UCITS-V Implementation Act has entered into force

Transcription

1 13 April 2016 UCITS-V Implementation Act has entered into force Beyond the implementation of the UCITS-V Directive, there are also several other adjustments to the German Capital Investment Code [KAGB, Kapitalanlagegesetzbuch]. Executive Summary > New requirements regarding remuneration, liability and depositaries; > The list of sanctions becomes stricter and the BaFin s [German Federal Financial Supervisory Authority s] powers of intervention are extended; > It is possible for external fund managers to grant loans for their own account to parent companies, subsidiaries and affiliated companies; > As to open-ended special funds, there is no limitation regarding the acquisition of unsecuritized loans; > Loan extensions and restructuring of loans are permissible for open-ended special AIFs; > Money loans constitute a permissible asset for closed-ended domestic (i.e., German) retail AIFs; > There is a new category of semi-professional investors for foundations / bodies governed by public law as well for Land corporations (corporations which are governed by a state or states) or Bund corporations (corporations which are governed by the federal state); > A new reference value is introduced for borrowing limits, debt limits, and risk diversification with respect to closed-ended retail AIFs; > There are new rules regarding the transfer and merger of contractual investment funds [Sondervermögen]. 1. Introduction The German UCITS-V Implementation Act [OGAW- V-UmsG] entered into force on March 18, 2016, transposing the UCITS-V directive (Directive 2014/91/EU), which has been adopted at EU level on July 23, 2014, into national legislation. The German legislator uses the changes in legislation that are caused by UCITS-V also to make further adjustments to the KAGB, which we will point out in this Update. For example, the requirements as to the granting of loans in the context of collective investment management are now incorporated into law, and this involves a few differences as to content in comparison to the letter issued by BaFin on May 12, 2015 (please confer our Update dated May 28, 2015). 2. Implementation of the UCITS-V Directive The following amendments in the KAGB result from the implementation of the UCITS-V Directive: Remuneration systems of UCITS fund managers In the future, the remuneration systems of UCITS fund managers shall be based on the risk management and the interests of the investment fund, for the purpose of avoiding that any wrong incentives are created. This means that the previously existing distinction between UCITS fund managers and AIF fund managers is set aside, so that, in the future, the requirements that apply to UCITS fund managers and AIF fund managers are essentially the same. Reuse by the depositaries The previous prohibition regarding the reuse of assets by UCITS depositaries and retail AIF depositaries and sub-custodians, which was in particular relevant in the field of securities lending, is abolished, and reuse is permitted under certain conditions. The background on 1

2 which this is based is the corresponding new regulation in the UCITS-V Directive. However, the depositary may not reuse the assets which it holds in custody for its own account; the reuse has to be exclusively for the benefit of the UCITS or the retail AIF. Prohibition of an exemption from liability or a limitation of liability in the case of sub-custody It is not possible anymore to arrange an exemption from liability or a limitation of liability for the depositary in the case of sub-custody with respect to UCITS and retail AIFs. Therefore, the depositary assumes unlimited liability for losses of financial instruments at the subcustodian level. However, the depositary may still arrange for limitations of liability with respect to special AIFs. Whistleblower procedure Fund managers (UCITS and AIFs), UCITS depositaries, and UCITS investment companies with variable capital are legally required to establish departments and/or procedures which enable their employees under conditions that ensure that the confidentiality of the identity of such employees is maintained to report any potential or actual violations of any provisions relating to investment law or criminal law (Section 28 Subsection 1 Sentence 2 No. 9 of the KAGB). The fund managers are free to choose whether they would like to implement the whistleblower procedure internally or whether they would like to delegate this function to an external third party (outsourcing). Furthermore, a new uniform whistle-blowing procedure at the BaFin is introduced pursuant to Section 4d of the Finanzdienstleistungsaufsichtsgesetz [FinDAG, German Act Establishing the Federal Financial Supervisory Authority], which shall be newly included pursuant to the Erstes Finanzmarktnovellierungsgesetz [1. FimanoG, First Act Amending Financial Market Regulations], and by means of which the misconduct of individuals in the financial market can be reported (it is envisaged to enter into force as of July 2, 2016). This (anonymized) reporting procedure shall also be available to people who are not employees of fund managers, UCITS-depositaries