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PLC Global Finance update for March 2011: Germany
Practical Law UK Articles 5-505-3477 (Approx. 3 pages)
PLC Global Finance update for March 2011: Germany
by Simmons & Simmons
| Published on 31 Mar 2011 • Germany |
The Germany update for March 2011 for the PLC Global Finance multi-jurisdictional monthly e-mail.
New draft Act targets German closed-ended fund industry
Dr Harald Glander and Norman Mayr
In Germany, the draft Act amending the law for investment intermediaries and capital investments (Diskussionsentwurf für ein Gesetz zur Novellierung des Finanzanlagenvermittler- und Vermögensanlagenrechts) has been published on 16 February 2011.
Under the rules of the Draft Act, issuers (for example; the entities that issue or offer the products) and the distributors of so-called grey-market products have to set for changes in the future. In Germany, such products (referred to as Vermögensanlagen – capital investments) are, for example, shares of German limited partnerships (Kommanditgesellschaften), registered bonds (Namensschuldverschreibungen) and profit participation rights (Genussrechte).
The Draft Act will have a significant impact on the German fund and financial services industry. Issuers and distributors of capital investments will have to comply with enhanced regulatory requirements.
New rules for issuers
The rules for the investment in future capital investments will be set forth in a new Act, the Vermögensanlagengesetz (Act on Capital Investments) which will replace the Securities Sales Prospectus Act (Wertpapier-Verkaufsprospektgesetz). The future Act on Capital Investments will introduce new rules. Most importantly, the issuers of capital investments have to provide a capital investments information sheet (Vermögensanlagen-Informationsblatt) no more than three pages in length to the investors which is comparable to the key investor information document for UCITS. This enables the investor to compare different kind of investments. Furthermore, issuers have to comply with certain new rules on accounting, audit and transparency. Amongst other things, the value of the investments has to be disclosed to the investors at least once a year. These rules are clearly in anticipation of the forthcoming AIFM implementation.
New rules for distributors
Under the current regulatory regime, capital investments (in line with the MiFID) do not qualify as financial instruments. The Draft Act will change the definition in the German Banking Act (Kreditwesengesetz – KWG) and the German Securities Trading Act (Wertpapierhandelsgesetz – WpHG). Capital investments will in the future qualify as financial instruments. Those companies who already have a banking licence and do business with capital investments have to comply with the regulation for financial instruments also in respect to such products.
However, distributors who only sell capital investments are exempted from the KWG and WpHG. Such distributors continue to be regulated by German trade law (Gewerbeordnung - GewO). However, the Draft Act provides for strengthened requirements under the GewO. Distributors will have to comply with certain rules of conduct when advising investors. This includes the preparation of a protocol of the investment advice as well as the disclosure of sales commissions. Furthermore, distributors have to prove their investment knowledge in an exam and to ensure that the have entered into a professional liability insurance.
Frankfurt higher regional court revisits investment advice jurisprudence
Sarah Rössing
In December 2000, the claimant sought advice from its bank in relation to potential investments. Based on the advice received, the claimant, who was at the time experienced in investing in financial assets but had not yet invested in the media industry and film funds, decided to subscribe to the relevant fund as part of his retirement scheme.
When the fund didn’t perform as anticipated and the claimant suffered a total loss of his investment, he brought damages claims against the bank on grounds he had been assured, both verbally and by reference to the sales brochure he received, that losses were capped at roughly 22%. However, the full prospectus relating to the fund investment specifically stated that the film industry is the oil industry of the 21st century and that investments can result in high profits but also total losses, but that the fund sought to counter losses by entering into insurance contracts.
The Court held that the investment advice of the bank had not been object-oriented because they had not provided any additional substantive information in the investment advice conversation than the one already (incorrectly) set out in the sales brochure. However, in the event of a wrong sales brochure, the Court held that the bank can only prevent liability if it explicitly advises on the possibility of a total loss of the investment, if this is indeed the worst case scenario. The fact that the sales brochure had been provided to the bank by the fund does not have an impact on the liability of the bank. If a bank exercises distribution functions and distributes funds, the Court held that this bank:
- Has to confirm the main statements set out in the sales brochure (for example, by reading it back to back with the prospectus)
- Has to notice if one of the promotionally most effective statements set out in the sales brochure, which are mainly the risk statements, have been whitewashed.