The German Fund Jurisdiction Act has been saved
The German Fund Jurisdiction Act
What are the changes for investment management firms?
Performance Magazine - Issue 37 ⬤ Published on 14 October 2021
The German Fund Jurisdiction Act
What are the changes for investment management firms?
Partner, Investment Management, Deloitte
Senior Manager, Investment Management, Deloitte
To the point
The Fund Jurisdiction Act aims to strengthen Germany as a fund jurisdiction, specifically through expanding its product range, integrating European sustainability aspects, and standardizing regulations on cross-border distribution.
But what are the key points of this new legislation and, as an asset manager, what opportunities can you seize going forward?
In April 2021, the German legislative passed the Fund Jurisdiction Act (the Fondsstandortgesetz, or FoStoG), which came into force in August 2021 with a few exceptions. The FoStoG will adjust several regulations—here is a brief oversight of these changes.
In this article, we will focus on the key changes for investment management firms.
Expansion of product range for fund managers
For fund managers, the most interesting point of the new legislation is probably the expansion of permitted products. With the open-ended infrastructure fund, a suitable fund vehicle is created that enables smaller investors to invest in infrastructure project companies. The regulations in this regard are based on those of open-ended real estate investment funds.
The specifics on the permissible assets, investment limits and redemption principles are set out under sections 260a to 260d KAGB. For example, the redemption of units is only possible on certain redemption dates, once every six months at the least and once a year at the most.
In addition to the corporate form of the investment fund, fund managers are able to set up the open-ended infrastructure investment fund as Investmentkommandit-Gesellschaften (investment limited partnerships). However, this is only possible for special AIFs. This corporate form can also be used for open-ended real estate investment funds.
The FoStoG also introduces master-feeder structures for closed-ended funds. The regulations for these are largely based on those of open master-feeder structures.
As well as the fund vehicles already mentioned, closed-ended special AIFs may also be launched as special assets in the future (section 139 KAGB). The regulations that already apply to open-ended investment funds also apply to closed-ended ones, insofar as they apply to (German) special AIFs. The exception is section 98 KAGB regarding the redemption of units, as units cannot be redeemed for closed-ended funds before the end of their term.
Finally, the expanded product range includes a separate fund category for development promotion funds, which can be launched as open or closed domestic special AIFs. These special AIFs may only invest in assets that measurably contribute to achieving sustainable development goals in developing countries and territories. The specific regulations are from section 292a ff KAGB. And, section 28a KAGB imposes additional organizational requirements for the asset management firm that manages these development promotion funds.
Increased product design flexibility
The FoStoG provides fund managers more flexibility in the design of their fund vehicles.
In the case of open-ended real estate investment funds, the granting of shareholder loans to wholly owned subsidiaries is made easier. Before, these funds needed to hold properties themselves to be able to grant loans to wholly owned subsidiaries. this requirement no longer exists; therefore, loans can now also be granted to so-called holding companies. Investment limits have also been removed pursuant to section 240 para. 2 KAGB. It is now possible for this fund vehicle to enter into joint ventures with a 100% participation, as well as indirect participation in Germany. Previously, this was only possible abroad and joint ventures could not be entered into.
Likewise, there are also changes to the open-ended domestic special AIFs with fixed investment conditions. Section 284 KAGB allows the possibility of investing in infrastructure project companies. The permissible borrowing limit has been raised from 50% to 60%, and fund managers are also given more flexibility in granting loans to real estate companies.
Finally, open-ended domestic special AIFs with fixed investment conditions pursuant to section 284 para. 2 KAGB can now invest in crypto securities within the meaning of section 1 para. 11 sentence 4 KWG, provided their market value can be determined. It should be noted that a maximum of 20% of the value of the open-ended domestic special AIF with fixed investment conditions may be invested in this asset class.
Digitization of supervision
Due to the digital transformation of supervisory bodies, electronic communications will soon be the rule for investment management firms, with the relevant regulations coming into force on 1 April 2023. The Federal Financial Supervisory Authority will provide a procedure with which investment management firms can electronically transmit notifications, applications, notices, documents and information, as well as evidence. The specific regulations are covered in section 7b KAGB. The switch to electronic communication will result in cost savings for investment funds and, therefore, also for investors.
Cross-border distribution of investment funds
During the transposition of Directive (EU) 2019/1160 into national law, regulations on the cross-border marketing of investment funds were introduced in the KAGB by the FoStoG. Sections 295a, b KAGB set out the revocation requirements of the cross-border marketing of EU UCITS and AIF in Germany, as well as the associated information obligations to investors. Similar provisions were also included for UCITS, EU AIFs and domestic AIFs in the case of revocation of marketing in EU or EEA member states with sections 313a, 331a KAGB.
Another element of Directive (EU) 2019/1160 was included in section 306a KAGB—requiring an investment management firm to provide a distribution facility for private investors. This facility must, among other things, process subscriptions, payments, redemptions and conversion orders from investors and inform investors about their rights. It also serves as a point of contact for communications with the Bundesanstalt.
Furthermore, when a domestic investment management firm markets domestic UCITS or AIFs to private investors, a separate institution does not need to be provided. In this case, the investment management company itself can assume the tasks of the institution.
The Directive (EU) 2019/1160’s pre-marketing regulations were also transposed into the KAGB. Pre-marketing refers to the direct or indirect provision of information or communications on investment strategies or investment concepts to potential professional and semi-professional investors. This process aims to determine investors’ potential interest in an AIF or sub-investment asset that is either not yet authorized in the state, or is authorized but has not yet been notified for marketing.
The definition of pre-marketing also applies to UCITS management companies, provided they act as third parties for an AIF management company pursuant to section 51 (4) sentences 1, 4 in conjunction with section 306b (6) KAGB. Until now, the measures of a capital management company in the run-up to the actual marketing were not covered by law. Now, the provisions must be considered accordingly, particularly for activities carried out before marketing begins.
Integration of European sustainability aspects
The (EU) 2019/2088 (“Transparency Regulation”) and (EU) 2020/852 (“Taxonomy Regulation”) were adopted as part of the European Commission's Sustainable Finance Action Plan. The FoStoG anchors the resulting environmental, social and governance (ESG) information requirements into the KAGB. This overview shows where these regulations’ provisions have been inserted into the draft KAGB.
Further innovations for fund managers
Alongside the significant innovations already discussed, the following two areas are also worth mentioning. The FoStoG abolishes numerous written form requirements and the use of a durable data medium to inform investors (unless prescribed by EU law) within the KAGB. This reduction in bureaucracy increases the flexibility of investment management firms.
Likewise, the disclosure period of closed-ended public investment companies with fixed capital and closed-ended public investment companies was extended from six to nine months. Therefore, asset managers need only prepare an annual report six months after the end of the financial year, which should be submitted to the auditor for auditing purposes and presented in the general meeting or to investors for approval. The actual publication in the Bundesanzeiger can take place nine months after the end of the financial year.
The FoStoG creates many new opportunities for investment management firms. Below, we have listed the essential questions that firms should ask themselves, and how we at Deloitte can support you in this regard.