and UCITS investment companies. However, the problem with this is that internal compliance systems of companies may be undermined, as they are primarily designed to rectify cases of maladministration within the company. Reorganization, extension, and tightening of sanctions By means of the UCITS-V Implementation Act, the KAGB s range of penalties and fines is also increased. At the same time, the list of administrative offenses is revised and significantly extended. Fines for both natural and legal persons may amount to up to EUR 5 million, or at least twice the amount of the economic benefit that was obtained by means of the violation. Moreover, if legal persons are involved, there is the possibility to impose fines of up to 10% of the annual total turnover (Section 340 Subsection 7 KAGB). What has also changed is that as of now, fines may be imposed for both the violation of the obligation to submit the prospectus and the KIID to the BaFin (Section 340 Subsection 2 No. 40 KAGB) as well as for the violation of the obligation to disclose the issue price, the redemption price, and the NAV (Section 340 Subsection 2 No. 41 KAGB). This opportunity should be used to revise the internal reporting procedures of the fund managers and, as the case may be, to adjust them, in order to be able to continue to comply with the disclosure and reporting obligations in a timely manner. Suspension of the license and prohibition of carrying out professional activities Instead of a revocation of the license as set forth in Section 39 KAGB, it is possible, as of now, that the license is temporarily suspended. In the future, the imposition of a fine against the fund manager because of certain administrative offenses shall already constitute a sufficient reason for such suspension. In the future, the prohibition of carrying out professional activities may be applied not only to the managing directors, but also to other responsible persons who work for the fund manager. Public disclosure of sanctions by the BaFin The BaFin is entitled and in cases that are particularly severe obliged to publicly dis- 2

3 close imposed sanctions on its website; first and foremost, this shall apply to measures that are final and can no longer be appealed anymore (Section 341a KAGB). However, the BaFin shall disclose measures that are immediately enforceable after it has diligently carried out an examination/balancing of interests on its website (Section 7a KAGB). 3. Granting of Loans and Loan Acquisition by AIFs Beyond the requirements of the UCITS-V Directive, the framework conditions regarding the granting of loans and loan acquisition by investment funds are from now incorporated into the KAGB. Moreover, new regulations emerge regarding shareholder loans, which are subject to facilitated requirements. Furthermore, the legislator permits external fund managers, in the context of what is called the group privilege, to grant loans to parent companies, subsidiaries, and affiliated companies, Section 20 Subsection 10 KAGB. a) Granting of Loans As to the granting of loans, various constellations have to be distinguished: Loan origination by means of direct lending to third parties (at fund level) Granting loans to third parties is exclusively possible for the account of closed-ended special AIFs (Section 285 Subsection 2 KAGB). This provision is an exhaustive and definitive provision, as the legislator assumes that the other types of funds entail the risk of a transformation of maturities. The granting of loans by closed-ended special AIFs is subject to the following restrictions: Originally, the legislator assumed that the granting of money loans is not an activity that is to be classified under collective investment management and that, consequently, the granting of loans is not included in the corresponding exception regarding the scope of application set forth in the Kreditwesengesetz [KWG, German Banking Act]. Therefore, the granting of loans for the account of the investment fund was classified as in principle impermissible under investment law (please confer the previous version of Section 93 Subsection 4 KAGB). However, in order to promote non-bankbased forms of financing as well, as, for example, the granting of loans by AIFs, while simultaneously providing certain investor groups with extended investment possibilities, the legislator now permits that loans are granted for the account of an AIF in certain cases, which are definitively defined in the KAGB (Section 20 Subsection 9 KAGB). Thus, any existing legal uncertainties as to loan funds that were created and/or invested in Germany are eliminated. - Leverage shall never amount to more than 30% of the aggregate capital contributions (Section 285 Subsection 2 No. 1 KAGB). - It is never permitted to grant loans to consumers (Section 285 Subsection 2 No. 2 KAGB). - For the purpose of avoiding cluster risks, it is not permitted to grant a borrower more than 20% of the aggregate capital contributions and the uncalled committed capital (Section 285 Subsection 2 No. 3 KAGB). Shareholder loans (at fund level) The legislator is less restrictive as regards shareholder loans at fund level, which may, in principle, be granted not only by (openended or closed-ended) special AIFs, but also by closed-ended retail AIFs; as far as openended retail AIFs and open-ended special AIF with fixed investment rules are concerned, Section 240 of the KAGB is additionally applicable. In the future, open-ended and closed-ended special AIFs may grant up to 50% of the ag- 3

