have been amended and/or adjusted by the Draft AIFM Act.
This article focuses on some important issues of the Draft AIFM Act. For further information, please see DechertOnPoint “The German Implementing Act for the AIFM Directive: A Critical Survey of the Draft Bill”, authored by Robert Eberius, Carsten Fischer, Till Friedrich, Martin Hüwel, Angelo Lercara, Achim Pütz, Florian Rinck, Daniel Schäfer, Hans Stamm, Benedikt Weiser and Frank Wilbert.
To replace the InvA, the Draft AIFM Act provides for the creation of the “German Investment Code” (Kapitalanlagegesetzbuch — GIC), which will comprise the future legal framework for all investment funds in Germany. The AIFMD must be implemented into national law by 22 July 2013. Numerous provisions in the draft of the GIC refer to the implementing Regulation for the AIFMD (version of July 2012) (Regulation).
Various provisions of the draft GIC distinguish between funds that only allow for non-individual investors, so-called “Special Investor Funds” (Spezialfonds), and funds that also allow for individual investors (Mutual Funds).
Approach Taken by the German Legislator
In principle, the draft of the GIC aims at a one-toone transposition of the AIFMD. This means that the provisions of the AIFMD should be incorporated into German law unchanged to the greatest extent possible. On several points, however, the BMF has gone beyond the mandatory minimum requirements of the AIFMD and imposed a more stringent legal framework on the German investment fund sector than that stipulated by the European legislator.
Scope of Application — “Investment Fund by Substance”
In determining the scope of the new regulations, the GIC abandons the prior approach of “investment fund by form” and replaces this with “investment fund by substance”, corresponding to the AIFMD. Based on this approach, in the future, a collective investment will be required to qualify either as an investment fund in accordance with the UCITS Directive (UCITS Fund) or as an Alternative Investment Fund (AIF) according to the AIFMD and the GIC. Other fund types will no longer be permitted.
Expanded Marketing Concept — Abolishment of Private Placement
The present rules for the marketing of investment funds are subject to substantial changes under the draft GIC. A key change is the expansion of the concept of “marketing”, which will prohibit the concept of “private placement”. While under the InvA (with the exception of provisions for single hedge funds), only “public marketing” was relevant in terms of regulatory law, in the future, the concept of “marketing” will encompass the direct or indirect offering or placement of shares or stocks of an investment fund, as well as advertising for an investment fund or a management company.
As a consequence of this revised concept, the previous regulation (according to which the marketing to certain institutional investors, as well as under certain circumstances the offering in general, is not considered as public marketing) will be discarded. However, certain of the exemptions that had been provided by the InvA will continue to apply. Such exempted activities (e.g., the designation by name of an investment fund, the publication of issue and redemption prices, the disclosure of taxation bases pursuant to Section 5 of the German Investment Tax Act (Investmentsteuergesetz — GITA)) are also not considered “marketing” under the draft GIC. In this respect, the concept of “public” marketing no longer plays a role.
This also means that all investment funds currently placed under the “private placement regime” in Germany have to retroactively submit registration notifications. The draft GIC provides a period of one year for obtaining such registration after the draft of the GIC comes into effect (i.e., until July 2014).
Definition of Investor
The adoption of the investor classification mechanism of the Securities Trading Act (Wertpapierhandelsgesetz — WpHG) introduced by the MiFID Directive constitutes another pillar of the marketing regulations of the draft GIC. Under the WpHG, investors are classified either as “professional investors” or as “retail investors”. In principle, the duties to provide information stipulated in the AIFMD initially apply to both groups. When regulating the marketing directed at retail investors, however, the German legislator made use of the option to stipulate stricter rules as provided by the AIFMD. This applies first and foremost to comprehensive duties to provide information and to certain disclosure obligations.
Notification Obligation for All Funds Before Starting Marketing
Also new is a requirement that a notification to the BaFin must be made prior to the start of the marketing of all AIFs — including domestic ones (!). For UCITS Funds, on the other hand, the existing disclosure procedure (EU passporting) remains in place.
The rules for the notification procedure for AIFs differ, based upon: whether the funds being marketed are domestic AIFs, EU AIFs or AIFs from third countries; whether the marketing is directed at professional investors or retail investors; and whether masterfeeder funds are marketed or referred to. The possible combinations of these factors results in almost case-by-case notification provisions under the draft GIC. With respect to marketing to retail investors, foreign AIF management companies must designate a reliable, suitable representative with a registered office in Germany, among other things. In contrast to the current legal situation, however, this representative must be able to exercise the compliance function for the management and marketing activities.
EU Passport for Certain Funds
Another essential element with regard to the marketing of AIFs to professional investors is the EU passport provided for in the AIFMD, which entitles a fund management firm authorised in a Member State to conduct marketing of AIFs on an EU-wide basis. The management company from a non-EU country, however, first must register in a Member State of reference of the European Economic Area (EEA).
