KAGG (law)

The German Investment Act ( Investment Act ) is the predecessor regulation of the Investment Code ( KAGB ). It was created by the Investment Modernisation Act and reformed on the initiative of the Federal Government to its expiry on July 21, 2013 following years to allow current regulations:

• Act on Investment Firms ( KAGG ) and
• Foreign Investment Act ( Foreign Investment ).

The Investment Act serves the development of the investment location Germany. This is in fierce competition with other European financial centers. The legal framework of countries such as Luxembourg, Ireland and the UK, providers of investment funds often considered more attractive than the national. Investment funds were therefore placed increasingly abroad. This development could intensify in the years 2000 to 2004 due to the further harmonization at European level. In the Investment Modernisation Act is a law article consisting of a regulatory Investment Act ( Investment Act ) and the Investment Tax Act ( Investment Tax Act ).

Overview

With the German Investment Act, the amending Directives 2001/107/EC and 2001/108/EC of 21 January 2002 on the EU investment Directive 85/611/EEC (Directive on Undertakings for Collective Investment in Transferable Securities, short UCITS Directive ) from 20 December 1985 implemented. The implementation of the guidelines, a further step in the creation of the European single market in the investment sector is completed. Moreover, by grouping together of the Law on Investment Companies ( KAGG ) and the Foreign Investment Act ( AuslInvestmG ) the national legal regulations are being modernized and unified in the investment fund sector.

In the Investment Act appropriations are increasingly provided to enact regulations to detailed technical regulations (eg on derivatives, valuation of assets, financial reporting) adapt quickly and flexibly to the ever faster changing business environment can. At the same time, the new Investment Act is to strengthen the supervision by the Federal Financial Supervisory Authority ( BaFin). In particular, the introduction of an accelerated approval process for contract terms of investment funds capacities for more essential supervisory tasks are released during the BaFin. In the context of improved market surveillance also new reporting requirements are introduced which enable the BaFin in the situation, timely and targeted measures to combat abuses. The prudential regulations are supplemented by a new version of the catalog of offenses. The amount of potential fines has been adapted to the economic development.

In addition, various other measures will improve investor protection. This is the case for new rules on transparency in annual reports and prospectuses. In particular, about the costs and fees must now be informed in more detail. Unified requirements allow investors also a better comparison of available on the market in domestic and foreign products.

Significant new features in detail

As part of the implementation of the amending directives to Directive 85/611/EEC and in the context of the review of existing regulations, the Investment Act contains the following improvements:

Launch of fund categories

Previously, there was in Germany several legally defined types of funds. The amended Directive 85/611/EEC now also regulates derivatives, investment certificates, money market instruments and bank deposits as assets. The statutory fund types that have been defined in Germany, the classification of a fund, eg as money market funds or a securities investment funds, accounts. The name of an investment fund does not necessarily reflect the investment focus. To prevent based on both the naming, possible misinformation of the investor, the BaFin has the option to set orientation standards in guidelines as an investment assets may be invested in order to be referred to in the naming or in advertising as a specific fund type can.

Simplified Prospectus

In addition to the previous prospectus there will now be a new standard, so-called simplified prospectus. The simplified prospectus must be in an easily understandable for investors form required for an investment decision information ( Brief description of the investment fund, investment information and economic information as well as to purchase and sale of shares ). This improves the information available to investors because of the detailed prospectus is often not read by investors.

Extension of the single passport for investment funds

The extension of the Directive 85/611/EEC on bank deposits, investment certificates, money market instruments and derivatives - and thus the initial harmonization on securities investment funds beyond - helps that more investment units may obtain the European passport so-called ( amending Directive 2001/108/EC ).

Passport for management companies

Management firms will for the first time an EU -wide approval if they meet the new requirements formulated and comply with the proposed notification procedure. Once admitted, a management company may then pursue their activities in other Member States through branches or under the freedom to provide services. In this case, has not only fund but also the investment company on a European passport.

Lowering the initial capital of investment companies

Directive 85/611/EEC, as amended, provides for a significant reduction of the necessary initial capital management companies. A lower initial capital allows for a higher return on equity, a criterion that could be considered in location decisions into the equation. Now a minimum capital in the amount of € 125,000 is required as well as additional own funds which are dynamically oriented to the business. Because of the credit institution must feature in Germany -based investment companies at least € 730 000 (new: 300 000; are investment companies and InvAGen equivalent ) have initial capital. In order to economically compensate for this competitive disadvantage is the dynamic capital adjustment for German investment companies only at a business value of € 3 billion (now € 1.125 billion ) a. Management companies, which also operate the depot businesses are intended to demonstrate equity of € 2.5 million due to the additional operational risks. The same applies to investment companies of real estate investment fund for which so far also increased capital requirements were (previously € 5 million). Regardless of investment companies must at all times have own funds which meet at least one quarter of its costs, whereby a sufficient capitalization of the companies could be assured.

Expansion of the activities of investment companies

In addition to managing funds pursuant to the amending directives and the individual portfolio management as requiring a permit main activity permitted. In addition to activities such as safekeeping of foreign funds and the distribution of Shares the grant of an EU passport no longer opposed.