4 gregate or committed capital as a shareholder loan, provided that - it is a subsidiary of the closed-ended special AIF, or - there was a subordination of claims agreed upon that relates to the loan, or - the loans that were granted do not exceed twice the amount of the acquisition costs of the equity stake held in the company (Section 285 Subsection 3 KAGB). To the extent to which loans for a closedended special AIF are merely taken out up to the amount of 30%, it is possible to grant subordinate loans that exceed the actual limit of 30% set forth for the granting of loans. As of now, closed-ended retail AIFs may pursuant to Section 261 Subsection 1 No. 8 in conjunction with 285 Subsection 3 KAGB only grant shareholder loans subject to the condition that not more than 30% of the aggregate or committed capital of the closedended retail AIF will be used for such loans and that the loans that were granted do not exceed the acquisition costs of the equity stake held in the company. Thus, the restrictions for such cases are narrower than those which apply to closed-ended special AIFs. Group privilege (fund manager level) On principle, external fund managers may, as of now independent of the type of the funds that are managed grant money loans to parent companies, subsidiaries, and affiliated companies on their own account this is called group privilege, Section 20 Subsection 10 KAGB. The capital requirements set forth in Section 25 of the KAGB shall remain unaffected by this; such capital requirements still have to be complied with when loans are granted internally within the group of companies. This intra-group possibility to grant loans is to be welcomed because it enables fund managers to use surplus liquidity within the group of companies. In practice, it is advisable to adjust the corresponding articles of association of the fund manager, into which the possibility to grant such loans may be integrated, for the purpose of ensuring a synchronization of the framework provided by supervisory law on the one hand and the articles of association which are governed by corporate law on the other hand. Moreover, when granting loans to subsidiaries, the fund manager shall ensure that the subsidiary, in turn, shall itself grant money loans to its own subsidiaries only in accordance with the same conditions. However, internal fund managers are not permitted to grant money loans for their own account. The transitional provision set forth in Section 353b KAGB Any money loans that were granted before March 18, 2016 for the account of the AIF to companies in which the AIF has a shareholding are exempted from the new provisions, i.e., they are grandfathered. Consequently, any money loans that were granted in compliance with the law do not have to be reimbursed. As to all money loans that were granted after March 18, 2016, any loans that were granted before March 18, 2016 have to be taken into account in the calculation of the maximum limit amounting to 50% or 30% and have to be included accordingly. b) Acquisition of Loans Contrary to the recommendation that was issued by the BaFin last year, the acquisition of unsecuritized loans is not limited anymore, not even for general open-ended special AIF and for openended special AIF with fixed investment rules. As the wording of the previous Section 285 KAGB has not changed in comparison to Section 285 Subsection 1 KAGB, the acquisition of loans is still permitted by closed-ended domestic (i.e. German) special AIFs. c) Loan extension and restructuring Furthermore, for the avoidance of doubt, it is pointed out that an extension (prolongation) and a restructuring of loans which have been granted or acquired for the account of an investment fund are on principle covered by the permission 4

5 to carry out collective investment management and that, consequently, the implementation of an extension or a restructuring of a loan does not constitute an unlawful lending business within the meaning of Section 1 Subsection 1 Sentence 2 No. 2 of the Kreditwesengesetz [KWG, German Banking Act]. The same applies now also to open-ended special AIFs; Section 20 Subsection 9, last half sentence, of the KAGB as initially provided in the draft bill, was repealed. Therefore, changes in the loan conditions by open-ended special AIFs are to be classified as part of the collective investment management and are thus permissible on the basis of the AIFM license. Thus, open-ended special AIFs are granted greater flexibility as to management and they are, from now on, enabled to manage unsecuritized loan receivables in which they invest in a more effective manner. Therefore, the previously existing necessity to use a fronting bank becomes obsolete in many cases. d) Risk management Fund managers which grant money loans for the account of an AIF or which invest in unsecuritized