20.09.2018 | KPMG Law Insights

Investment | Law | Compact – Issue 09/2018

Dear Readers,

As reported in our August issue, BaFin is granting a deadline for adjusting the cost regulations of mutual funds until
December 31, 2019. However, it requires companies that apply for amendments to investment terms and conditions within this period to also adapt them to the new model cost clauses in the process.
The German financial regulator has spoken out on the subject of Brexit. In a letter to supervised investment companies, BaFin points out that – from a current perspective – outsourcing of portfolio management or risk management to companies in the UK as of the
March 30, 2019 to be treated as outsourcing to entities in a third country. According to the KAGB, this requires cooperation between the relevant supervisory authorities. As this has not yet been clarified for the period from March 30, 2019, the capital management companies must be prepared for the “worst case” and have appropriate contingency plans in place.
We also report on further regulatory news and take a look across the border to Luxembourg, where the CSSF has tightened its supervisory practice on the organization of management companies.

With warm regards
Henning Brockhaus

National supervision

BaFin publishes German translations of isolated Q&A on UCITS and AIFM Directive

On August 31, 2018, BaFin published German-language translations of selected questions of the Q&A catalogs on the UCITSand AIFM Directives.
The supervisor points out that the official English original versions are still binding.

National supervision

BaFin expands investment fund database

BaFin will expand the investment fund database on its website. In addition to public investment funds from (EU) countries that are authorized to market, all other active German investment funds will also be displayed there in the future, as well as special AIFs and investment funds that do not have a marketing license in Germany. The database contains information on investment funds, management companies and depositaries.
The expansion of the database facilitates the allocation of the unique company identifier, the so-called Legal Entity Identifier (LEI), as the LEI-issuing companies will be able to access the investment fund database in the future.
The change will take effect no earlier than October 1.

National supervision

BaFin requires adjustment of cost clauses already at next change of investment conditions

BaFin has shared that no changes to investment terms and conditions are currently approved for mutual funds without also simultaneously adapting the existing cost regulations of mutual funds to the new model cost clauses.
Capital management companies that want to or have to make changes to the Special Terms and Conditions of Investment can therefore not use the deadline actually granted by the supervisory authority of December 31, 2019 to adapt the cost rules to the new model cost clauses, but must also adapt the cost paragraph as early as the next amendment to the Terms and Conditions of Investment.

National supervision

BaFin facilitates submission of reports on investment assets

BaFin has announced that, with immediate effect, only one copy in paper form and one copy electronically are to be transmitted for the submission of annual, semi-annual and interim reports on investment funds.
For dissolution and settlement reports, on the other hand, the rule remains that three copies must be submitted, two in paper form and one electronically. § Section 4 (1) of the KARBV shall be amended accordingly.
In deviation from the current version of Section 3 (5) sentence 1 KAPrüfbV, the submission of audit reports on investment funds is also facilitated. From now on, two copies are sufficient for this purpose, one in paper form and one electronically. § Section 3 (5) sentence 1 KAPrüfbV shall be amended accordingly.
For the audit reports on capital management companies, on the other hand, the current rule remains that three copies must be submitted, two in paper form and one electronically.

European supervision

EU Commission Initiates Regulations on ESG Risks and Factors in Asset Management

The EU Commission is making progress in establishing tangible regulations on ESG. It has asked ESMA to prepare adjustments to the Level 2 measures for the inclusion of ESG risks and factors in the investment process. Affected by these proposals would be, among others, the legal acts on the UCITS and AIFM Directives as well as on MiFID2.
The EU Commission expects proposals on the following points:

  • Organizational requirements that ensure the appropriate consideration of ESG risks,
  • Systematic consideration of ESG risks in the investment strategy and investment decision,
  • Systematic integration of ESG risks into the risk management process and
  • Consideration of ESG risks when determining the target market according to MiFID2

ESMA is to submit its proposals by April 30, 2019. The letter from the EU Commission (which went accordingly for insurance regulation from to EIOPA) can be found here.


Luxembourg Supervision Increases Requirements for Authorization and Organization of Management Companies

The Luxembourg financial supervisory authority “Comission Surveillance du Secteur Financier” (CSSF) has published a new circular (Circulaire CSSR 18/698) in which it presents the licensing requirements for UCITS and AIF management companies domiciled in Luxembourg.
In particular, it is a question of what the internal organization of a management company should be, what its policies and processes should be, and what staffing must be available in view of the business volume and business activities of the management company.
The CSSF also specifies due diligence requirements for the selection of outsourcing companies and their ongoing monitoring.
Among other things, the circular replaces the previous version from 2012, which still referred exclusively to UCITS management companies and contained less restrictive requirements.
The new circular is applicable with immediate effect, so management companies should make any necessary adjustments without delay.

European supervision

European Union wants to regulate climate indices

The regulatory package on “Sustainable Finance” also includes proposals to amend the Benchmark Regulation (BMR). This is intended to legally regulate so-called low-carbon benchmarks (with low-carbon values) and positive-carbon impact benchmarks (values with a positive impact on carbon dioxide emissions along the entire value chain).
With the extended requirements for providers of ESG and CO2 avoidance indices, the EU Commission intends to achieve a correct and reliable representation of the economic conditions underlying the respective index.
The BMR amendments mean expanded disclosure requirements. For example, the sustainability element methodologies of all ESG benchmarks must be explained to users. In addition, all ESG characteristics of the index must be reflected in the so-called “benchmark statement”.

National supervision

BaFin comments on Brexit consequences for outsourcing to the UK

BaFin has sent a letter to German capital management companies informing them that it currently assumes that the United Kingdom of Great Britain and Northern Ireland (UK) will no longer be considered an EU or EEA country after March 29, 2019. Accordingly, outsourcing of portfolio management or risk management to companies domiciled in the UK pursuant to Sec. 36 para. 1 sentence 1 no. 4 KAGB can only be continued if cooperation with the competent British supervisory authority is ensured. This is still open at the current time, he said.
BaFin therefore advises capital management companies that effective contingency plans must be in place in the event that an outsourcing relationship with a UK company then needs to be terminated. In addition, the companies are to provide information on their potential impact.

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