The Act Implementing the AIFM Directive - Norton Rose

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The Act Implementing the AIFM Directive 04 Norton Rose December 2012 In the case of laws that implement a European directive, the focus is on a European lawcompliant interpretation. Thus, statements contained in the discussion paper of ESMA 7 dated 23 February 2012 “Key concepts of the Alternative Investment Fund Managers Directive and types of AIFM” (hereinafter referred to as “Discussion Paper”) are of particular importance. A purely national issue impacts massively on the interpretation of the scope of the KAGB-E and the fund definition. According to section 307 no. 1 KAGB-E, anyone who performs the business of a capital management company as specified in section 20 sub-section 1 KAGB-E without holding a licence is punishable. Even AIF capital management companies that manage small special AIFs and conduct their business without being registered are subject to punishment according to section 307 no. 2 KAGB-E. Section 17 sub-section 1 KAGB-E provides that capital management companies are domestic undertakings whose business is aimed at, amongst other things, managing domestic investment asset pools. Consequently, whether or not an offence is committed is directly determined by the fund definition. According to the principle no penalty without a law of Article 103 sub-section 2 of the German Constitution (Grundgesetz – GG), an individual must be made sufficiently aware whether and which behaviour incurs criminal liability. This means that, for constitutional reasons, the investment fund definition is to be interpreted narrowly. The constitutional principle takes priority over the will of the national legislator. Furthermore, a Community law-compliant interpretation reaches its limits here, as the AIFM Directive, even though not self-executing but mandatorily requiring transposition into national law, would be superseded by Article 103 sub-section 2 GG. Hence, a broad interpretation of the fund definition is not appropriate where criminal liability would be no longer sufficiently foreseeable. The aforementioned considerations drive the interpretation and definition of an investment asset pool (Investmentvermögen). 1.2.2 Criterion: collective investment undertaking The first criterion “collective investment undertaking” is not defined in the AIFM Directive. These words appear to be a reference to the UCITS Directive 8 where the term is also used, but not specified. The term may have to be understood in the sense of a collective investment vehicle. The following criteria are stated in clause 28 of the Discussion Paper: “An AIF for the purposes of the Article 4 must be a collective investment undertaking which pools together capital raised from investors. A collective investment undertaking should have the purpose of generating a return for its investors through the sale of its investments as opposed to an entity acting for its own account and whose purpose is to manage the underlying assets with a view to generating value during the life of the undertaking.” The above understanding refers to a form of organisation which allows the creation of a pool of assets with the possibility to allocate such assets to several parties involved. Hence, it serves, on the one hand, as differentiation from individual portfolio management and trust situations, where no joint asset pool is created but where an investor grants an individual authorisation, and, on the other hand, as differentiation from own profit-making situations. The latter alternative is closely related to, and discussed in, the paragraph on holding companies. 9 7 http://www.esma.europa.eu/system/files/2012-117.pdf. 8 Directive 2009/65/EC of the European Parliament and of the Council of 13 July 2009 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS). 9 Cf. clause 1.3.1. below.
Another aspect of the fund definition, i.e. that investors cannot directly access or control the assets of the fund, is stated in clauses 33 and 34 of the Discussion Paper. Accordingly, a managed account does not qualify as a collective investment undertaking as it lacks the element of collectivity and the holder – in addition to the manager of the account – retains or, in any event, may resume its power of disposal. This would also apply if a group of investors opened a joint account or securities custody account and an asset manager was granted authority with respect to the account. This will mainly be the case if the portfolio management is outsourced to an asset manager. Rather than the asset manager level, the collective investment undertaking is only created at the level of the outsourcing fund. This opinion is confirmed by section 36 sub-section 1 no. 3 KAGB-E, according to which an outsourced provider requires a licence for individual asset management or financial portfolio management. 1.2.3 Criterion: capital raising The wording of the criterion “capital raising” requires an activity on part of the investment asset pool. This means that processes of a purely passive nature are excluded from its scope. Hence, if several persons come together and actively pool money, this can conceptually no longer be considered as “capital raising”. The Discussion Paper also picks up another aspect by pointing out that any capital raising which is not intended to deliver an investment return or profit should not be considered an AIF, because the concept of capital raising has a commercial component. The example scenario given in the Discussion Paper is that a group of householders purchases a piece of neighbouring land to use it as a common area. 1.2.4 Criterion: number of investors As regards the criterion “number of investors”, section 1 sub-section 1 sentence 3 KAGB-E states that this criterion is met, “if the investment conditions, the articles of association or the instrument of incorporation of the collective investment undertaking do not limit the number of possible investors to one single investor.” The Act Implementing the AIFM Directive Actually, the same criterion as the requirement of a collective vehicle is referred to here. Where a number of investors is conceptually excluded, only individual management can exist. In particular, wholly-owned group companies are thus exempt from the scope of the KAGB-E. However, in cases other than the clear cases of individuals or legal persons, the question of the definition of “investor” arises. In view of the fact that the KAGB-E’s purpose is to cover only collective investment situations, the relevant criterion is whether the single investor acts as a single legal entity. This is affirmed in cases of joint ownership – both with regard to commercial partnerships and civil law partnerships. But if a trustee acts as intermediary for several investors, the criterion of the single investor is not fulfilled. Clause 29 of the Discussion Paper describes a case where a representative acts on behalf of a number of investors. This is relevant, in particular, in the case of a trustee acting as limited partner – a structure which is commonly used for closed-ended funds. Formally, a trustee who acts as limited partner is a single investor. But since, economically, the trustee is not to carry any rewards or risks itself, the Discussion Paper looks through the trustee to the investors. Norton Rose December 2012 05
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