Outsourcing of the investment company

Management companies are now allowed to activities transferred to third parties (such as fund accounting ). The supervision must not be impaired. The now also permitted transfer of portfolio management may only be conducted on those companies that are approved for the purpose of asset management. To account for the core of the investment idea, the fundamental investment decision must remain with the outsourcing investment company in the transfer of portfolio management. However, the transferred asset management company may not " outsource " their liability. Already because of the typical investment companies fiduciary relationship must not touch the interests of investors, outsourcing. The statutory provisions are interested to outsource investment companies legal certainty for the structuring of so-called "Master - KAG ".

Use of derivatives

The expanded investment opportunities in derivatives generally lead to an increase in the potential market risk of the Fund. Directive 85/611/EEC, as amended, does not say clearly the degree to which derivative transactions may increase the potential market risk. Therefore, the Investment Act provides, in accordance with the interpretation of the majority of Member States that the use of derivatives may double the potential market risk of an investment fund at most. The EU - Commission decision necessary for the uniform interpretation and application of the relevant provision in all Member States is still pending. The regulations on permissible derivative transactions, the requirements for risk measurement systems and on the definition of the potential market risk will be undertaken in an ordinance.

Accelerate the approval process for contract terms

The Investment Act provides for a restructuring of the examination procedure, which complies with the requirements of Directive 85/611/EEC and the national requirements in line. To be submitted by the managers test documents should be better prepared. This is the responsibility of the directors of companies - supported by the auditors - strengthened for the conditions of contract and the law clearly. As a rule, now the BaFin is based its analysis on the statements and particulars of the directors and approve the terms and conditions for non-problematic situations quickly. The authorization may be accompanied by supplementary provisions. For abuse cases there are adequate regulatory measures so that the investor protection is ensured.

Reporting obligations to the BaFin

The reporting requirements of investment companies with BaFin must be regulated in the Investment Act On the way from a formal to a substantive market surveillance and reducing bureaucracy. The existing market surveillance to protect the integrity of the investment location Germany and the protection of investors' interests was inadequate due to lack of available data. This deficiency is submitted by the obligation of companies, valuation date assets and also to report data electronically over the stock of the Fund and the transactions made ​​to BaFin eliminated. Most reports consuming to create manually are omitted.

Accounting and valuation

The regulations on accounting of funds are partly revised. The goal is to further standardize the accounting in order to bring a serving to protect investors better comparability of investment funds. So now to contents of accounting in an ordinance to be regulated. Another ordinance will establish a basis for the evaluation, especially of innovative financial instruments, and also lead to a uniform practice.

Pooling of funds

The transfer of all assets of one fund into another fund should be already regulated under the Fourth Financial Market Promotion Act, but failed to tax issues. The transfer is now possible with the approval of BaFin. It is permitted, including when the acquiring fund is managed by the same investment company and investment limits and principles do not differ significantly from each other. The pooling of funds can lead to a desirable from the perspective of the investment company streamlining the product range and in certain cases also be advantageous for the investor. Thus, a need of the economy are met and at the same time the interests of the investors in the fund involved are better protected.

Cost transparency

Asset management companies should make in the context of far-reaching transparency rules in the annual report and the prospectus details of all costs and fees including, eg, flat fees, which are directly or indirectly borne by investors. In particular, the so-called total expense ratio will give the investors an overview of the effective cost burden. The total expense ratio is the ratio of all costs incurred in the management of a fund costs to the average net asset value of the Fund during the preceding financial year represents the actuarial assumptions and methods are regulated in an ordinance.

The above-mentioned total expense ratio and there to be detected costs are the subject of intense debate since the entry into force of the law. Investors complain protectors that often largest in practice cost component, namely the transaction costs in the total expense ratio just is not included. The fund investors will thus denied the opportunity to at least begin to check whether the number of rotations made by the fund management of securities transactions - and the transaction costs incurred as a result - are in an acceptable proportion to the investment policy pursued. This means any loss of transparency, the goal to which the provisions of the Investment Act are required. Against efforts to make the transaction costs for part of the total expense ratio, the BVI, the trade association for the German fund industry spends. , The finding of the transaction costs, the BVI, technically not feasible, since many businesses, especially shops bonds, "net", ie without separate disclosure of transaction costs can be performed. It should be noted that it is part of the obligation of the Fund Manager for the proper management of the entrusted assets ( see § 9 of the Investment Act ) to preserve the at any time track of the cost situation. In terms of transaction costs, would offer about to commit the executing bank or broker for separate disclosure of costs involved.

Fund

In addition to the inserted with the Fourth Financial Market Promotion Act Classes of Shares can now be summarized funds with different investment focuses under one virtual screen ( engl. umbrella ). With the structure of this " umbrella fund " the investor has an inexpensive way to switch between various sub-funds with different investment policy. This form of investment is already practiced successfully in Luxembourg, Ireland and the UK. Germany pulls with the new rules the same.

