On 8 June 2011, the European Parliament and the Council of the European Union passed the directive on Alternative Investment Fund Managers (2011/61/EU) ("AIFM‑D"). The scope of the AIFM‑D comprises the regulation of alternative investment fund managers ("AIFM") and the marketing of alternative investment funds ("AIF") within the European Union to professional investors. The Member States have to implement the AIFM‑D in national law until 22 July 2013. On 12 December 2012 the Federal Government of Germany adopted the draft of a federal law on the implementation of the AIFM‑D, at the center of which is the government draft of a Capital Investment Act (Kapitalanlagegesetzbuch) ("Draft KAGB"). The Draft KAGB has passed through the Financial Committee of the Bundestag on 24 April 2013, and has been adopted by the Bundestag on 16 May 2013. Even though the KAGB as such does not require the consent of the Bundesrat, the latter could refer the entire implementation package to the Conciliation Committee for further consideration. At the end of the conciliation procedure, the Bundesrat may raise an objection against the KAGB. Such objection may then be outvoted by the Bundestag. The final parliamentary adoption of the KAGB is still expected in time before the implementation deadline ends on 22 July 2013.
The Draft KAGB is not only designed to implement the AIFM‑D into national law, rather the future KAGB shall also replace the existing German implementation of Directive 2009/65/EC ("UCITS-Directive"). As a result, the Draft KAGB is offering a coherent set of rules for all "investment funds" (i.e. for collective investment undertakings which raise capital from a number of investors, with a view to investing it in accordance with a defined investment policy for the benefit of those investors and which is not an operating company with a non-financial business). Therefore, each investment undertaking is either an undertaking for collective investment in transferable securities pursuant to the UCITS-Directive ("UCITS") or an AIF. Whereas the AIFM‑D regulates AIFM and only indirectly intends to regulate AIF, the Draft KAGB, at least partially, directly regulates AIF, too.
In any case, AIF and AIFM are subject to supervision by the German Federal Financial Supervisory Authority ("BaFin"), if and to the extent that they fall within the scope of application of the Draft KAGB.
Key characteristics for the application of the Draft KAGB regarding AIFM and/or AIF are:
- registered seat and central administration of the AIFM in Germany (Sec. 1(16) Draft KAGB, Sec. 17(1) Draft KAGB),
- determination of Germany as Member State of Reference for non‑EU AIFM,
- registered seat of the AIF in Germany (Sec. 1(19) no. 34 Draft KAGB),
- marketing (Sec. 293(1) Draft KAGB, Art. 4(1)(x) AIFM‑D) of units or shares of domestic AIF, EU‑AIF or non‑EU AIF in Germany to professional investors, semi-professional investors or retail investors,
- management (Art. 4(1)(w) AIFM‑D) of AIF in Germany and
- investment and divestment activities of AIF within Germany, as far as regulatory law does not provide for a distinction according to the seat of the AIF or the seat of the AIFM managing the AIF (cf. Art. 26-30 AIFM‑D).
Inter alia, holding companies, family offices, joint ventures and securitization special purpose entities are exempt from the scope of the Draft KAGB and the AIFM‑D.
"Small" domestic AIFM whose assets under management in total do not exceed a value threshold of (i) EUR 100 million including any assets acquired by the use of leverage on the level of the fund or (ii) EUR 500 million (unleveraged), that do not grant investors redemption rights during a period of 5 years, are subject to a restricted application of the Draft KAGB. Such domestic AIFM are free to voluntarily opt in, in which case the Draft KAGB applies in its entirety.
Classes of investors
The Draft KAGB differentiates between different classes of investors, namely professional investors (within the meaning of the AIFM‑D) on the one hand and retail investors (within the meaning of the AIFM‑D) on the other hand. Additionally, the Draft KAGB establishes a new class of investors, the semi-professional investor (i.e. (i) a retail investor with a minimum investment of EUR 200,000 and a certification by the AIFM, that such retail investor has sufficient expertise, experience and knowledge to make his investment decision while understanding the risks associated therewith or (ii) a managing director or employee of the AIFM, as far as such director or employee invests in an AIF managed by this AIFM). Semi-professional investors are treated like professional investors by the Draft KAGB.
