BaFin-Consultation 1/2017 – Letter of interpretation on the tasks to be performed by an AIF-KVG
In Germany, the relationship between an AIF in corporate form, e.g. as LLP-structure, and the managing external AIF-KVG (the German AIFM) has been the subject of discussions since the beginning of the KAGB. These have been and are mainly dealing with the question of which competences have to be assumed by the AIF-KVG and which tasks can remain with the AIF.
BaFin, the German Financial Supervisory Authority, is once again addressing this topic, but with potentially unpleasant and undesired interpretations for the market.
This update highlights key aspects of the planned interpretive guidance. Statements regarding the consultation paper of 3 February 2017 may be submitted to BaFin by 17 February 2017. A further consultation is not planned.
The key points in brief
- In its Consultation Paper 1/2017, BaFin reflects interpretations of ESMA on matters of responsibility of and the possibilities of retransferring functions from an AIFM.1 This will have far-reaching consequences for the delegation of functions and the monitoring and documentation of the relationship between an AIF-KVG and an AIF in corporate form as well as distributors, if and to the extent BaFin implements its planned interpretation in practice.
- According to BaFin, all services listed in Annex I of the AIFM Directive must be allocated to the original area of responsibility of an AIF-KVG. This would include administrative tasks as well as distribution in addition to portfolio management and risk management. The inclusion of third parties in distribution activities ultimately may lead to the application of outsourcing and delegation rules which is not good news. Also, this considerably contradicts the explanations of the German Minimum Requirements for Risk Management for Capital Management Companies (KAMaRisk) which were just recently passed.
- BaFin assumes on the basis of the transfer of functions according to Annex I of the AIFM Directive that an AIF-KVG generally acts on its own behalf even if from an economic point of view it acts for the account of the AIF. Within the further explanations, this statement is however adapted to practice so that this opinion essentially does not have to be challenged.
- BaFin views a "retransfer" of functions of the collective asset management from an AIF-KVG to the managed AIF in corporate form as critically as ESMA. In practice, however, a fund initiator or other third parties, amongst others, will rather be entrusted with distribution tasks so that this interpretation of BaFin should have less far-reaching consequences.
Critical individual aspects
Starting point – "collective asset management"
The starting point of BaFin´s considerations is the concept of collective asset management pursuant to sec. 1 para. 19 no. 24 of the German Capital Investment Code (Kapitalanlagegesetzbuch - KAGB). This includes "portfolio management, risk management, administrative activities, the sale of own investment fund units as well as in connection with AIF activities relating to the assets of the AIF".
Deviating from what the explanatory memorandum of the Act suggests, BaFin assumes that Annex I of the AIFM Directive is thereby implemented.2 This interpretation sets the tone for the entire interpretive guidance, as all functions set out in Annex I are thereby allocated originally to the AIF-KVG.
| The allocation of all services set out in Annex I of the AIFM Directive as original activities of the AIF-KVG will in practice not find favour. BaFin transfers provisions of the UCITS Directive to the AIFM sphere, although the latter constitutes a "may exercise" regulation (the scope of the "may" functions and the resulting legal implications will not be reiterated in detail here) - therefore, other countries distinguish more clearly between the UCITS and the AIFM Directive. BaFin supports its interpretation with a perceived discretionary power of the national legislator which had also, among others, allocated administrative activities and distribution to "collective asset management". This can (and should), however, be viewed critically, since the concept of "collective asset management" is based on the UCITS Directive and not on the AIFM Directive. In addition, sec. 17 para 2 no. 2 KAGB does not refer to an "appointment for collective asset management" but rather to an "appointment for the management of an investment fund", i.e. the use of different terms indicates different interpretation. Also, the European and German legislators have not indicated to date that Annex I of the AIFM Directive was an optional implementation regulation. The interpretation of BaFin therefore does not seem mandatory. BaFin is however not alone in terms of the result: in its Q&A of December 2016 (ESMA/2016/1669), ESMA stated in relation to the responsibility of complying with the requirements of the Compliance of the AIFM Directive: "Where a third party performs a function stated in Annex I of the AIFMD, this function should be considered as having been delegated by the AIFM to the third party. Therefore, the AIFM should be responsible for ensuring compliance with the requirements on delegation set out in Article 20 of the AIFMD and the principle expressed in Article 5(1) of the Directive according to which the single AIFM appointed for an AIF is responsible for ensuring compliance with the AIFMD. For the avoidance of doubt, this applies to all functions stated in point 1 and point 2 of Annex I of the AIFMD". This may lead to the conclusion that all functions listed in Annex I to the AIFM Directive are to be allocated originally to the AIFM. |
Original functions of an AIF-KVG / Remaining functions of the AIF in corporate form
According to the above-mentioned interpretation, BaFin wants to attribute all functions listed in Annex I of the AIFM Directive originally to the AIF-KVG. Accordingly, BaFin notes that the appointment of the AIF-KVG leads to the assumption of all activities of "collective asset management" by the AIF-KVG. It also states that the AIF-KVG is also granted full power of attorney under civil law.
