Significant Changes to German Investment Law - Part II: Registered AIFMs

On 16 July 2021, the Act to Further Strengthen Investor Protection was published in the Federal Law Gazette. Additionally, to the German Investment Act (VermAnlG), the German Securities Prospectus Act (WpPG) and other laws, the Act also adapts the German Investment Code (KAGB). After looking into the changes for capital investments and securities in the first part, we will now look at the changes for investment funds.

The changes in the KAGB particularly will affect so-called small investment fund managers which are often used by smaller investment houses, family offices and venture capital funds due to the reduced regulation.

1. Abolition of registered mini-public AIFMs and small public AIFMs (section 2 (4a) and (5) KAGB)

Under the changed law, registration of an AIFM will no longer be possible if the AIFM is to be marketed to private clients/retail investors. In the future, a licence as a capital management company (KVG) will always be required for this. The exceptions for so-called mini-public AIFMs and small public AIFMs will be abolished. One of the main purposes, to strengthen investor protection and provide a uniform level of protection for small investors. This change in the law is probably also supported by the small number of mini-public AIFMs and small public AIFMs.

For already registered mini-public AIFMs and small public AIFMs, the previous regulations continue to apply. However, they may no longer issue new units/shares.

2. Annual financial statements registered small special AIFM (§2 para. 4 KAGB)

The Act introduces for the first time a general accounting requirement for so-called small special AIFMs. Small special AIFMs are those capital management companies that only have a limited amount of assets under management and only market the units of the investment funds to (semi-) professional investors. Currently, small special AIFMs do not have to obtain a licence under the KAGB; only a registration is required.

If the AIF managed by the small special AIFM is not an investment stock corporation or investment limited partnership, the rules of the German Commercial Code (HGB) for annual financial statements and management reports must be observed. If the AIF managed by the small special AIFM is not an investment stock corporation or investment limited partnership, certain rules on the preparation of annual financial statements for investment companies also apply. A corresponding regulation applies to the preparation of the annual financial statements and the management report of special investment funds (special AIF) that are managed externally by a registered special AIFM.

A management report must also be prepared if the AIFM is a small corporation (within the meaning of section 267 (1) HGB). The exemptions from the accounting regulations do not apply here.

The new accounting regulations for registered special AIFMs are to be applied for the first time to annual financial statements, management reports and annual reports for the financial year starting after 31 December 2020. For the financial years prior to that, the previous regulations will continue to apply.

3. Audit of financial statements: duty to audit and notification

After the change, the small special AIFM must have its annual financial statements and management report audited by an auditor within 9 months after the end of the financial year and notify the BaFin of the auditor.

The scope of the audit should also cover, in the case of internally managed AIFMs making money loans, whether the provisions of the memorandum or articles of association have been complied with by the small specialised AIFM and whether profits, losses, contributions and withdrawals have been properly allocated to the individual capital accounts.

The auditor should submit the report on the audit of the annual financial statements to BaFin.

4. Audit of financial statements: In particular also money laundering obligations

When auditing the annual financial statements, the auditor must also check whether the small special AIFM has fulfilled its obligations under the Money Laundering Act. Small special AIFMs are also obligated parties under the Money Laundering Act and are subject to special obligations. The auditor should separately state the result of the audit in the audit report.

This explicit mention of the obligations under money laundering law is in particular due to the national risk analysis, which found that many small special AIFMs are not aware of their obligations under money laundering law.

5. What’s next?

The regulations relating to the KAGB will become applicable on 16 August 2021 (one month after promulgation).