The Act Implementing the AIFM Directive - Norton Rose

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The Act Implementing the AIFM Directive 02 Norton Rose December 2012 1.1 Formal and material fund definitions and their respective backgrounds Under German law, there is no long-term consistency as regards the definitions that apply in the investment sector. Rather, the fund definition applicable at a particular time corresponds with the then prevailing regulatory doctrine. In times of strict regulation, the material fund definition tends to prevail, while in times of less stringent regulation the formal definition applies: • By applying a substance-over-form approach, the material fund definition aims at avoiding all actual or alleged attempts to circumvent the law to the disadvantage of investors. • The purpose of the formal fund definition, on the other hand, is to ensure legal certainty, leaving it to the discretion of product providers and investors to decide whether or not to put themselves within the scope of investment regulatory law. Hence, in view of the ongoing global financial crisis, the introduction of a material fund definition which is prescribed by the EU Directive and, thus, beyond the control of the German legislator, is not surprising. Until 2003, a purely material fund definition had existed under the former Foreign Investment Act (Auslandinvestmentgesetz – AIG). The purpose of the material fund definition was to capture as many collective investment scenarios as possible, despite the high complexity of investment products existing outside Germany, for the purpose of investor protection and to thwart any attempts to circumvent the law. Also the Investment Modernisation Act of 2004 had initially applied a material fund definition. The current fund definition has been applicable since the end of 2007, when the Act Amending the German Investment Act (Investmentänderungsgesetz – InvÄndG) added formal conditions to the fund definition. Under the current law, the fund definition comprises a material definition, which forms its basis, and formal restriction criteria overlaying and limiting it. The reason that was given for this change was to limit the scope of the InvG to open-ended funds or funds that are subject to investment supervision in their home state. 4 This has provided the investment sector with considerable legal certainty and has proved successful in practice. Following the financial crisis, the consultation draft of the Draft Bill focuses on (alleged) investor protection and aims to reach the widest scope of application possible by prescribing a material fund definition: 5 “... the Capital Investment Code uses a material investment fund definition in line with the requirements of the AIFM Directive. This means that any collective investment undertaking that collects capital from a number of investors with a view to investing that capital for the benefit of those investors in accordance with a defined investment strategy qualifies either as an undertaking for collective investment in transferable securities (UCITS) or as an alternative investment fund (AIF) and, accordingly, must meet the requirements under either the UCITS Directive or the AIFM Directive and, thus, also the requirements of this Act. A fund that does not meet the respective requirements is unlawful and constitutes prohibited investment business.” 4 Cf. printed paper of Federal Parliament 16/5576, p. 56. 5 Draft Bill, p. 321.
In line with the above objective, the term “investment asset pool” (Investmentvermögen) is introduced as a new generic term and is legally defined in section 1 sub-section 1 sentence 1 KAGB-E as follows: “any collective investment undertaking other than an operationally active enterprise outside the financial sector that collects capital from a number of investors with a view to investing that capital for the benefit of those investors in accordance with a defined investment strategy.” In section 1 sub-section 1 sentence 2 KAGB-E, undertakings for collective investment in transferable securities (UCITS) and alternative investment funds (AIFs) are defined as the two sub-categories of investment asset pools. As UCITS funds are strongly formalised and, by definition, cannot come into existence if not established by a licensed fund management company, the material investment definition will mainly affect AIFs. Due to the definition’s wide scope, many scenarios involving asset management products may, in future, qualify as AIFs, subjecting them and their respective managers – the AIFMs – to supervision under the KAGB-E. If (possibly by reason of an error) such a situation is not identified, it may have drastic consequences for managers, distribution channels and investors. 1.2 Fund definition and the scope of the KAGB-E 1.2.1 Interpretation of the law The correct approach to the interpretation of the law is of particular importance, as the material fund definition in section 1 sub-section 1 sentence 1 KAGB-E is based on only very few criteria that are not clearly distinguished from each other. The relevant parts of the definition are: i. a collective vehicle (collective investment undertaking) ii. that collects money iii. from a number of investors iv. with a defined investment strategy, and v. in doing so, acts for the investors’ benefit vi. unless the vehicle is an operationally active enterprise outside the financial sector. Except for the definition of “a number of investors” in section 1 sub-section 1 sentence 3 KAGB-E, the above criteria are neither described in more detail nor further specified in any other way. Also, the legislative notes (Gesetzesbegründung) to the Draft Bill do not contain information beyond the statement that the widest possible scope of application should be created: 6 “Sub-section 1 defines the term “investment asset pool” as the generic term for all funds irrespective of their legal form and irrespective as to whether they are open-ended or closedended funds. Thus, investment asset pools comprise both undertakings for collective investment in transferable securities (UCITS) and alternative investment funds (AIFs). The definition includes domestic UCITS and EU-UCITS as well as domestic AIFs, EU-AIFs and foreign AIFs.” 6 Draft Bill, substantiation to section 1 sub-section 1, p. 362. The Act Implementing the AIFM Directive Norton Rose December 2012 03
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