General Introduction of the Three-Parties Concept (“Investment Triangle”)
In the past, the InvA provided for a separation of investment firms and custodians, each in contrast with the investor, in whose interest they must always act. Previously, this so-called “investment triangle” did not apply to unregulated fund structures. The draft of the GIC provides for replacement of the term “custodian” (Depotbank) with that of “depositary” (Verwahrstelle) and, due to the differing prescriptions in the UCITS Directive and the AIFMD, provides for separate regulations for UCITS depositaries and AIF depositaries. Under the new framework of the draft of the GIC, a depositary must be designated for any investment fund in the future. Here, from the perspective of investor protection, some mandatory, stricter rules for AIF depositaries were carried over to UCITS depositaries and in anticipation of the UCITS V Directive.
Fund Vehicles Under the Draft GIC
Further changes are planned regarding permitted types of fund vehicles. The draft GIC would retain the current distinction set out in the InvA between contractual Special Investor Funds of investment firms and statute-defined sub-funds of investment stock corporations (Investmentaktiengesellschaft — InvestmentAG). An additional investment fund in the statute-defined form — the investment limited partnership (Investmentkommanditgesellschaft — InvestmentKG) — is being introduced into law. This will create a new closed-ended investment vehicle in Germany for tax-transparent pooling of a company’s pension funds as well as for real asset funds.
The draft of the GIC also makes a distinction between open-ended and closed-ended funds. Closed-ended funds must choose between an InvestmentAG (with fixed capital) or a closed-ended limited partnership, so-called InvestmentKG.
Single Hedge Funds
Whereas currently, units in single hedge funds can be distributed only by way of private placement, and public distribution is prohibited, in the future even the private placement of such units will be prohibited. Under the draft of the GIC, it will only be possible to set up single hedge funds as open-ended Special Investor Fund AIFs, the units of which may be held only by professional investors.
Private Equity Funds
Based on the draft of the GIC, private equity funds should normally be regarded as closed-ended (i.e., redemption is not required at least once a year), since such funds typically invest in illiquid assets. Even if the liquidity necessary to qualify as an open-ended investment fund (with at least annual redemption rights) could be generated from an operational point of view, it must be taken into account that open-ended Special Investor Fund AIFs must invest predominantly in financial instruments and cannot have control over unlisted companies.
Open-Ended Real Estate Funds
Under the draft of the GIC, it will no longer be possible to set up open-ended real estate funds. This applies both to Mutual Funds and to Special Investor Funds. This restriction is a surprise to the industry, since new redemption restrictions for open-ended real estate funds were introduced in the recent amendment of the InvA.
It is particularly surprising that open-ended Special Investor Fund real estate funds will not be permitted in the future, because no liquidity issues had been experienced by such funds, nor were such issues expected, in principle, in light of the typical provisions used in related contractual agreements with institutional investors.
Closed-ended funds, up to now unregulated in terms of their investment policy and management, will be assigned to the regulated fund category under the draft of the GIC. The approach to new regulation by the legislator indicates the following major regulation principles for closed-ended funds:
- Closed-ended domestic investment funds may be set up solely as an InvestmentAG with fixed capital or closed-ended InvestmentKG.
- The ultimate consequence of this mandatory legal form is that investors may participate in closedended funds (both Mutual Fund AIFs and Special Investor Fund AIFs) only as shareholders/partners. As a supplementary measure, the breakdown of the shares into voting shares and non-voting shares has been nullified with regard to closedended InvestmentAG with fixed capital.
- Both closed-ended Mutual Fund AIFs and closedended Special Investor Fund AIFs must invest their funds primarily in assets that are not financial instruments within the meaning of the AIFMD.
- While stronger product-based constraints are intended for Mutual Fund AIFs, such constraints only apply to Special Investor Fund AIFs on a limited basis.
- Leverage (on the fund level) is to be limited to 30%.
Amended Outsourcing Rules
Portfolio management and risk management functions may only be outsourced to entities that are authorised or registered to provide asset management or financial portfolio management and that are subject to supervision by regulatory authorities (as is already currently the case where portfolio management is outsourced). An exception is made for AIF asset management companies that, upon authorisation by the BaFin, are permitted to outsource the portfolio management or risk management of Special Investor Fund AIFs under their management to companies that have not been authorised for asset management purposes. The requirements for a sufficient licence to provide asset management will be set forth in greater detail in the Regulation.
The draft of the GIC is a step forward for harmonisation in the area of investment law, which will now extend beyond just UCITS Funds. However, it can be assumed that the AIFMD will not be the end of the harmonisation attempts at the European level. On the contrary, there are already further drafts of directives and regulations in the area of investment and capital market law at the European level — examples include the UCITS V and UCITS VI Directives, the MiFID II Directive and the Regulations on European venture capital funds and European social entrepreneurship funds.