On 12 December 2017, the German Federal Financial Supervisory Authority ("BaFin") published the long-awaited new capital investment circular on the interpretation of the German Investment Regulation (Anlageverordnung, "AnIV") and the German Pension Fund Supervision Regulation (Pensionsfonds-Aufsichtsverordnung, "PFAV"): Circular 11/2017 (VA), Guidance notes on the investment of guarantee assets of primary insurance undertakings, to which to the provisions regarding small insurance undertakings (sections 211 to 217 VAG) are applicable, and local pension schemes and pension funds (Kapitalanlagerundschreiben) ("Circular 11/2017").

The update was necessary because the BaFin Circular 4/2011 (VA) dated 15 April 2011 containing guidance notes on the investment of restricted assets of insurance undertakings ("Circular 4/2011") had not yet been adapted, in particular, to (i) the German Capital Investment Code (Kapitalanlagegesetzbuch, "KAGB") that entered into force on 21 July 2013, (ii) the changes caused by the transposition of the so-called Solvency II Directive into German law with effect as of 1 January 2016 and (iii) the amendments to the AnlV and the German Insurance Supervision Act (Versicherungsaufsichtsgesetz, "VAG") made after April 2011.

The draft of Circular 11/2017 was published by BaFin in December 2016 for consultation (Consultation 16/2016, Gz. VA 25-I 3201-2016/0002).

Scope of application

Circular 11/2017 summarises the future administrative practice of BaFin regarding the AnlV and PFAV. Both regulations govern the investment of guarantee assets of "small" insurers, pension schemes and pension funds. Via corresponding regulations or statutes specific to the German states, the AnlV or PFAV and thus Circular 11/2017 ultimately also apply to other insurance schemes such as benefit funds. So far as the circular stipulates general requirements for the investment of guarantee assets, it is likely that also insurers covered by the scope of Solvency II will be guided by the circular with regard to § 124 VAG. Therefore, the new circular is of significant practical importance for investments by numerous institutional investors.

Essential reforms

Compared to the consultation draft, Circular 11/2017 will essentially introduce the following reforms:

  • Bail-In-Quota: A new 25% quota for direct and indirect investments held in bail-in-compliant debt instruments (i.e. pursuant to section 46f (6) German Banking Act) is available. Investments made before 1 January 2017 benefit from grandfathering and are not to be charged to the bail-in-quota.

    Bail-in-compliant debt instruments can for instance be acquired pursuant to section 2 (1) n°7, 8 or 18 AnlV or in case of a rating between speculative grade and investment grade to the high-yield-quota (5%) or to the opening clause (section 2 (2) AnlV).

  • Participation Quota (section 2 (1) n°13 AnlV): The former short-term leverage restriction of 10% is no longer applicable to private equity funds, unless such fund qualifies as a fund-of-fund. This is in particular advantageous with respect to the allocation of foreign private equity funds. Further, BaFin permits borrowings for the purpose of pre-financing capital calls. BaFin still imposes a requirement of free transferability. Further, BaFin stresses the importance of a business model with entrepreneurial risks for the fund.

  • Real Estate Quota (section 2 (1) n°14 AnlV):

    • N°14 lit. a): In general, any transfer of real estate or interest in a real estate company requires the prior consent of the trustee (section 129 (1) VAG). However, in the event of an emergency sale, i.e. a necessary sale within five business days, the trustee may consent to the transfer afterwards.

    • N°14 lit. c): In accordance with current non-formalised BaFin administrative practice, BaFin clearly states that assets which are necessary for the management of the real estate (Bewirtschaftungsgegenstände, section 231 (3) KAGB) are eligible assets.

      The former requirements for the redemption procedure of an open-ended fund (i.e. redemption within six months, payment of the redemption price within 20 calendar days) should no longer apply. Pursuant to BaFin's definition of an open-ended fund, which is unfortunately not in line with the EU-wide harmonised definition of an open-ended fund, redemption of fund's units or shares should be possible at least once a year. For EU-AIF, this new practice is good news as adjustments to the needs of VAG-investors can be achieved easier.

  • Investments in Undertakings for Collective Investments in Transferable Securities ("UCITS") (section 2 (1) n°15 AnlV): Such investments must no longer be fully transparent. An UCITS may invest in a non-transparent target fund to a small extent. Such investment can be allocated to the 7.5% quota for alternative investments. Unfortunately, BaFin does not define the term “small extent”.

  • Participation in an open-ended special fund with fixed investment conditions (Spezial-AIF mit festen Anlagebedingungen) (section 2 (1) n°16 AnlV):

    • The broad term “securities” within the meaning of section 284 (2) lit. a) KAGB is now limited to securities within the meaning of section 193 KAGB. Unfortunately, transitory or grandfathering provisions with respect to current investments do not exist. In case investments of the guarantee assets (not only those pursuant to n°16) do no longer fulfil the applicable requirements, they must no longer be liquidated immediately but can be liquidated in line with the interests of the insured persons.

    • The 20% quota for non-listed interests in companies now also comprises closed-ended private equity funds within the meaning of n°13 lit. b). As a consequence, it may be more complicated to qualify such investments as an investment in securities. Pursuant to the wording, investments in other closed-ended funds do not per se have to be qualified as an investment in non-listed interests in companies.

  • As far as open-ended funds permit suspension of the redemption of units or shares due to extraordinary circumstances, such funds may generally be acquired with the guarantee assets and be allocated pursuant section 2 (1) AnlV n°15 to 17. Despite the explicit reference to funds within the meaning of n°15 to 16, such relief should also apply to open-ended real estate special funds pursuant to n°14 lit. c).

Entry into force and repeal of previous circular

Circular 11/2017 will supersede Circular 4/2011. At the same time, the circular on investments in asset-backed securities (ABS) and credit-linked notes (CLN) and the circular on investments in hedge funds will be repealed. Their contents are now included in Circular 11/2017. The three BaFin guidance notes on investments in company loans, in the high-yield segment and in the EU, the ESM and the EFSF were also repealed.


Was it worth the wait? No, rather not. Compared to the draft consultation, the amendments of the new Circular 11/2017 are of minor impact. In addition, one year in order to finalise the draft is too long and does not justify the uncertainties in the market. Nevertheless, Circular 11/2017 reduces the uncertainties with regard to investments of the guarantee assets in investment undertakings that have existed in particular since the KAGB came into force. Further, fund structuring and fund investments are much easier now and previous uncertainties have been clarified. Summarising the BaFin requirements in one single circular makes them also easier to handle.