| In practice, some contracts for appointment to date only provide for the assumption of portfolio management and risk management and in the case of Service-KVGs in principle also administrative activities. Distribution is often not assumed by the AIF-KVG or assumption is made under the proviso that the AIF in corporate form does not carry out distribution itself (regarding the possibility of retransfer, see below). This would need to be adjusted if, contrary to the KAMaRisk, distribution were suddenly considered to be an outsourcing issue. The consultation does not seem consistent with respect to the granting of power of attorney: the consultation speaks of a "full power of attorney" with respect to the assumption of the activities of the collective asset management by way of the appointment. At the same time, pursuant to the consultation, the AIF-KVG acts on its own behalf with respect to key activities and therefore does not require a power of attorney. Ultimately, BaFin limits the full power of attorney in the course of the interpretative guidance to the acquisition/sale of items of the fund assets; for the rest, the AIF-KVG acts on its own behalf (with regard to acting on one’s own behalf or as an agent, see below). |
Tasks resulting from the organisational structure under company law and the related rights and obligations remain with the AIF in corporate form. BaFin had already made this clear in the course of several seminars and it therefore does not come as a surprise. It is also in line with the consideration that an externally managed AIF in corporate form corresponds rather to a special purpose vehicle structurally than to an operative unit. BaFin recommends (and this is already being observed in practice today) that the AIF-KVG is consulted prior to the passing of resolutions by the AIF in corporate form.
Acting on own behalf or as an agent?
The second aspect which is dealt with in the consulted interpretation is the question of whether the AIF-KVG is acting on its own behalf or as an agent when it performs activities for an AIF in corporate form. In contrast to contractual investment funds ("Sondervermögen"), AIFs in corporate form are separate legal entities and can therefore create or assume their own rights and obligations.
BaFin links the question of whether a company is acting on its own behalf or as an agent closely to the question of the obligation of bearing costs: if the KVG acts on its own behalf, it becomes the immediate beneficiary and obligor and may only have a claim to reimbursement of expenditures against the AIF. However, if the KVG acts on behalf of the AIF, the rights and obligations are immediately those of the represented AIF, so that the costs are directly borne by it.
Deviating from what the statement regarding the "full power of attorney under civil law" suggests, BaFin wants to assume that the AIF-KVG acts in principle on its own behalf due to the assumption of functions pursuant to Annex I of the AIFM Directive:
"The provision of sec. 17 para. 3 KAGB, in accordance to which the KVG is responsible for compliance with the requirements pursuant to KAGB, speaks in favour of the fact that the KVG essentially carries out the tasks regarding collective asset management on its own behalf due to its original responsibility. This interpretation ultimately corresponds with the character of the externally managed investment company as an investment fund in corporate shape, as intended by the legislator, which should not be treated differently to funds in contractual form (i.e. "Sondervermögen"). In case of funds in contractual form, the KVG always acts on its own behalf. In this respect, there are no grounds for assuming an exception with regard to the above described principle."
| Note: One could see the "grounds" in the fact that an AIF in corporate form, in contrast to a contractual investment fund, constitutes a separate legal entity. |
However, BaFin brings the aforementioned interpretation to a large extent in line with the existing practice by stating the following:
- When outsourcing portfolio management and risk management to a third party (to the extent permitted), the AIF-KVG acts in its own name.
- In the case of actual acquisition and sale of the assets, BaFin correctly assumes that the AIF-KVG acts on behalf (and account) of the AIF in corporate form. The rights and obligations arising from this activity shall only apply to the AIF in corporate form, thus requiring the granting of a power of representation.
- Administrative duties will (at least in the case of Service-KVGs) be assumed by the AIF-KVG which will carry out the duties in its own name by means of a contract for appointment (and in accordance with the interpretation of BaFin due to the term "collective asset management"). This applies, for example, to legal services, the commission of external valuers as well as to fund accounting.
