Jaga Gänßler, BaFin
UCITS V: Implementation Act comes into force in March
On 18 March 2016, the UCITS V Implementation Act (OGAW-V-Umsetzungsgesetz) came into force. It transposes the provisions of the European UCITS V Directive, the fifth Directive on undertakings for collective investment in transferable securities, into German law. The UCITS V Implementation Act also introduces some changes that are not conditional on the Directive, for instance rules regarding the granting of loans by alternative investment funds (AIFs). This article presents the most important new provisions.
Until now, only German AIF management companies (AIF-Kapitalverwaltungsgesellschaften) have had to determine remuneration policies for senior management and certain employees. In accordance with the UCITS V Directive, this now also applies to German UCITS management companies. From now on, they are required to establish and maintain, for senior managers and those categories of staff whose professional activities have a material impact on the risk profiles of the UCITS that they manage, remuneration policies and practices that are consistent with sound and effective risk management.
To this end, certain principles must be complied with. For instance, the fixed and variable components of total remuneration must be appropriately balanced. The variable remuneration is paid or vests only if it is sustainable according to the financial situation of the management company as a whole, and justified according to the performance of the business unit, the UCITS and the individual concerned.
The UCITS V Directive has also expanded the range of tasks and duties of the UCITS depositary. For instance, more details were provided on the depositary's duties regarding assets that are capable of being held in custody and those that are not.
The Directive also makes it clear that the assets held in custody by the depositary may only be reused under specific conditions. These include the requirement that the reuse be executed for the account of the UCITS and be for the benefit of the UCITS and in the interest of the unit-holders.
The UCITS V Implementation Act also sets out stricter rules for the liability of UCITS depositaries. Until now, they were, under certain conditions, able to contractually exempt themselves from liability for the loss of financial instruments entrusted for safe-keeping to a sub-delegate. This option will no longer be available.
Provisions on administrative fines
Last but not least, the UCITS V Directive strengthens the competent authorities' sanctioning powers. The authorities should be able to impose fees high enough to act as a deterrent. To achieve that, as well as in order to inform the general public of the contraventions, the UCITS V Directive also requires the competent authorities to publish the sanctions. There are exemptions, however. If, for example, publication would cause a disproportionate damage to the parties involved, the Directive provides for an anonymous publication of the sanction. Also, publication should be waived if it would jeopardise the stability of financial markets.
This is why the German legislature in the UCITS V Implementation Act restructured and increased the administrative fines. The old two-tier system with maximum administrative fines of EUR 100,000 and EUR 50,000 has been replaced with a three-tier system. BaFin can now impose administrative fines of up to EUR 5 million, EUR 1 million or EUR 200,000, depending on the infringement. The UCITS V Implementation Act also stipulates that BaFin publish on its website certain decisions on imposing fines regarding UCITS against which there is no appeal. BaFin needs to inform those affected beforehand.
Granting loans on behalf of AIFs
In addition, the UCITS V Implementation Act will change the German Investment Code (Kapitalanlagegesetzbuch – KAGB) to the extent that German AIF management companies may now, under specific conditions, grant loans for the account of closed-ended special AIFs. Some of the conditions are: the company may borrow no more than 30 per cent of the AIF capital for the account of that closed-ended special AIF, the loan will not be granted to consumers, and a specific risk diversification is observed when granting the loan.
The UCITS V Implementation Act provides for concessions regarding the granting of shareholder loans. Pursuant to them, loans may be granted to companies in which the special AIF already holds shares (shareholder loans) without complying with the limit for borrowing for the account of a closed-ended special AIF. There are restrictions, one of which is that no more than 50 per cent of the AIF's capital may be used for such loans.