loan receivables are supposed to have adequate minimum requirements with respect to the risk management system. For this purpose, procedures shall be integrated with respect to the operational and organizational structure which are appropriate as regards both the implemented transactions and their scope. In doing so, the focus shall be on banking-specific transactions, like granting loans and the restructuring of unsecuritized loan receivables. The detailed requirements are supposed to be substantiated by the BaFin in the context of its administrative practice, and shall be based on the risk management principles that are already applicable to the lending business of banks (BaFin circular 10/2012 (BA) Minimum Requirements for Risk Management MaRisk, and/or on the new MaRisk 2016, which are being discussed at the moment). The additional risk management requirements that exist in this respect for loan funds are extensive and should be taken into account in good time when the internal risk management organization is adjusted; as the case may be, it may be advisable for fund managers to cooperate at least during the initial phase with a bank which has experience in the loan sector. However, these requirements do not apply to loans that were already permitted to be granted in accordance with the provisions of the former legal situation, neither do they apply to shareholder loans, provided that such shareholder loans comply with the requirements set forth in Section 285 Subsection 3 KAGB (Section 29 Subsection 5a KAGB). This is intended to facilitate the use of loans as a flexible instrument of business financing. e) Reporting procedure for large exposure loans pursuant to Section 14 KWG Furthermore, the reporting procedure for large exposure loans pursuant to Section 14 KWG shall henceforth be applied to fund managers granting loans for the account of an AIF or acquiring unsecuritized loan receivables (Section 34 Subsection 6 KAGB). To the extent to which a money loan that is running into millions is granted, the fund manager shall, on a quarterly basis, report those borrowers whose credit volume amounts to one million Euro or more to the Deutsche Bundesbank s Central Credit Register [Evidenzzentrale der Deutschen Bundesbank]. This shall ensure that the fund managers are notified about the indebtedness of their major borrowers, in order to be able to control their risk management more effectively. f) Is the fund that is granting loans or acquiring loans to be regarded as a shadow banking entity? As things stand at present, it is to be expected that additional requirements will emerge with respect to loan funds due to the future shadow banking regime. According to the EBA s Guidelines on Limits to Exposures to Shadow Banking Entities, banks are henceforth supposed to identify and quantify risks resulting from business relationships with shadow banking entities and to set internal limits on exposures. In this context, shadow banking entities are regarded to be companies which engage in credit intermediation activities and which are not explicitly exempted. While AIFs 5

6 are supposed to be exempted on principle, this does not apply to AIFs which, according to the terms of their contract, are allowed to grant loans or purchase third parties lending exposures and add them to their balance sheet. According to the EBA guidelines, funds that invest in unsecuritized loan receivables are classified as shadow banking entities. Whether also the granting of shareholder loans to special purpose vehicles is to be classified as a granting of loans within the meaning of the guidelines remains an open question, however, there are valid arguments that can be found against this. A corresponding classification would have an effect on banks which invest in funds qualifying as shadow banking entities; for them, the investment may become more expensive based on risk-related aspects. However, it remains to be seen what the further development will look like in general. g) Registered fund managers According to the abovementioned letter by the BaFin dated May 12, 2015, the requirements regarding the granting of loans are intended to apply as well to AIFs that are subject to the provisions of Section 2 Subsection 4, 4a, and 4b KAGB. From now on, however, according to Section 2 Subsection 4 KAGB, the application of the granting of loans as regards registered fund managers is on principle limited to closed-ended special AIFs. The granting of loans for the account of an open-ended, registered special AIF is excluded, unless it is a shareholder loan which is subject to the new provisions of Section 282 Subsection 2 Sentence 3 in conjunction with Section 285 Subsection 3 KAGB. Moreover, registered fund managers are also permitted to grant money loans for their own account to parent companies, subsidiaries, and affiliated companies (Section 2 Subsection 4 No. 2 in conjunction with Section 20 Subsection 10 KAGB). However, it is not possible for registered fund managers to acquire loans, because Section 2 Subsection 4 No. 3 and Subsection 5 No. 8 KAGB provide that the provisions set forth therein shall be applied exclusively to the granting of money