However, BaFin goes beyond the previously existing interpretation and practice and contradicts its explanation in the recently adopted KAMaRisk:
In accordance with the functions mentioned in Annex I of the AIFM Directive and according to the usage of the term "collective asset management," BaFin also interprets distribution as an original function of the AIF-KVG:
"The distribution of shares of an AIF lies within the responsibility of the KVG. The KVG must act in its own name, if it uses an intermediary for distributing shares. The same applies to preparing, copying and publishing sales documents (e.g. sales prospectus or key investor information)."
Even if this question is addressed in connection with acting on one’s own behalf or as an agent, it once again confirms the risk that using third parties in distribution may lead to the application of outsourcing provisions: if distribution is originally been allocated to the AIF-KVG, then this task is considered to be outsourced in case of a third party being commissioned. The following is, however, explicitly stated in the KAMaRisk:
"The external procurement of services which are typically used by a company and as a result of actual circumstances or legal requirements are not or cannot be provided by the company itself on a regular basis, neither at the time of external procurement nor in the future (e.g. using clearing agents within the framework of payment transactions and settlement of securities, engaging correspondent banks or distributing investment shares) are not to be qualified as outsourcing."
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Contrary to the statements in the KAMaRisk, applying the AIFM Directive and/or sec.°36 KAGB (Outsourcing) would have far-reaching effects on distribution structures:
Particularly in the case of distribution networks with several layers of distribution partners, the previous duty of notification to BaFin would lead to time delays. Also, the expansion of outsourcing controlling and the application and agreement of usual rights to give instructions, rights of inspection and control rights to (sub) distribution partners would not be good news. The AIF-KVG must agree to the sub-outsourcing prior to its effectiveness. Stating the distribution outsourcing partners in the offering memorandum may also be difficult. Furthermore, considering that the interpretive guidance does not provide for a transitional provision with regard to a possible adaptation of the structures (which can be long-winded especially in the case of international businesses), one can only hope that BaFin applies its interpretation with a sense of proportion to existing cases. But perhaps the statement is to be understood differently, so that the regulation in the KAMaRisk stated above can continue to be applied. |
Retransferring duties?
BaFin states that the AIF-KVGs duties regarding "collective asset management" may not be (re)transferred to the AIF in corporate form.
"An externally managed AIF in corporate form may not perform activities regarding collective asset management, if it has appointed an external KVG to do so. The collective management of the AIF in corporate form is the sole responsibility of the external KVG which is responsible for doing so pursuant to sec.°17 para.°3 of the KAGB. "Retransferring" the tasks of the external KVG to the AIF in corporate form contradicts the legal purpose thereof. An externally managed AIF in corporate form is an investment vehicle in the shape of corporate law which approximates funds in contractual form and which – in contrast to the internally managed AIF in corporate form – should not manage itself and be operationally organised. The outsourcing to the AIF in corporate form would evade this principle."
In practice, this subject is not of excessive importance, since many tasks which the AIF-KVG does not want to carry out itself, may be assumed for example by fund initiators. A "retransfer" of the duties to the AIF in corporate form would be conceivable to date; however, in practice, distribution activities and other tasks are rather assumed by third parties.
| If one wanted to nevertheless critically question BaFin´s position, one could raise the question why an Investment fund LLP, for example, needs to have two qualified managers, if in particular the company should not be operationally. In this respect, however, BaFin can easily refer to ESMA’s position in its Q&A "Externally-managed AIFs are not regulated as AIFM. The performance of the functions stated in Annex I of the AIFMD is only permitted for AIFs which are internally managed pursuant to Article 5(1)(b) of the AIFMD. Where the AIF appoints an external AIFM pursuant to Article 5(1)(a), the external AIFM is through its appointment as AIFM of the AIF responsible for providing the functions stated in Annex I of the AIFMD. The external AIFM may delegate to third parties the task of carrying out functions on its behalf in accordance with Article 20 of the AIFMD. The AIF is, however, not a ‘third party’ in accordance with Article 20(1) of the AIFMD". |
Ashurst’s German investment funds team advises national and international asset managers, KVGs and distribution partners on all regulatory issues. Outsourcing and distribution structures are supported in the most important markets all over the world.
Please contact us, should you have any questions or wish to discuss the impact of the intended interpretation.
2. Bundestag printed paper (Bundestagsdrucksache - BT-Drucks.) 17/12294, p. 203: "Number 24 introduces the definition of collective asset management and is based on Annex II of Directive 2009/65/EC", i.e., the UCITS Directive.
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