30.04.2015 | KPMG Law Insights

Alternative Investments Legal – Alternative Investments Legal | Issue 3/2015

Dear Readers,

The long weekend is just around the corner and on Labor Day there is a lot of the same in front of you.

The Bundestag has just passed the Small Investor Protection Act, which has undergone two significant changes compared to the original draft. In addition, a draft of the Auditor Reform Act is available, according to which AIFs are generally not subject to the strict audit-related requirements under European law.

Furthermore, things are in flux at the European level. For example, EIOPA has established a new work area for insurers’ infrastructure assets. This means that the introduction of a separate risk class under Solvency II is being examined. In addition, the Council of the European Union has waved through the ELTIF Regulation. A consultation paper from the EBA is also interesting. According to this, all AIFs are qualified as shadow banks across the board in a draft on banking supervision guidelines.

Finally, reference should be made to the draft of the BaFin circular on the appointment of external valuers for real estate. BaFin is thus pursuing the goal of concretizing the legal requirements and thus specifically facilitating their proof.

We wish you a happy holiday and an exciting read!

With best regards

Dr. Ulrich Keunecke


National legislation

Bundestag passes Small Investor Protection Act – cooperatives remain in it

The German Bundestag passed the Small Investor Protection Act on April 23, 2015. The proposal of the Federal Council to exclude cooperatives from the scope of application of the KAGB (cf. Newsletter AIL February 2015) has not been adopted in this context. In this respect, the clarification made by BaFin in its leaflet of 09.03.2015 that registered cooperatives are excluded from the scope of application of the KAGB (cf. Newsletter AIL March 2015) remains valid.

Compared to the government draft, the adopted law has undergone two more significant changes. For example, the threshold for exemption from the expensive prospectus requirement for investment projects was increased from one million euros to 2.5 million euros for swarm financing. The coalition also showed leniency with regard to the planned advertising regulations. Originally, it was envisaged that crowdinvestments could only be advertised in media with a business focus. Social media would thus have been excluded. The parliamentarians reversed this limitation. Advertising is permitted in all media thereafter. However, BaFin can intervene in the event of problematic advertising.

Related links

You can view the adopted resolution recommendation of the Finance Committee here.

You can find the AIL Newsletter February 2015 here.

You can access the March 2015 AIL Newsletter here.

Alternative investment funds

AIFs not public interest entities

AIFs are generally not covered by the strict regulatory requirements under European law, according to the draft Audit Reform Act. In implementing the audit-related provisions of European law, the Federal Ministry of Justice and Consumer Protection has made use of its implementation discretion to the extent that it defines the term “public interest entities” narrowly. Essentially, capital market-oriented companies as well as banks and insurance companies are covered.

The core requirement of the regulation is the so-called external rotation, according to which an auditor may not work for a public interest entity for more than ten years. Other key elements of the reform are the strengthening of the audit committee of audited companies, extended requirements for the audit opinion and an additional report to the audit committee. In addition, there is a restriction on the consulting services that the auditor may provide to the company it audits.

Related links

You can access the draft bill here.

Investments for insurers

EIOPA publishes consultation on infrastructure assets

EIOPA has established a new working area on infrastructure assets of insurers and published a consultation paper on the assessment of infrastructure assets under Solvency II as a first act on March 27, 2015. EIOPA is examining whether investments in infrastructure projects constitute a separate risk category that the standard formula cannot reflect. Specifically, the Authority intends the following:

  • Develop a definition of infrastructure investment that meets regulatory purposes and possible criteria for the new risk class;
  • Examine the current regulatory treatment of infrastructure assets;
  • Identify existing regulatory barriers to investment for insurers;
  • Examine whether current Solvency II requirements are sufficient to manage the risk of this complex and relatively new asset class for insurers;
  • Investigation of infrastructure investments inherent problems of financial stability.

A large number of detailed questions are addressed in the consultation paper in order to obtain the most targeted answers possible. The input period ended on 26.04.2015. EIOPA will submit the results to the European Commission in a final recommendation.

Related links

You can access the consultation paper here.


EU Council waves through ELTIF Regulation

On 20.04.2015, the Council of the European Union adopted the “Proposal for a Regulation of the European Parliament and of the Council on European Long-Term Investment Funds (ELTIF)”. The regulation is intended to provide more capital for long-term investment in the EU economy. A new investment vehicle in the form of a fund was created for this purpose. Only AIFs managed by an authorized alternative investment fund manager (AIFM) – in Germany KVGen – may be marketed as ELTIFs. Furthermore, additional rules apply to ELTIF. Among other things, they must invest at least 70% of their capital in precisely defined categories of eligible fixed assets. Investments in individual assets are generally limited to 10% of fund assets in order to achieve better risk diversification; in exceptional cases, up to 20% is permissible. Trading in assets other than long-term investments is permitted for an ELTIF only up to 30% of its capital. In addition, leverage is limited to the extent that borrowing by an ELTIF is possible up to a maximum of 30% of the fund assets. Target investors of ELTIFs are mainly smaller institutional investors. However, shares can also be sold to private customers, provided that the strict requirements are met.

