15.09.2016 | KPMG Law Insights

Investment Law – Investment | Law | Compact – Issue 9/2016

Dear Readers,

Since the last amendment to the German Investment Code (KAGB), the launch of credit funds has been permitted in Germany. Institutional investors in particular are increasingly turning to these alternative investments.

This asset class is also open to traditional securities investment assets. In purely formal terms, the fund invests its resources in so-called unsecuritized loan receivables. In economic terms, however, it meets the financing needs of infrastructure projects, for example.

In March 2016, the legislator also amended the rules for the acquisition of unsecuritized loan receivables. In the meantime, half a year has passed – we take this as an opportunity to revisit the topic of loans and to stimulate some further thoughts.

With warm regards

Henning Brockhaus

National legislation

Investment in loan receivables – now more attractive after KAGB amendment?

In March 2016, the German legislator also made significant amendments to the German Investment Code (Kapitalanlagegesetzbuch, KAGB) for investments in loan receivables by way of the UCITS V Implementation Act. The aim was to make investment in unsecuritized loan receivables more practicable.

Now half a year has passed. In our view, this is a good time to ask to what extent the asset class “unsecuritized loan receivables” has actually become more attractive for open-end investment funds.

New challenges

It should be noted that the change in the regulatory perspective has actually opened up more scope for the management of unsecuritized loan receivables, as the sword of Damocles of inadmissible lending business no longer constantly hangs over the investment. At the same time, however, new challenges and new questions arise that the asset manager must answer, such as:

  • What type of loans can be purchased?
  • From a legal perspective, what are the important steps to consider in the acquisition process?
  • What provisions should the loan agreements contain?
  • What are the requirements for risk management?
  • Can revolving loans and future loan receivables also be purchased?
  • Is disbursement of the loan amount directly from the fund permissible?

Subsequent amendment to the terms and conditions of the loan

Since March 16, 2016, the KAGB regulates in § 20 para. 9 sentence 2 that it does not constitute a granting of a loan (inadmissible for KVGs) if loan conditions are subsequently amended. Until May 2015, BaFin had assessed this differently and qualified the prolongation and restructuring of loans in particular as impermissible lending business. However, new questions also arise from the relaxation of administrative practice and the new regulation of the KAGB, for example:

  • How should the term “subsequent amendment to the terms of the loan” be interpreted?
  • What adjustments to the loan can be subsumed under this? May only originally agreed contract contents actually be changed or should the provision be interpreted broadly?
  • Where, if applicable, is the boundary between “modification” of the loan receivable and a (new) loan grant?
  • What is the practical procedure for changing the terms of a loan?

We would be happy to discuss answers to the questions posed here as well as other aspects and approaches with you in a personal meeting. Contact us.

International supervision

IOSCO Proposes Rules of Conduct on Fund Liquidations

The International Organization of Securities Commissions (IOSCO) has proposed rules of conduct for the liquidation of investment assets. In a consultation, IOSCO is seeking feedback from market participants on its questions.

The planned rules of conduct refer both to fund liquidations that the investment company carries out on its own initiative, for example for strategic purposes, and to cases in which massive outflows of funds from the investment assets cause the asset manager to liquidate the investment vehicle.

IOSCO is seeking comments by October 17, 2016. You can find the consultation here.

European supervision

ESMA comments on EU passports for third country AIFMs

The European Securities and Markets Authority (ESMA) has issued a final statement on the opening of the EU market to third-country AIFMs.

In its final report, ESMA states that there are no material concerns regarding the authorization of asset managers from Jersey, Guernsey, Japan, Canada and Switzerland. With regard to the U.S., however, it notes that distortions of competition are possible because the U.S. market is not freely accessible to European fund providers. US suppliers should therefore only be granted limited access to the European market.

The EU Commission now has three months to prepare Level II measures on the application of EU passports for third-country providers based on ESMA’s comments.

International supervision

IOSCO Publishes Final Report on Conduct of Business Rules on Fees and Costs of Investment Funds

IOSCO has published international standards for investment fund fees and costs in a final report.

The document includes recommendations on the fee structure, the disclosure of fees and costs to investors, the handling of transaction costs and so-called “soft commissions”.

The proposals largely reflect the principles already recognized in Germany.

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Henning Brockhaus


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