July 2012 New legal framework for funds in Germany German law-maker uses AIFMD to propose comprehensive new draft law on funds Draft Capital Investment Act introduces uniform and comprehensive legal framework for funds The draft Capital Investment Act (Kapitalanlagegesetzbuch, CIA ) published on 20 July 2012 by the German Ministry of Finance proposes a new and comprehensive legal framework for German funds and the distribution of German and foreign funds in Germany. The CIA will replace the German Investment Act (Investmentgesetz) and, therefore, will also be the sole German legal framework governing harmonised European funds. In addition, the draft CIA aims to implement the Directive 2011/61/EC on Alternative Investment Fund Managers ( AIFMD ) into German law which is required until 22 July 2013. The CIA also reflects the existing requirements of the Directives regarding Undertakings for Collective Investments in Transferable Securities ( UCITS ). Table of Contents Going beyond AIFMD minimum requirements... 1 Overview CIA product regulation... 2 Structure overview: Fund categories pursuant to the CIA and selected characteristics... 3 Contacts... 5 Going beyond AIFMD minimum requirements Regarding alternative investment funds, the draft CIA goes beyond the AIFMD requirements. In particular: The CIA limits the organisational form (or type) German fund vehicles may take and limits the eligible assets for each fund type. Existing fund types, such as the German open-ended real estate fund, are abolished. New German real estate funds must be close-ended. This set of rules creates a comparably rigid framework for German funds which, in particular in relation to institutional products, seems difficult to justify. Without further changes to the draft CIA, competitiveness of Germany as domicile for funds could be negatively affected in comparison to other European jurisdictions. The placement of interests of Non-EU alternative investment funds in Germany will become subject to comparably high hurdles, such as the requirement that the alternative investment fund and its manager must be supervised in their home jurisdiction. The currently available private placement exemptions under German law for such funds will New legal framework for funds in Germany 1
be abolished. This will make access to such products more difficult for German institutional investors. The draft CIA introduces for the first time regulation for German closed-ended retail funds. Retail funds investing in one asset only and open to investors committing less than EUR 50,000 a typical structure for German retail funds - are abolished as well. Such fund types must now invest in a risk diversified portfolio of assets. Sponsors of such fund types must not only adapt to the new regulation, but must also structure their products to be compliant with the new requirements. Overview of CIA product regulation The envisaged comprehensive regulation of German fund products leads to a new categorisation of funds. The CIA distinguishes between funds organised as UCITS or as alternative investment funds ( AIF ) as well as for the first time in German investment law between open-ended or closed-ended funds. New fund products must be structured within those main categories and adhere to the CIA requirements on permissible fund vehicles and eligible assets. This newsletter, therefore, presents new fund categories and their main characteristics in a simple to follow format. The overview shows the new fund categories and their respective requirements in direct comparison to each other and aims to create transparency for a better understanding of the CIA. In the context of this initial newsletter, we refrain from a more comprehensive review of the CIA or from an in-depth analysis of particular aspects. The audible response from the fund industry and interested public on the draft CIA suggests there will be intensive debate and that the draft may be expected to change during the further legislative process. Irrespective how the legislative process develops, the draft CIA will prove a major challenge for the German fund industry. New legal framework for funds in Germany 2
Structure overview: Fund categories pursuant to the CIA 1 and selected characteristics Characteristics Open-ended 2 / Close-ended Eligible Investors Permissible Vehicles German UCITS German Investment Funds German AIF Open-ended Open-ended Close-ended Mutual UCITS Special-AIF Mutual-AIF Special-AIF Mutual-AIF Investment Stock Corporation with variable capital Eligible Assets Securities (Sec. 189) Risk Diversification Money Market Instruments (Sec. 190) Bank Deposits (Sec. 191) Fund Units (Sec. 192) Derivatives (Sec.193) Other Investments (Sec. 194) Required investment and issuer restrictions Investment Stock Corporation with variable capital Open-ended Investment Limited Partnership No catalogue of eligible assets but must invest predominantly in financial instruments (Sec. 249 para. 1) Market value must be assessable Non-controlling participations in private companies Special case: Open-ended Special-AIF with fixed investment strategy (Sec. 252) General principle of risk diversification no special restrictions on eligible assets or issuer limits Investment Stock Corporation with variable capital Fixed catalogue of eligible assets, depending on permitted fund type, which consists of (Sec. 210): Mixed Funds (Sec. 215) Other Funds (Sec. 217) Hedge