loans. Likewise, the additional requirements concerning risk management systems and liquidity requirements (Section 29 Subsection 5a KAGB) also apply exclusively to such registered funds as described in Section 2 Subsection 4 KAGB i.e. those that grant loans but not for those that acquire loans. As to internal fund managers pursuant to Section 2 Subsection 4a KAGB, the granting of loans for the account of a retail AIF is also only permissible if it is a shareholder loan within the meaning of Section 285 Subsection 3 KAGB. However, the extension and restructuring of unsecuritized loans which are following the granting of the loan remains possible for retail AIFs within the meaning of Section 2 Subsection 4a KAGB, too, although this does not mean that this has to be classified as loan origination by means of direct lending. The provision set forth in Section 2 Subsection 4b KAGB, however, is repealed in its entirety, as according to the current explanatory memorandum for the law, for reasons pertaining to general aspects of the law relating to cooperative societies cooperative societies are usually not considered to be investment funds within the meaning of the KAGB. 4. Section 93 Subsection 4 KAGB is repealed The previous Section 93 Subsection 4 KAGB, which had contained the provision which was applicable to investment funds in the form of contractual investment funds [Sondervermögen] that a fund manager could neither grant money loans nor enter into obligations under a contract of surety or guarantee for the collective account of the investors, was repealed because of the extended possibilities regarding the granting of loans. The possibility to grant loans for the account of a UCITS is now based on Section 20 Subsection 8 KAGB, the possibility of granting loans with respect to AIFs is based on Section 20 Subsection 9 KAGB. The conclusion that was drawn occasionally based on the fact that Section 93 Subsection 4 KAGB was repealed and based on the wording of Section 20 Subsection 8 KAGB, namely, that a fund manager, for the lack of an explicit prohibition, is now entitled to enter into obligations under a contract of surety or guarantee for the collective account of the investors is a conclusion which, in our opinion, must be assessed with caution. According to the principle of specialty, which is applicable in investment law, a 6

7 fund manager may, on principle, only enter into such transactions for the account of an investment fund that are explicitly permitted to it pursuant to the KAGB. However, entering into contracts of surety or guarantee, and, consequently, assuming the credit risk of a third party, is something that was precisely not permitted to fund managers due to the fact that the previously existing provision has been repealed. Moreover, the restrictions arising from the banking supervisory law still have to be complied with, and they apply in particular to the guarantee business (please confer Section 1 Subsection 1 Sentence 2 No. 8 KWG). 5. Physical shares (actual securities in physical paper form) are abolished In order to comply with the FATCA Agreement, the UCITS-V Implementation Act additionally contains, independent of the implementation of the directive, provisions regarding the abolishment of physical shares. In the future, the securitization of shares in contractual investment funds [Sondervermögen] shall only be effected by means of global certificates. The reason for this is the FATCA Agreement with the US, according to which unit certificates that are made out to the bearer, and the corresponding profit participation certificates, are not permitted anymore to circulate in the form of physical shares. Physical shares which are already existing shall become ineffective by the end of December 31, 2016, unless they have been given into collective safe custody prior to that. However, in that case, the investor is given the opportunity to demand that the co-ownership share in the global certificate is transferred to a securities deposit account which is held for him (Sections 95, 97, 358 KAGB). As a result, this does not lead to a reduction of the fund assets and the investors get to keep the value of their shares. Beginning on January 1, 2017, the securitization of unit certificates that are made out to the bearer shall exclusively be effected in global certificates. 6. Reference value in the context of closedended retail AIFs In the future, the reference value for the borrowing limits and the restriction on encumbrances with respect to closed-ended retail funds shall be the aggregate capital contribution and the committed capital that has not been called yet minus the costs that have to be borne by the investor, rather than using the net asset value (NAV) of the AIF (Section 263 KAGB), as was the case before. The same shall apply with respect to the hedging of currency risks (Section 261 Subsection 4 KAGB), and the risk diversification of the tangible assets that are being held for closed-ended retail AIFs (Section 261 Subsection 1 No. 1 KAGB), so that in those cases, too, the NAV of the AIF will not be used as a reference anymore. Simultaneously, the restrictions of leverage and encumbrance for closed-ended retail AIFs are raised from 60% to 150% (Section 263 Subsection 1 and Subsection 4 KAGB). However, the new reference values shall only apply to AIFs that are created on March 18, 2016 or later, i.e. funds that were created before that point in time are grandfathered. However, existing closedended retail AIFs may voluntarily adjust the reference value to the new legal situation (Section 353a Sentence 2 KAGB), provided that they are granted the corresponding approval of the investors as to the change in the investment rules. 