Since April 2016, BaFin had been examining German equity funds with a volume of 10 million euros or more and with equity holdings comprising at least 51 percent for the use of closet indexing. The European Securities and Markets Authority (ESMA) had already conducted an investigation prior to this. The term "closet indexing" describes cases in which investment companies state that a fund is actively managed although it closely tracks a benchmark and therefore follows a more passive investment strategy. One point of criticism of this practice is that investors receive information that is incorrect or even misleading. Furthermore, investment companies have been accused of charging management fees which are inappropriate for a form of passive management.

In its investigation, BaFin did not identify any cases in which a fund was purportedly active, had corresponding fees and nonetheless solely tracked an index. However, based on the figures which BaFin requested from the asset management companies, it was possible to identify some funds which closely tracked an index. BaFin requested that the companies comment on this matter. Once the responses had been assessed, the number of noteworthy funds fell to a few individual cases. These funds, however, had significantly lower management fees than is normal for actively managed funds. Moreover, they are no longer being actively marketed.

Although at present BaFin does not see any reason to intervene in the remuneration structures of asset management companies on the basis of the investigation results, it nonetheless plans to issue an announcement in order to increase transparency obligations for the investment fund industry. From mid-2017 at the latest, asset management companies will, in cases where equity holdings comprise 51 percent or more of the funds, therefore have to state in their prospectuses whether retail funds are actively managed or merely track an index. If companies use a benchmark, then they will have to name it and also specify whether and by how much they intend for it to be exceeded or fallen below. Furthermore, it will be necessary to provide a chart in the prospectus that clearly depicts the long-term performance of the fund in comparison to the benchmark used.

BaFin's higher transparency requirements will enable investors to better assess the activity of investment fund products. It will also be necessary for asset management companies to communicate their management approach more clearly to investors in future because such additional information will have to be included in their prospectuses (a liability document). In general, prospectuses for funds currently contain no specific information in this regard.

Comments on the consultation may be submitted in writing until 27 January 2017.