Fund of Funds (Sec. 220) No real estate investments permitted! Required depending on fund type, special restrictions on eligible assets and issuer limits apply Investment Stock Corporation with fixed capital Close-ended Investment Limited Partnership No catalogue of eligible assets but must invest predominantly in financial instruments (Sec. 253 para. 1) Market value must be assessable Risk diversification not required Investment Stock Corporation with fixed capital Close-ended Investment Limited Partnership Real Estate Ships Aircraft Renewable Energy PPP-Companies Interests in closed-ended German and foreign Mutual-AIFs and Special-AIFs Securities within the meaning of Sec. 188 to 191 (max. 49%) Derivatives, for hedging purposes only No direct private equity investments! Risk diversification in principal Special case: One asset funds possible, if each investor, inter alia, invests a minimum of EUR 50.000 (Sec. 226 para. 1) 1 2 Draft dated 20 July 2012. References to Sections refer to sections of the CIA. Funds are classified as open-ended if redemption of units is possible at least once per annum (Sec. 1 para. 2 CIA). For German UCITS funds and certain Mutual-AIF shorter intervals apply.. New legal framework for funds in Germany 3
Characteristics Open-ended 2 / Close-ended German UCITS Leverage Short-term borrowing up to 10% (Sec. 195) Distribution Other German Investment Funds German AIF Open-ended Open-ended Close-ended Mutual UCITS Special-AIF Mutual-AIF Special-AIF Mutual-AIF Documentation: Prospectus and key investor information document EU-passport for distribution to professional and retail investors within EC/EEA (Sec. 278) Short-term borrowing: no limitation (exception: openended special AIF with fixed investment strategy up to 30%) BaFin can impose limits (Sec. 241) Distribution must be notified to BaFin BaFin response within 20 days (Sec. 287) Documentation: Information obligations towards investors pursuant to Sec. 273 EU-passport for distribution to professional investors within EC/EEA (Sec.297) Special requirements for hedge funds (Sec. 250, 251) Short-term borrowing up to 10%, for Other Funds up to 20% Distribution must be notified to BaFin BaFin response within 40 days (Sec. 282) Documentation: Prospectus and key investor information document EU-passport for distribution to professional investors within EC/EEA (Sec.297) Existing open-ended real estate funds benefit from unlimited grandfathering period (Sec. 314) Short-term borrowing: no limitation BaFin can impose restrictions (Sec. 241) Unclear to what extent closed-ended special AIFs can enter into long-term borrowing Distribution must be notified to BaFin BaFin response within 20 days (Sec. 287) Documentation: Information obligations towards investors pursuant to Sec. 273 EU-passport for distribution to professional investors within EC/EEA (Sec.297) Special rules for private equity funds (Sec. 256 ff.) Borrowing up to 30% (Sec. 227) Distribution must be notified to BaFin BaFin response within 40 days (Sec. 282) Documentation: Prospectus / securities prospectus with additional information and key investor information document EU-passport for distribution to professional investors within EC/EEA (Sec. 297) New legal framework for funds in Germany 4
Contacts Contacts: Alexander Vogt Partner +49 69 71003-414 alexander.vogt@linklaters.com Markus Wollenhaupt Partner +49 69 71003-117 markus.wollenhaupt@linklaters.com Rocco Beck Managing Associate +49 69 71003-342 rocco.beck@linklaters.com Dr. Daniel Voigt Managing Associate +49 69 71003-357 daniel.voigt@linklaters.com This publication is intended merely to highlight issues and not to be comprehensive, nor to provide legal advice. Should you have any questions on issues reported here or on other areas of law, please contact one of your regular contacts, or contact the editors. Linklaters LLP. All Rights reserved 2012 Linklaters LLP is a limited liability partnership registered in England and Wales with registered number OC326345. It is a law firm authorised and regulated by the Solicitors Regulation Authority. The term partner in relation to Linklaters LLP is used to refer to a member of the LLP or an employee or consultant of Linklaters LLP or any of its affiliated firms or entities with equivalent standing and qualifications. A list of the names of the members of Linklaters LLP and of the non-members who are designated as partners and their professional qualifications is open to inspection at its registered office, One Silk Street, London EC2Y 8HQ, England or on www.linklaters.com and such persons are either solicitors, registered foreign lawyers or European lawyers. Please refer to www.linklaters.com/regulation for important information on our regulatory position. We currently hold your contact details, which we use to send you newsletters such as this and for other marketing and business communications. We use your contact details for our own internal purposes only. This information is available to our offices worldwide and to those of our associated firms. If any of your details are incorrect or have recently changed, or if you no longer wish to receive this newsletter or other marketing communications, please let us know by emailing us at marketing.database@linklaters.com. Mainzer Landstraße 16 60325 Frankfurt am Main Telephone +49 69 71003-0 Facsimile +49 69 71003-333 www.linklaters.com New legal framework for funds in Germany 5