7. Universal succession as regards investors investing in special funds and in non-riskdiversified closed-ended retail funds The UCITS-V Implementation Act also contains provisions for the case that fund units are acquired by operation of statutory law. Previously, the status of special funds and non-risk-diversified closedended retail funds was endangered in the event that an investor, e.g. after the acquisition of units by means of an inheritance, did not match the fund s investor profile (semiprofessional or professional investor). In the future, an investor who acquires a unit in a speciald AIF by operation of statutory law shall be deemed to be an accredited inves- 7

8 tor; in the case of non-risk-diversified closed-ended funds, such acquisition by virtue of universal succession shall be ignored (Section 1 Subsection 6 No. 2, 262 Subsection 2 Sentence 1 No. 2 KAGB). Conversely, however, this could suggest, by a process of a contrario reasoning, that any transfer by virtue of a legal transaction, and therefore, also donations, to an investor who is not qualified for the corresponding type of fund has to be assessed separately. In those cases, the bylaws of the AIF in question have to ensure that a continuance with such investors shall only take place if it is possible to classify them as professional or semiprofessional investors as well; otherwise, the bylaws have to contain provisions by means of which it is possible to exclude such succeeding investors. 8. Transfer of contractual investment funds [Sondervermögen] to new fund manager By means of the new provision of Section 100b KAGB, it is possible to transfer funds in cases where no notice of termination was given. Requirements for a transfer are the BaFin s approval and the existence of a corresponding permission of the accepting fund manager with respect to that contractual investment funds [Sondervermögen] which is to be accepted. Additionally, there are some formal requirements that have to be complied with, e.g. an announcement in the Bundesanzeiger [German Federal Gazette] and in the annual report. If the prerequisites for the approval are met, the BaFin shall grant its approval within eight weeks after the application for approval was filed. However, the investment rules of retail funds have to explicitly provide the possibility of a transfer (Section 162 Subsection 2 No. 15 KAGB). In this respect, a corresponding provision should be included in the investment rules of retail funds when the investment rules are updated to the UCITS-V Implementation Act. However, the UCITS-V Implementation Act still does not provide any comparable provision as regards special funds. Consequently, it is not to be expected that it is necessary that the investment rules of special funds also have to contain transfer possibilities. 9. Mergers of contractual investment funds [Sondervermögen] to InvKGs By means of the UCITS-V Implementation Act, the merger of open-ended special investment funds with InvKGs [Investmentkommanditgesellschaften, investment limited partnerships] or sub-funds thereof should also become possible (Section 281 Subsection 2 KAGB). Until recently, it was only possible to merge special investment funds if they had been created in the legal form of a contractual investment funds [Sondervermögen] or an InvKG with variable capital. This is especially relevant in order to enable the transfer of existing pension funds to InvKGs (pension pooling). 10. Amended definition semiprofessional investor By means of the amendment of the definition of the semiprofessional investor (Section 1 Subsection 19 No. 37 KAGB), foundations and bodies governed by public law as well as Bund corporations (corporations which are governed by the federal state) and Land corporations (corporations which are governed by a state or states) are now also enabled to invest in special AIFs. 11. The registration expires when it is not used Furthermore, the UCITS-V Implementation Act provides that a registration may expire by operation of law under certain conditions, as, e.g., when a registration is not used within one year since it has been granted, or when no business operations that are covered by the registration are conducted for six months (Section 44 Subsection 5a KAGB). In the style of the already existing rules for comprehensive limited partnerships, this shall prevent any non-operating companies, i.e., stockpile registrations and companies which are not operating anymore. 12. ELTIF In the context of the UCITS-V Implementation Act, the KAGB will additionally contain the legal arrangements for the purpose of integrating the ELTIF Regulation into the KAGB, please confer Section 338a KAGB. 13. Distribution right At last, it is clarified that a distribution right pursuant to the Sections 329, 330 KAGB i.e. pursuant to the specific German distribution provisions regarding funds involving third countries (non-eu countries) shall still continue to exist even after the introduction of the third-country passport. An 8