Private Equity Funds
The Draft KAGB differentiates between (i) open-ended investment funds (investors have redemption rights exercisable at least once a year) and close-ended investment funds (all investment funds not qualified as open-ended investment funds) on the one hand and (ii) investment funds open to retail investors (open and close-ended Publikums-AIF), and investment funds reserved for semi-professional and professional investors (open and close-ended Spezial‑AIF, Sec. 1(6) Draft KAGB) on the other hand.
Private equity funds qualified as closed-ended Spezial‑AIF are not subject to the principle of risk spreading and may not offer any redemption rights, but are reserved for semi-professional and professional investors in Germany (Sec. 295(1) sentence 2, 317 – 320 Draft KAGB). These findings also apply with respect to Master-Feeder-Structures, where retail investors may only invest in (Publikums-) Feeder-AIF which themselves are only allowed to invest in Publikums-AIF and are thus subject to the principle of risk spreading (Sec. 171(2), 280 Draft KAGB).
Furthermore, the Draft KAGB lays down restrictions for AIF-Kapitalverwaltungsgesellschaften with respect to (i) the holding of shares in non-listed companies and, linked thereto, provisions regarding the acquisition of control (in accordance with the Draft KAGB) and the prohibition of the so-called asset stripping for a period of 24 month following the acquisition of control (Sec. 292 Draft KAGB, Art. 30 AIFM‑D), (ii) investment conditions (leverage, derivatives, short sales, currency risks) and (iii) investment objects. Material restrictions regarding (ii) and (iii) are outlined in principle in the following table:
Click here to view table.
Management and marketing of AIF
As regards the management and the marketing of AIF, in principle, the Draft KAGB distinguishes between
- AIF-Kapitalverwaltungsgesellschaften (domestic AIFM),
- EU-AIF-Verwaltungsgesellschaften (EU AIFM) and
- ausländische AIF-Verwaltungsgesellschaften (non‑EU AIFM),
each of which may manage and market domestic AIF, EU-AIF or non‑EU AIF.
The following activities require written admission by BaFin:
- business operation of a domestic AIF (Sec. 20 Draft KAGB),
- the management of domestic Spezial-AIF or EU-AIF by a non‑EU AIFM which has chosen Germany as its Member State of Reference (Sec. 58(1) Draft KAGB) and
- the marketing of units or shares in any AIF in accordance with Art. 39, 40 AIFM‑D by a non‑EU AIF which has chosen Germany as its Member State of Reference (Sec. 58(1) Draft KAGB).
The application for permission to BaFin requires the submission of comprehensive information, explained in a "guideline to the approval procedure for domestic AIFM according to Sec. 22 Draft KAGB", dated 22 March 2013 (inter alia, evidence regarding the required initial capital and additional own funds or a corresponding professional indemnity insurance to cover potential professional liability risks, the intended shareholding structure, investment strategies and remuneration policies and practices). The marketing of AIF by AIFM in Germany requires a notification to BaFin. In case a domestic AIFM, which holds a permission, intends to manage EU‑AIF by cross-border supply of services or by establishing a branch in another Member State, it has to submit various information to BaFin. If there is no reason to believe that the management of the EU‑AIF violates provisions of the KAGB, BaFin will transmit the documentation to the competent authority of the intended host Member State and will notify the AIFM about the transmission ("Notification of Transmission"). Upon receipt of the Notification of Transmission, the AIFM may begin with the management of the EU‑AIF in the respective host Member State.
Besides, the private placement regime will be abolished and the marketing of any AIF will require the passing of a notification procedure.