The regulation has yet to be published in the Official Journal of the European Union and will enter into force 20 days later. The regulations will only be applicable after a transitional period of a further six months.

You can view the proposed regulation here.

Valuation of real estate fund assets

BaFin Draft Circular on the Appointment of External Valuers for Real Estate

On 16 April 2015, BaFin published a draft circular on the requirements for the appointment of external valuers for “real estate” in accordance with Section 216 KAGB and put it out for consultation (05/2015). The aim is to make the requirements more specific and to make it easier to prove them to BaFin.

According to the draft, a legally recognized professional registration exists if the activity as an external appraiser depends on a relevant registration required by law. This is the case, for example, with Section 36 of the German Trade Regulation Act (GewO), because the provision contains requirements for the appointment as well as concretizations of the powers and obligations of publicly appointed experts. All professions that are organized in professional corporations under public law (e.g. Chamber of Public Accountants) are subject to professional rules. Associations organized under private law must provide for regulation under their own responsibility by issuing binding rules.

Furthermore, the draft specifies which documents must be submitted to prove the professional guarantees.

Finally, the draft points out that a legal entity or partnership appointed as an appraiser must also comply with the requirements of Section 216 KAGB. It should be noted that the personal requirements can only be proven by linking them to the specific natural persons acting, who must be named in the notification to the authority. A valuation by two persons from the same company is not sufficient if the KAGB requires two external valuers.

Comments on the draft circular can be submitted to BaFin until 15.05.2015.

Related links

You can access the draft of the BaFin circular here.

Alternative investment funds

Are AIFs shadow banks?

The EBA published a consultation paper on draft banking supervisory guidelines on 19.04.2015. The new guidelines are intended to limit credit institutions’ exposure to shadow banks. To this end, the draft classifies all investment funds, with the exception of UCITS that are not money market funds, as shadow banks on a blanket basis. According to the EBA, credit institutions should set a uniform limit in relation to eligible capital for their risk exposures to shadow banks. In addition, they must define individual limits on the burden with respect to individual market participants deemed to be shadow banks. If a credit institution fails to take such protective measures on its own responsibility or does not comply with the limits it has set itself, a uniform limit of 25% of eligible capital (“fall-back approach”) applies to risk positions vis-à-vis shadow banks.

Comments on the EBA’s consultation paper can be submitted until 19.06.2015.

Related links

You can find the EBA draft here.

Infrastructure investment

Plans of the expert commission make sense

On April 13, 2015, the expert commission set up by the German Federal Ministry of Economics to “Strengthen Investment in Germany” presented the key points of its final report in Berlin. Among other things, the Commission recommends that private capital for infrastructure investments be raised in the future via public infrastructure funds for institutional investors and via a citizens’ fund. This would make it possible to draw on the expertise of the KVGs. On the other hand, fund companies are subject to strict supervision, so that no additional regulatory regime would be necessary.

Related links

You can find the key points paper here.

You can access the full report here.

National supervisory law

Update on the Money Laundering Circular

BaFin published the FATF statement and information report on April 20, 2015. The statement addresses countries that have been identified as having serious deficiencies in measures to prevent money laundering and terrorist financing. These continue to include Iran, the Democratic People’s Republic of Korea, as well as Algeria, Ecuador and Myanmar. In the case of business relationships with these countries or with business partners residing in these countries, as well as in the case of transactions from or to these countries, additional due diligence and organizational duties commensurate with the increased risk (as identified by the FATF) must always be performed.

The information report represents the result of an ongoing country review by FATF. Reports include compliance with and application of action plans agreed with individual countries. Even if there are no direct obligations to act in relation to these countries and no additional due diligence and organizational obligations commensurate with the increased risk are to be fulfilled, the situation in the countries mentioned or of persons from these countries should nevertheless be adequately taken into account when assessing country risks in the context of prevention against money laundering and terrorist financing.

Related links

Both the declaration and the information report can be accessed here.

Investments for insurers

VAG amendment announced – Solvency II is coming

On April 10, 2015, the Act on the Modernization of Financial Supervision of Insurance Companies was promulgated in the Federal Law Gazette. This law, which includes an amendment to the Insurance Supervision Act, transposes the European Solvency II Directive into national law. The law enters into force on 01.01.2016. In the future, the ISA will thus regulate the legal framework for larger insurers subject to the Solvency II regime; for smaller insurers and pension funds, the Investment Regulation of March 7, 2015 will continue to apply after January 1, 2016.

Related links

The Act on the Modernization of Financial Supervision of Insurance Companies can be found here.

Investments for insurers

BaFin publishes explanatory memorandum to AnlV

BaFin has published on its website the explanatory memorandum to the amended Investment Regulation, which came into force on 07.03.2015. An updated version of the Capital Investment Circular 4/2011 (VA) is not yet available.

Related links

You can find the justification here.

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Dr. Ulrich Keunecke

Leiter Sector Legal FS Insurance

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