13.05.2015 | KPMG Law Insights

Investment Law – Investment | Law | Compact – Issue 5/2015

Dear Readers,

It is good news for asset managers who pursue a loan or debt strategy for their investment assets:

BaFin is responding to a long-expressed need in practice by allowing an investment fund under the KAGB not only to acquire unsecuritized loan receivables, but also to restructure them, roll them over and – for certain types of AIF – even to grant loans.

But it was not only the practice that called for this business expansion. A look at Europe and other member states shows that so-called “loan originating funds” are already permitted elsewhere.

In keeping with this, we provide you with some information on the new European Long-Term Investment Funds (ELTIF) regulation. This set of regulations also has the same thrust: AIFs structured in accordance with the ELTIF Regulation will in future be allowed to grant loans to unlisted companies.

With warm regards

Henning Brockhaus


Changed administrative practice on loan receivables

On May 12, 2015, BaFin responded to the industry’s call for more hands-on supervision of investment assets that pursue loan or debt strategies.

Now, restructuring and prolongation of existing loans, and for closed-end funds also original lending, are to be possible with a KAGB license. Under the KAGB, a capital management company could invest in unsecuritized loan receivables as early as 2007, but after acquiring the receivable it was only able to “manage” the receivable within narrow limits because decisions with regard to the loan generally had to be qualified as lending decisions or lending – an activity that is fundamentally impermissible for an asset manager.

To date, the KAGB simply mentions unsecuritized loan receivables as a permissible asset class. The Act does not contain any further, explanatory provisions with regard to the management of loan receivables. Until now, the legislature has left this up to the industry – which, however, has been faced with very tight regulatory frameworks. These restrictions have made the acquisition of loan receivables quite unattractive to date.

The change in administrative practice thereby anticipates future, clarifying regulations within the KAGB. In other EU countries, lending funds are already permitted and the ELTIF Regulation also provides that AIFs may grant loans. In addition, the European Securities and Markets Authority (ESMA) also considers “loan originating funds” to be permissible.

Against this background, BaFin’s new administrative practice appears to be a logical step. At the same time, it heralds a significant upheaval within financial supervision. In addition, new business opportunities are opening up for investment funds.

European legislation

ELTIF regulation is just around the corner

On April 20, 2015, the Council of the European Union adopted the Regulation on European Long Term Investment Funds (“ELTIF”). The aim of the regulation is to make more capital available for long-term investment in the European economy. ELTIFs are alternative investment funds (AIFs) with special design features that are managed by authorized alternative investment fund managers (AIFMs).

Compared to the known AIF according to the KAGB, ELTIFs have to comply with additional or different regulations. Thus, ELTIFs marketed to retail investors as mutual funds are subject to the identical, high requirements for a depositary as UCITS, although the assets themselves are to be counted among the classic “alternatives”.

ELTIFs should invest at least 70% of their capital in long-term assets. Permitted facilities include, but are not limited to:

  • Equity or equity-like instruments of unlisted companies that are not financial companies;
  • Debt instruments issued by such companies;
  • Loans extended to such companies;
  • Shares in other ELTIFs, European Venture Capital Funds (EuVECA) and European Social Entrepreneurship Funds (EuSEF);
  • direct interests in real assets.

ELTIFs are generally open to all investor classes, but there are increased information requirements for sales to retail investors.

The ELTIF Regulation enters into force immediately – i.e. without a national transposition act – 20 days after its publication and is applicable six months after its entry into force.

The link to the ELTIF regulation can be found here.

National legislation

Bundestag passes Small Investor Protection Act

On April 23, 2015, the German Bundestag passed the Small Investor Protection Act. As already reported in the March issue of “Investment | Recht | Kompakt”, the Retail Investors Protection Act partly anticipates the provisions of MiFID 2. This applies above all to BaFin’s expanded supervisory powers, according to which it can impose sales restrictions and bans as well as warnings (so-called product intervention rights). Other regulations anticipating MiFID 2 (in particular on the product release procedure) will not enter into force until January 3, 2017.

Compared to the government draft, the final Small Investor Protection Act contains a number of changes of practical significance. The legislator initially raised the threshold for exemption from the prospectus requirement for crowdfunded investments with a total investment volume of up to EUR 2.5 million. In addition, the far-reaching ban on advertising was not included in the final law. Accordingly, advertising is permitted in all media, but combined with a mandatory warning. With regard to the asset information sheet, it was decided that investors should also be able to take note of this document online, at least if they exclusively use means of distance communication.

Find here the press release of the Federal Ministry of Finance from April 23, 2015.


BaFin publishes updated version of fund category guideline

On April 17, 2015, BaFin published an updated version of the “Guideline on the Determination of Fund Categories Pursuant to Section 4 (2) of the German Investment Code (KAGB) and Further Transparency Requirements for Certain Fund Categories” (so-called Fund Category Guideline) on its website.

According to BaFin’s amendments, money market funds with a short maturity structure (Art. 3 No. 3 of the Fund Categories Directive) and “normal” money market funds (Art. 4 No. 4 of the Fund Categories Directive) should now also refer to the ratings of credit rating agencies registered with and supervised by ESMA, in addition to the 2010 CESR guidelines on money market funds. The background to the amendment is the question of whether credit quality can be classified as appropriate on the basis of external ratings.

The changes are likely to have little impact on capital management companies in practice, since according to BaFin’s requirements, external ratings are not likely to carry undue weight in the assessment of credit quality anyway.

The current version of the Fund Category Guideline can be found here.

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Henning Brockhaus


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