Distribution of investment funds based outside the EU and EEA

In terms of foreign investment, which were not harmonized by Directive 85/611/EEC, the Investment Act aims to harmonize the requirements for contractual conditions, the prospectus and the financial reporting to the investor to the possibility of comparability between domestic and foreign products facilitate. The distribution of investment units based outside the European Union and the European Economic Area will be approved if the competent supervisory authorities of the third country are prepared to cooperate with the BaFin. The same is true for working with tax-relevant data. Investment vehicles which are already registered in Germany for public distribution ( mainly from the USA and Switzerland ), enjoy grandfathering.

Hedge Funds

With the introduction of a " funds with additional risks," the so-called hedge funds, investment companies may now hang up and distribute hedge funds in Germany. The private investor can on supervised by BaFin funds acquire shares in hedge funds rather than merely as previously unregulated hedge fund certificates. In addition to improving the competitive situation on the financial center of Frankfurt in the field of alternative financial products, this reinforces the protection of investors in this investment segment significantly.

In this context, the legislature has opted for an exhaustive list of system object and rules for the selection of target funds for the fund of funds with additional risks to avoid that suppliers of products with different orientation solely on tax motives are now supervised by BaFin " make hedge funds ' advantage.

With the regulation of hedge funds are extracted only under certain conditions from the gray capital market and are included in the scope of the Investment Act and the Investment Tax Act. Other alternative investments such as private equity and venture capital are not regulated, for that other solutions must be sought. Main characteristics of hedge funds are flexible investment strategies and a very far-reaching freedom of the manager at the investment. Provider of hedge funds to meet modern legal framework for the Investment Act in Germany. The financial center of Germany is now ripe for the approval of alternative investment products. The hedge fund industry seems to have developed into an industry that the risks associated with hedge funds is aware. The approach adopted in the Investment Act regulatory approach sees in terms of the scope of the investment strategies often carried out short sales ( short sales ) as well as the borrowing and the use of derivatives in order to obtain leverage ( leverage effect) a generous scheme and sets out vendors that their products institutional investors wish to sell, to no restrictions. Instead, high demands on the companies, the hang up these funds and their managers are provided. Private investors are also able to benefit from the advantages of an investment in shares of hedge funds, but is for the legislature here is the protection of the investor in the foreground. Therefore, is limited because of different and complex structure of the products and the additional risk associated with the distribution of so-called single hedge funds, that private investors may only purchase shares in funds of funds that invest in hedge funds and already have in themselves a risk spreading the reduced risk of loss of the private investor. Nevertheless, because of the not too ignores ligand risk of an investment in shares in hedge funds required an explicit warning, which makes the potential private investors clear that he can lose up to 100 % of its assets employed. Hedge funds can now be launched as a special asset of an investment company. These are traditional in Germany specialized credit institutions, making the special requirements to be met under the Banking Act. These increased demands could prove to hedge fund managers who intend now to manage hedge funds in Germany, as an obstacle.

Investment AG

As an attractive alternative is the investment corporation, which has to fulfill as a financial services institution lower requirements under the Banking Act. In addition to the modified investment stock corporation with fixed capital, the Investment Act also provides for a variant with variable capital. In the Investment AG previous configuration, it is a closed-end mutual fund, which was, however, not yet adopted by the industry, for which in addition to the tax treatment of the legal framework be held responsible. The new Investment AG with variable capital has already been established in other EU Member States such as Luxembourg (SICAV) or Ireland. Thus, the investment in Germany is significantly strengthened for competition in the internal market.

Tax regulations

Closely related to the redesign of the regulatory side of the regulations of the investment system in Germany depends on the reform of the taxation of investment funds together. With foreign funds disadvantages of the non-application of the so-called half -income method to investment income and on the sale of investment units to be eliminated. Since increased access financial products such as certificates on the market, which yield no current capital gains, but lead to capital gains that are not yet taxed, unfair results to investors are the consequence that should be eliminated through the inclusion of private securities capital gains in a flat tax. The new investment law has led to a variety of changes. To mention are mainly:

• The incorporation of the investment stock corporation and the funds with additional risks,
• The medium term of a formal legal term investment for foreign investment funds
• A system for determining the income tax,
• The announcement of the tax bases in the electronic Federal Gazette,
• The introduction of a separate determination for domestic income,
• Compensate incorrectly announced tax bases for the next notice,

Legal

Decisions taken by the BaFin in accordance with the Investment Act is open to the administrative courts. The responsible authority is the Administrative Court of Frankfurt.

Recent Developments

On 28 December 2007, entered into force from the Investment Law Amendment ( InvÄndG ) an extensive amendment to the Act and related changes in other laws.

In July 2011 came with the UCITS IV Implementation Act extensive changes to the investment law in force. These were intended to implement the revised UCITS Directive, which has since replaced the old Directive 85/611/EEC.

Meanwhile joined the European Union Directive 2011/61/EC in force. To implement this strategy, the federal government submitted a draft law on alternative investment fund managers. With the records drawn up on July 4, 2013 Act, the previous Investment Act is repealed and transferred its regulatory content, effective 22 July 2013 in the newly created Investment Code ( KAGB ).