In our Client Memo of December 2, 2011, we reported on the
adoption of the "Act Reforming the Laws on Intermediaries for
Financial Investments and on Investment Products"
("Act"). One important change the Act
brings about is the extended scope of the notion of "financial
instruments" in the German Banking Act
("KWG"): As of June 1, 2012, also
interests in closed-ended funds will qualify as financial
Over the last weeks, evidence has increased that this change of
law, in the view of the German Federal Supervisory Authority
("BaFin"), could trigger a licensing
requirement pursuant to the KWG for private equity (fund-of-)funds
or their managers. This position of BaFin, which has as yet only
been uttered in non-published statements, is outlined below.
I. Starting Point
As interests in closed-end funds will be treated as financial
instruments as from June 1, 2012, certain activities regarding fund
interests can trigger a licensing requirement under the KWG. A
possible field of application are fund-of-funds, which invest in
other closed-end funds (i.e., in financial instruments under the
new law). The management of a fund-of-funds concerns the licensing
requirements for investment management and financial portfolio
management. The Act contains an exemption in this field (Sec. 2(6)
sentence 1 no. 20 KWG-new), the scope of which is, however,
II. Investment Management
BaFin assumes that funds which invest in interests in other
funds will typically fall under the rules for "investment
management" (Sec. 1 (1a) sentence 2 No. 11 KWG), and will
therefore generally require a license for rendering financial
services pursuant to Sec. 32(1) KWG. BaFin mostly speaks of
"secondary market funds" in this context. It must be
assumed that the same will apply to funds-of-funds, regardless of
whether they make primary investments in target funds or acquire
interests on the secondary market.
Investment management is defined in the KWG as the acquisition
and disposal of financial instruments with investment discretion on
behalf of a community of private individual persons. Therefore, at
least blind pools primarily targeting private individual investors
would be concerned.
BaFin apparently takes the view that such funds cannot rely on
the newly inserted exemption in Sec. 2(6) sentence 1 no. 20 KWG.
The wording of the exemption requires that an undertaking must
render services on behalf of initiators or issuers of investment
products". According to BaFin, this is not the case for the
funds concerned, as they act "for the investors".
Additionally, it appears that the private equity exemption,
which BaFin currently applies in connection with investment
management, will not apply to funds-of-funds.
It is yet an open question whether BaFin would apply a licensing
requirement at the level of each individual "secondary market
fund"/fund-of-funds, or whether the licensing requirement
would (only) concern the relevant fund manager (e.g., general
partner or managing limited partner). Pursuant to an already
existing exemption in the KWG, it might be sufficient if a
fund's parent company has been granted the respective
III. Financial Portfolio Management
Additionally, BaFin takes the view that it depends on the
individual case whether financial portfolio management (Sec. 1(1a)
sentence 2 No. 3 KWG)
could be triggered. In case that BaFin will actually assume this
position in the future, it can no longer be excluded that even
directly investing private equity funds might fall under a
licensing requirement pursuant to Sec. 32 para. 1 KWG. There are,
however, no concrete indications for this at the moment.
IV. Outlook, Further Process
The position of BaFin outlined above raises significant
questions of doubt concerning both the rationale of the new Act and
the compatibility with the AIFM-Directive which is to be transposed
into German law by July 2013 (and which will also introduce
licensing requirements for the management).
In case BaFin will uphold its position, the initiators concerned
will have time to file an application for the required license
until the end of 2012. As far as foreseeable today, German
funds-of-funds would be concerned if they follow blind-pool
strategies and are marketed to private individual investors as
primary target group. But also foreign blind pool funds-of-funds
might be affected, as licensing requirements might be triggered
even on a cross-border basis if the fund is actively marketed to
German-based private individual investors. However, whether a
license will actually be required will depend on the individual
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.
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