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16.02.2017 | KPMG Law Insights

Investment law – Investment | Law | Compact – Issue 2/2017

Dear Readers,

ESMA published an opinion on the formation and handling of unit classes for UCITS at the end of January 2017 – about two years after the publication of a first discussion paper. The aim is to harmonize the regulation of share classes in Europe.

The European Supervisory Authority explains which unit classes are inadmissible in its view and according to which principles admissible unit classes should be formed and managed. It also provides guidance on appropriate risk management for share classes that differ from others in their use of derivatives.

We also report today on some recent announcements by BaFin. In addition to the announcement of administrative opinions, the German Financial Supervisory Authority is currently consulting an “Interpretative Letter on the Activities of a Capital Management Company and the AIF Investment Company it Manages Externally”. In essence, it is a question of which activities the external capital management company is responsible for and which the externally managed investment company is responsible for.

With warm regards
Henning Brockhaus

EUROPEAN SUPERVISION

ESMA publishes opinion on unit classes in UCITS

After several consultations, ESMA published an opinion on the formation and handling of unit classes in UCITS on January 30, 2017. The background to this measure is that the UCITS Directive hardly contains any regulations in this regard and this has led to inconsistent practice in the Member States. We have already reported on this here.

In its opinion, ESMA now proposes four principles to be observed in the formation and handling of unit classes in UCITS.

1. uniform investment strategy

A uniform investment strategy must apply to the overall fund despite different unit classes. In principle, this must be realized through a uniform pool of assets. ESMA explicitly mentions that the hedging of currency risks at unit class level is consistent with a uniform investment strategy. However, the following additional principles must be observed.

2. avoidance of spill-over effects

The use of derivatives for only one unit class may give rise to counterparty risks and operational risks for other unit classes as well. These so-called “spill-over effects” may also disadvantage investors of another share class. ESMA believes that any additional risk arising from this must be minimized and adequately monitored. Stress tests, among other things, should be introduced for this purpose.

3. definition of the design features of unit classes

All features of a share class shall be clearly defined in time before the share class is formed. In the case of unit classes with currency hedging, this determination should also relate to the currency risk.

4. transparency

The existence and characteristics of each share class should be disclosed to each investor. It does not matter which unit class the investor holds. ESMA also requires that at a minimum, the following operational principles are adhered to:

  • Information on existing unit classes should be provided in the prospectus in the information on types of units and their characteristics.
  • An easily accessible and always up-to-date list of share classes with spill-over effects should be maintained.
  • The stress test results should be made available to the regulatory authority upon request.

Effect on current existing share classes and transitional provisions

All existing share classes can initially be continued as before. According to ESMA, the following should apply:

  • Share classes that do not comply with the principles set out in the ESMA Opinion should be closed to new investors by 30 July 2017 (6 months after the publication of the ESMA Opinion on 30 January 2017).
  • Top-ups by existing investors in share classes that do not comply with the principles set out in the ESMA Opinion are only permitted until July 30, 2018 (18 months after the publication of the ESMA Opinion on January 30, 2017).

ESMA’s opinion on the share classes can be found here.

NATIONAL SUPERVISION

BaFin publishes administrative practice on section 307 para. 5 KAGB

At the beginning of February 2017, BaFin revised its administrative practice on information requirements pursuant to section 307 para. 5 KAGB announced.

This is the supervisory authority’s response to queries from market participants regarding the provision of Sec. 307 (1) FiMaNoG, which was introduced by the 1st FiMaNoG. 5 KAGB whether a KID must now be provided to semi-professional investors prior to the acquisition of units in AIFs.

As already reported in our December 2016 issue , this provision is based on Article 6 of the 1st FiMaNoG, which entered into force on December 31, 2016. Regulation (EU) No. 1286/2014 (PRIIPs Regulation), to which section 307 para. 5 KAGB did not – as initially planned – enter into force at the same time as Art. 6 of the 1st FiMaNoG on December 31, 2016, but will only become applicable at the beginning of 2018.

Against this background, BaFin has now announced that until the PRIIPs Regulation enters into force, it will continue to exercise its right under section 5(5) of the PRIIPs Regulation. 6 KAGB in the event of a breach of section 307 (1) of the German Stock Corporation Act. 5 KAGB to the effect that it will not issue an enforcement order. However, this administrative practice will end with the entry into force of the PRIIPs Regulation.

EUROPEAN LEGISLATION / EUROPEAN AND NATIONAL SUPERVISION

Associations suggest postponing application of variation margin under EMIR

Various fund associations have approached the European Commission and European regulators (ESMA, EBA and EIOPA, together ESAs) with a request to postpone the mandatory introduction of variation margin for non-centrally cleared OTC derivatives as of March 1, 2017 by six months, as required under EMIR. However, this would require changes to the regulatory standards on bilateral collateral obligations.

In the alternative, the associations ask the various national regulators to grant affected market participants a six-month delay in implementing the variation margin requirements.

The background to this is the massive time pressure under which the relevant contractual documentation (master agreements and collateralization annexes) must be adapted and negotiated with the respective counterparties in order to meet the new requirements by March 1, 2017.

KPMG Law will be happy to assist you in amending and negotiating the master agreements and collateralization annexes. Please contact us.

NATIONAL SUPERVISION

BaFin comments on documents to be submitted for sales announcements

BaFin informs that in case of a change notification for the distribution of funds, fund companies only have to submit the amended documents. If the prospectus has changed, it must then be submitted in its entirety, not just the pages that are the subject of the change. However, other documents that have not changed do not need to be submitted a second time.

The background to this announcement by BaFin is ESMA’s statement in its FAQ on the AIFM Directive of November 2016 that fund companies should submit a complete set of documents when amending the distribution notice. We had reported on this in our December 2016 issue .

NATIONAL SUPERVISION

BaFin consults interpretative letter on allocation of duties

On February 3, 2017, BaFin published a draft of an interpretative letter presenting its administrative view on the allocation of responsibilities between a capital management company and the investment company it manages externally (e.g., Investmentkommanditgesellschaft (InvKG) or Investmentaktiengesellschaft (InvAG)).

In particular, it seems worth mentioning that BaFin distinguishes, with regard to portfolio management, between the “decision whether and on what terms assets are to be acquired” and the subsequent execution action. In the opinion of the supervisory authority, the capital management company must carry out the former in its own name for the account of the InvKG or InvAG, but the “concrete act of execution” should then be carried out in the name of the InvKG or InvAG. The execution action is an “annex” to the core competence of portfolio management, BaFin said.

From a civil law perspective, this distinction remains unclear, at least for the following reason: If the “decision as to whether and under what conditions assets are acquired” refers to the obligation under the law of obligations to purchase the asset (the purchase agreement) (BaFin also refers to the conclusion of a contract with a third party in this context), then the “concrete act of execution” would have to represent the transaction of disposal or performance under the law of property (the transfer of the asset to the third party).

In this context, it is also not immediately clear, at least from a civil law perspective, why a distinction is made between the transaction in the company’s own name and the transaction in the name of InvKG or InvAG.

There is an opportunity to participate in the consultation until February 17, 2017.

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Contact

Henning Brockhaus

Partner

THE SQUAIRE Am Flughafen
60549 Frankfurt am Main

tel: +49 69 951195061
hbrockhaus@kpmg-law.com

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