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Fund Management 2019 – Q&A concerning German jurisdiction

This article contains a summary of the pertinent aspects of regulatory law concerning fund management, fund managers and those marketing funds in Germany.

Investment Funds

by Dr. Sebastian Käpplinger †, POELLATH, Tarek Mardini, POELLATH
14 August 2019
  • fund management
  • financial supervisory
  • marketing of fund interests
  • fund regulation
  • fund taxation
  • fund structuring
  • investment funds
  • institutional investors
fund management private equity fund
Frankfurt – Many banks and investment companies have their headquarters in Germany’s financial metropolis. Source: Pixabay

How is fund management regulated in your jurisdiction? Which authorities have primary responsibility for regulating funds, fund managers and those marketing funds?

Fund management is regulated in Germany by the German Capital Investment Act (KAGB). The KAGB implements the EU Undertakings for Collective Investments in Transferable Securities (UCITS) Directive (2009/65/EC) and the Alternative Investment Fund Managers Directive (AIFMD).

Responsible for regulating funds, fund managers and those marketing funds is the Federal Financial Supervisory Authority (BaFin).

Is fund administration regulated in your jurisdiction?

Fund administration is not regulated per se in Germany. The Regulation rather depends on whether the specific services fall within a specifically regulated environment.

As a rule, general assistance in fund administration is not regulated, such as the preparation of reports or distribution notices.

Certain administrative services are regulated by professional services laws. Before offering bookkeeping services on the market, a minimum of three years’ professional experience is required. Trade settlement is typically licensable as the financial service of the execution of orders on behalf of clients or the banking activity of trading on behalf of others.

What is the authorisation or licensing process for funds? What are the key requirements that apply to managers and operators of investment funds in your jurisdiction?

Regulation of funds is primarily exercised through regulation of managers. It requires that the manager is either fully licensed or registered with BaFin under the KAGB. If a fund is internally managed, then the fund itself needs a licence or registration.

Registered managers: registration process

Availability

The registration process is only available to certain small or mediumsized managers. The most important category of these small to medium-sized managers is known as ‘sub-threshold managers’ under the AIFMD and KAGB. In practice, most German fund managers fall within this category.

Sub-threshold managers, under the KAGB, are managers with assets under management of not more than €100 million (in the case of leverage) or not more than €500 million (no leverage) and who only manage special alternative investment funds (special AIFs). Special AIFs are AIFs whose interests or shares may only be acquired according to the fund documents by professional investors or semi-professional investors (ie, non-retail funds).

Professional investors are defined in the AIFMD and in the Markets in Financial Instruments Directive II (MiFID II). A semi-professional investor is a person who:

  • commits to invest at least €200,000;
  • confirms in writing that he or she is aware of the risks; and
  • has the expertise, experience and knowledge to participate in the investment opportunity. This must be assessed and confirmed by the manager.

In addition, senior management, risk-takers and other staff of the manager within the meaning of article 13 of the AIFMD are considered semi-professional. A person with a minimum commitment of €10 million is also considered semi-professional. Besides the requirements mentioned above, special AIFs managed by sub-threshold managers are in principle not regulated.

Registration procedure

The registration procedure is comparatively simple. It requires the submission of an informal registration request together with certain ‘corporate’ documents on the manager and the managed funds (such as the fund’s limited partnership agreement (LPA) and the manager’s articles of association). In addition to being a special AIF, the fund may not require the investors to pay in additional capital beyond the investor’s original commitment.

Ongoing issues

An advantage of the registration is that only a few provisions of the KAGB apply to a ‘registered-only’ manager, mainly the provisions on the registration requirements, ongoing reporting requirements and the general supervisory powers of BaFin. However, fund-specific requirements do not apply to ‘registered-only’ managers and their funds. In particular, the depositary requirements and marketing requirements, as well as the additional requirements of the KAGB for fully licensed managers, do not apply.

On the downside, the registration restricts the manager to the type of funds and investors for which the registration was obtained (ie, only special AIFs and professional or semi-professional investors). Furthermore, a registered manager does not benefit from the European marketing passport under the AIFMD. A registered manager can, however, opt in to become a fully licensed manager.

Fully licensed manager: licensing process

Availability

Fund managers who do not qualify for a registration or who opt out of a registration must apply for a full fund management licence with BaFin under the KAGB.

A full fund-management licence opens the door for a manager to market funds to retail investors as well as to the marketing passport under the AIFMD or UCITS Directive. Retail investors are Investors who are neither professional nor semi-professional investors.

Licensing procedure

The licensing procedure is a fully-fledged authorisation process with requirements equivalent to the requirements for granting permission under article 8 of the AIFMD or article 6 of the UCITS Directive. The licensing procedure checks requirements, such as sufficient initial capital or own funds, sufficiently good repute of the directors and shareholders, and organisational structure of the manager.

Ongoing issues

The licensing of the manager results in the manager being subject to the entirety of the KAGB. This means, in particular, the following:

  • the required appointment of a depositary for the funds;
  • access to setting up contractual funds;
  • adherence to the corporate governance rules for funds set up as investment corporations or investment limited partnerships (investment KGs);
  • adherence to the fund-related requirements of the KAGB;
  • adherence to the marketing rules of the KAGB;
  • access to the marketing passport under the AIFMD or UCITS Directive;
  • access to the managing passport under the AIFMD or UCITS Directive; and adherence to the reporting requirements of the KAGB.

 

Read this article in full:
Law Business Research_Fund Management 2019_Chapter Germany

This article was first published in: Law Business Research, Getting the Deal through, Fund Management 2019, July 2019, pp. 21-27

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Autoreninfos

Dr. Sebastian Käpplinger †

POELLATH

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Autoreninfos

Tarek Mardini

POELLATH

Profile | Contact

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