There are currently two legislative proposals in Germany that aim to introduce a short, easily readable and understandable document that contains key information for investors in financial instruments: the Key Investor Information Document ("KII") under UCITS IV, and the information leaflet under the draft German Investor Protection Act.
Expedited Implementation of the KII in Germany
The first legislative proposal is based on the so-called UCITS IV Directive, which is more fully discussed in Key Investor Information Document: Friend or Foe? in this Report. The UCITS IV provisions will be implemented in amendments to the German Investment Act. The Committee of European Securities Regulators ("CESR") has agreed on the date of 1 July 2012 as the latest date for the implementation of the KII in all Member States.
The draft amendments to the German law would provide for an earlier implementation of the KII than required by the CESR agreement—UCITS set up in Germany would be required to issue a KII to investors from 1 July 2011, instead of 1 July 2012. However, this expedited requirement relates only to German funds (approved by the Bundesanstalt für Finanzdienstleistungsaufsicht – BaFin). The draft amendments also contain a grandfathering clause for non-German UCITS admitted to public distribution in Germany prior to July 2011. These UCITS must provide the BaFin with a KII as soon as a KII is required to be produced under the rules of the relevant home state of the UCITS, and in any event by 30 June 2012.
It is unclear whether the grandfathering clause would also be applicable to UCITS currently in existence that are registered for public distribution in Germany after 1 July 2011; the draft amendments do not explicitly address this situation. In our opinion, the grandfathering provision should also be available for such UCITS, since the German Investment Act cannot require supervisory authorities in other EU countries to approve KIIs before the relevant home state rules would impose such an obligation.
The Information Leaflet Under the Draft German Investor Protection Act
Under a separate legislative initiative, the German Ministry of Finance has published a draft Act to strengthen investor protection and improve capital market efficiency. The German Investor Protection Act would introduce, among other requirements, the obligation for intermediaries deemed to be investment services firms to provide retail clients with a short and easy to understand information leaflet (Informationsblatt) before a transaction is concluded and where investment advice is provided. According to the draft, if the financial instruments that are subject of the investment advice are shares of a UCITS, the information leaflet may be replaced (the draft act says "substituted"—("tritt an die Stelle") by the KII.
The information leaflet will be introduced by an amendment of section 31 of the German Securities Trading Act (Wertpapierhandelsgesetz, the "WpHG") that contains the general code of conduct rules for investment services firms.1
As discussed above, the obligation to provide the KII would not be imposed until 1 July 2011, at the earliest. Should the Investor Protection Act be enacted before that date, an intermediary that markets German UCITS would need to produce an information leaflet during the period of time between the introduction of the information leaflet and 1 July 2011.
Currently, the German Ministry of Finance (responsible for drafting both sets of rules discussed above) seems to be of the view that if the information leaflet regime is introduced before 1 July 2011, German UCITS may "ignore" the information leaflet and may continue to use the simplified prospectus until 1 July 2011, when provision of the KII will be mandatory.
The situation is unfortunately unclear for foreign UCITS, and the Ministry of Finance has not yet taken a position on this matter. However, it is likely that foreign UCITS will benefit from the same grandfathering rule and that, until 1 July 2011 such UCITS may use the simplified prospectus instead of the information leaflet.
It is also still unclear whether a foreign UCITS that, according to its home state rules, is not required to produce a KII before 1 July 2012, will be required to produce an information leaflet in Germany from 1 July 2011 or may continue to use its simplified prospectus until 1 July 2012.
Potential Consequences for Foreign UCITS
Distribution Through Exempt Financial Advisors
The Markets in Financial Instruments Directive ("MiFID") includes a provision allowing EU Member States to exempt from the application of MiFID: persons who provide investment services limited to the receipt and transmission of orders for units in collective investment undertakings; and persons who provide investment advice in relation to such financial instruments and who, in the course of providing such advice, are only allowed to transmit orders to certain licensed entities.
Germany is one of the Member States that has made use of this exemption. The German Banking Act provides an exemption from the license requirement under such Act for "Exempt Financial Advisors"— persons that provide investment broking, contract broking and investment advice in respect of funds (such as foreign UCITS) that are registered for public distribution in Germany, provided such person does not receive or hold monies or shares from or for investors.
An Exempt Financial Advisor is not considered to be an investment services firm and therefore is not subject to the provisions of 31 et seq. WpHG. As a consequence, Exempt Financial Advisors will not be subject to the newly introduced requirement to provide retail investors with an information leaflet. However, there has been suggestion that the German government may plan to further regulate Exempt Financial Advisors and that a comparable requirement will be imposed on these advisors to provide an information leaflet in the near future.
Distribution Through Licensed Financial Services Providers
Any other regulated investment services firm will be required to comply with the new rules. As discussed above, the obligation to produce the information leaflet under the WpHG will not be directly applicable to the UCITS. It will be an obligation of the investment services firms acting as intermediaries between the UCITS and the clients. However, it may be anticipated that these German distributors will require the domestic and foreign UCITS to produce such an information leaflet in order to continue distribution.
The Information Leaflet
The information leaflet for non-complex financial instruments, such as (currently still) shares of UCITS, may not be longer than two pages of A4 size. It must contain the essential information regarding the financial instrument, set forth in a clear and coherent manner to enable an investor to judge (and make comparisons to other financial instruments) in a best possible way: the type of financial instrument, its functionality, the risks and costs related thereto, and the chances of a repayment of the capital under different market conditions.
The information leaflet may only relate to one financial instrument, and it must not contain any marketing information nor any information that does not relate to the above-mentioned purpose. It may be made available in electronic format.
As of the date of this publication, it is not foreseeable how the information leaflet obligations will be applied to foreign UCITS that are not required to make a KII available before 1 July 2012. Information in this respect has not been forthcoming from the BaFin or the Ministry of Finance, and it seems the result will depend on the further legislative procedure and the outcome of the relevant hearings.
In a worst case scenario, foreign UCITS would have two potential options:
- They could produce an information leaflet for the interim period until the KII is available in their home state, which would lead to additional cost and workload uniquely for the German market; or
- They could ensure that a KII is available in the German language by 1 July 2011. However, under this alternative, the UCITS would not benefit from the grandfathering provided for by the UCITS IV Directive and confirmed by CESR.
1 The obligation to provide an information leaflet would not apply with respect to professional investors as defined in section 31a para. 2 of the WpHG. These generally include, among others: investment services enterprises; authorized or supervised financial institutions; insurance undertakings; collective investment schemes and their management companies; pension funds and their management companies; enterprises whose investment service is solely to provide proprietary business on a German stock exchange or derivatives market; proprietary trading, principal broking services or contract broking on derivatives markets; quotation of prices as market maker on derivatives markets; exchange traders and commodity derivatives dealers; certain other institutional investors; and entities offering the securitization of assets and other financing transactions.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.