With respect to the applicable provisions regarding the management and the marketing of AIF (under the Draft KAGB and the AIFM‑D), in particular, two time periods have to be distinguished:
Until 22 July 2015, ESMA has to issue its advice and an opinion on the functioning and the application of the EU marketing passport for EU AIFM and non‑EU AIFM to the European Parliament, the European Council and the Commission (Art. 67(1) AIFM‑D). At the latest 3 month after having received positive advice and an opinion from ESMA, the Commission shall adopt a delegated act, specifying a date when certain rules and provisions regarding the EU marketing passport become applicable in the Member States (the time period until such date, the "Transition Period").
The above-mentioned time periods are reflected in the Draft KAGB. During and after the Transition Period, different provisions regarding the marketing of AIF by domestic AIFM, EU AIFM or non-EU AIFM to semi-professional and professional investors within Germany and in the EU apply (Sec. 295 (2), (3) Draft KAGB).
Non‑EU AIFM intending to market one or several AIF within the EU during the Transition Period are referred to the respective national regulations of each Member State in which the AIF shall be marketed. Basically, such non‑EU AIFM shall have to obtain and receive authorisation, if applicable, for and from each Member State in which they intend to market AIF during the Transition Period, in accordance with the respective applicable national law (ground 69 AIFM‑D).
Regarding the domestic marketing of EU AIF or non‑EU AIF by non‑EU AIFM to semi-professional and professional investors, the Draft KAGB does not provide for a requirement of a permission by BaFin but rather establishes a notification requirement for the non‑EU AIFM with a corresponding authority of BaFin to deny the marketing (Sec. 295(2) no. 1, (3) no. 1(a), Sec. 330, 314 Draft KAGB). Under the EU marketing passport available exclusively after the Transition Period, the non‑EU AIFM only has to notify the competent authority of its Member State of Reference (in Germany, the BaFin) of its intention to market AIF in the EU (outside of its Member State of Reference) to semi-professional and professional investors. Thereafter, this authority, in case there are no complaints, notifies the competent authorities of the Member State in which one or more AIF shall be marketed about the non‑EU AIFM's intention and further informs the non‑EU AIFM about such notification. As of the date the non‑EU AIFM has received such information, it may start marketing the AIF in the respective Member State(s).
Potential measures of BaFin in case of violations of provisions of the KAGB
In order to prevent illegal investments, BaFin may, in extreme cases, issue ordinances ordering the immediate cessation of business operations and the execution of transactions. In principle, BaFin may revoke authorisation or rather demand the revocation of the responsible managers, prevent the managers from further exercising their business and temporarily transfer their competences to a special representative. In case a domestic AIFM's own funds do not comply with the requirements of the KAGB, BaFin may, inter alia, restrict withdrawals of shareholders and limit or bar the distribution of profits.
Liability risks under civil law for AIFM
The AIFM‑D addresses potential professional liability risks of AIFM (Art. 9 (7), (9) AIFM‑D). A violation of provisions of the KAGB after implementation shall, as an initial point, constitute a violation of public regulatory law. Whether and to what extent individual provisions of the KAGB will also provide for protection of third party interests in favor of investors and/or may constitute protective laws with corresponding sanctions in tort, will have to be clarified in practice and by the competent courts.
The Draft KAGB provides for a special liability of domestic AIFM towards investors of its managed AIF. Further, the depositary may, as statutory representative action (Prozessstandschaft), in its own name and on behalf of the investors, assert the investor's liability claims (Sec. 89, 90 Draft KAGB). Claims of the investors for violations of the KAGB or the investment conditions may e.g. include (i) violations of the evaluation criteria for the evaluation of investments/portfolio companies which were announced when the AIFM began to market shares in an AIF (Sec. 307(1) no. 11 Draft KAGB), when compared to an actual later evaluation thereof (Sec. 286, 272 Draft KAGB) or (ii) violations of the required due diligence process (Sec. 29(3) Draft KAGB, Art. 15(3) AIFM‑D).
Consequences for practice
The comprehensive scope of the Draft KAGB raises the expectation for the further legislative process that all or almost all alternative investment funds (private equity funds, hedge funds and other funds not subject to the UCITS-Directive) have to review their KAGB-compliance and possibly have to adapt their existing structures and internal procedures to the regulations of the KAGB and the AIFM‑D.