German government publishes draft Act to strengthen investor protection and to improve the operation of capital markets | Practical Law

German government publishes draft Act to strengthen investor protection and to improve the operation of capital markets | Practical Law

This article is part of the PLC Global Finance December 2010 e-mail update for Germany.

German government publishes draft Act to strengthen investor protection and to improve the operation of capital markets

by Jochen Kindermann, Simmons & Simmons

Speedread

On 9 November 2010, the German government published the draft Act to strengthen investor protection and to improve the operation of capital markets. The draft Act includes a number of significant regulatory changes, which are likely to have a significant impact on the operation of the German market for financial instruments.
On 9 November 2010, the German government published the draft Act to strengthen investor protection and to improve the operation of capital markets (Gesetz zur Stärkung des Anlegerschutzes und Verbesserung der Funktionsfähigkeit des Kapitalmarktes (AnlsFuG-E) – the draft Act).
The draft Act includes a number of significant regulatory changes, which are likely to have a significant impact on the operation of the German market for financial instruments. This article considers two key amendments:
  • Product information document. Distributors of financial instruments providing investment advice to retail clients are required to handover a product information document (PID) setting out key features of the recommended financial instrument. The PID will be mainly similar to the key investor information document (KIID) as defined under the UCITS IV Directive (2009/65/EU). In this respect it is consequent that UCITS funds will be exempted from the PID requirement as the KIID must anyway be provided to investors.
    The current draft Act misses out any transition phase for the PID. Accordingly, all institutions providing investment advice to retail clients in Germany will be subject to the new requirement. Although issuers of financial instruments which do not provide investment advice to German customers would not be subject to the PID-requirement, it can be expected that investment advisors will ask the issuers for PIDs as some of the information can only be provided by them.
    In light of the implementation date for the UCITS IV KIID on 01 July 2011, it is still unclear if during an interim phase between March/ April when the draft Act is expected to come into force and the new UCITS IV rules applying as of 1 July 2011, distributors will be required to produce a PID. The same ambiguity exists in relation to existing UCITS funds which make use of the grandfathering rule. The grandfathering rule allows the continuation of the distribution of existing UCITS funds on the basis of the simplified prospectus instead of a KIID. Again, it is unclear whether a PID will be required for these existing funds.
    In light of the ambiguous situation, issuers offering financial instruments through distribution channels in Germany should prepare to be able to produce a PID for each of their financial instrument as of March 2011.
  • Disclosure obligations concerning holdings in other instruments. The new provision requires investors of financial instruments to disclose their holding if the financial instrument allows its holder to acquire the voting rights in shares of issuers located in Germany and listed on a German stock exchange. Such a disclosure obligation arises:
    • if the counterpart of the investor is able to hedge or at least reduce its risk through an investment in the shares of the issuer. It should be noted that it is sufficient if a hedge is suitable to reduce the counterparty's risk; an actual investment of the counterpart is not required to trigger the disclosure obligation.
    • if the instrument grants a right or an obligation to acquire the shares.
    The new rule, sometimes called "lex Porsche", requires holders of certain rights to disclose their holdings if they are not already subject to disclose their holdings based on other disclosure obligations. Following the Porsche scenario, the legislator came to the conclusion that a disclosure obligation should already arise if an investor is economically in a position to acquire the shares of an issuer. Consequently, contract for differences would fall under the new disclosure obligation. The same applies to the second alternative which triggers a disclosure obligation also in relation to certain call-options or certain put-options.
    The threshold for the new disclosure obligation is 5%. The new rule will come into force nine months after the AnlsFuG came into force.
    It can be expected that the draft Act comes into effect in March or April 2011. Until then it is likely that it will be subject to further amendments. In a meeting of the German Finance Committee last Wednesday, it became clear that further amendments can be expected on the rather nebulous disclosure obligations. In relation to various details (for example; creeping in), it is still not clear whether a disclosure obligation is triggered. Furthermore, the liability structure for information contained in the PID is subject to further debate.