9 existing distribution license pursuant to Sections 329 or 330 KAGB does not expire provided that the fund manager was entitled to distribute the AIF at the point in time when the third-country passport pursuant to Sections 329 or 330 KAGB was introduced and it is only distributed in Germany (Section 295 Subsection 2 Sentence 2 KAGB). However, in the event that the AIF is not merely distributed domestically (in Germany), but also in another EU state or EEA state, this has to be reported to the BaFin. The distribution right then expires pursuant to Sections 329 or 330 KAGB and the distribution right on the basis of the third-country passport shall apply exclusively from then on (Section 295 Subsection 2 Sentence 4 KAGB). According to the BaFin s opinion, this transition provision, which may look confusing at first glance, shall nonetheless merely provide clarification. Especially third-country AIFs which already have a distribution right in Germany pursuant to Sections 329 or 330 KAGB while simultaneously being permitted to be distributed pursuant to the respective national distribution provisions of other EU member states may continue to use any ongoing distribution rights pursuant to other national provisions. It is only for the first-time distribution in EU states that the third-country passport has to be applied for, where necessary. 14. PRIIPs Regulation We also want to point out changes affecting the fund sector according to the PRIIPs Regulation. By means of the PRIIPs Regulation, new key information documents for packaged products are introduced universally. However, UCITS investment funds are exempted from the obligations under the PRIIPs Regulation until December 31, 2019 (Article 32 Subsection 1 PRIIPs Regulation). The same shall apply to those AIFs with respect to which the national legislator has declared that the provisions regarding key investor information for UCITS are also applicable. Furthermore, products which are subject to the PRIIPs Regulation shall not additionally be subject to any national obligations relating to the preparation of information documents. With regard to special AIFs, this means that semiprofessional investors may either be provided with key investor information pursuant to the KAGB or with key information documents pursuant to the PRIIPs Regulation (please confer Section 307 Subsection 5 KAGB-E [KAGB draft] pursuant to the draft of the 1. FimanoG [Erstes Finanzmarktnovellierungsgesetz, First Act Amending Financial Market Regulations]). However, as to products that are not subject to the PRIIPs Regulation, the nationally required information documents still have to be prepared. 15. Prospects, Implementation deadlines The law entered into force on March 18, UCITS funds had to be adjusted already as early as until March 18, 2016 (Section 355 Subsection 5 KAGB), open-ended retail AIFs have to be adjusted at the latest until March 18, 2017 (Section 343 Subsection 8 KAGB). It is therefore clear that the UCITS-V Implementation Act s entry into force involves a change of the investment rules of any and all UCITS and open-ended retail AIFs. Consequently, the investment rules, the prospectuses, and the KIIDs have to be adjusted. The changed investment rules enter into force on the day after they were published in the Bundesanzeiger [German Federal Gazette]. The investment rules of UCITS that are required to be submitted to the BaFin are only permitted to contain editorial changes and/or changes that are necessary for the conversion to UCITS-V (Section 355 Subsection 5 KAGB); the adjustment of the investment rules is insofar not deemed to be a change of the investment principles and/or of material investor rights. However, the investment rules of open-ended retail AIFs are also allowed to contain additional changes that are not necessary for the conversion to UCITS-V. It has to be taken into account that the extended possibilities to grant loans under statutory law will initially effect only the supervisory framework. However, as far as the relationship with the investors is concerned, there may arise the need as the case may be to adjust the investment rules in 9

10 order to implement the corresponding transactions. Furthermore, it remains to be seen whether the insurance supervision and/or the institutions which have been called upon by virtue of state law to supervise pension schemes may demand more far-reaching restrictions with respect to the determination whether investment funds are suitable for the corresponding capital investment. Dr. Oliver Glück Rechtsanwalt/Lawyer Munich Office Dr. Timo Patrick Bernau Rechtsanwalt/Lawyer Munich Office Sascha Zentis Rechtsanwalt und Notar/Lawyer and Notary Frankfurt Office Moritz Gerstmayr, LL.M. (Melbourne) Rechtsanwalt/Lawyer Munich Office 10

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