BaFin’s consultation: impact on foreign asset managers

The German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht - BaFin) has issued a draft guidance for consultation, addressing the extent to which investors can exert influence on investment decisions for investment funds.

Consultations on the draft guidance are expected to continue until the end of March 2025. Once adopted, the guidance will have significant implications, not only for German capital management companies (Kapitalverwaltungsgesellschaft - KVG) but also for any appointed asset manager ("Asset Manager"), both in Germany and abroad. As KVGs need to comply fully with regulatory requirements, they will request that their outsourced portfolio management services to align with these standards. 

Key Points

According to sec. 17 of the German Investment Code (Kapitalanlagegesetzbuch -- KAGB), KVGs are ultimately responsible for managing investment funds.  Significant investor influence on investment decisions is not compatible with this responsibility. The draft guidance aims to clarify the line between permissible and impermissible investor influence over the investment decisions made by KVGs.

1. Permissible and impermissible influence

According to the draft guidance, the following are considered prohibited actions as they would transfer the decision-making power to investors:

• Direct instructions from investors regarding the purchase or sale of individual titles

• Veto rights or approval requirements by investors concerning individual titles

In contrast, the following are considered permissible actions:

• Investors may have veto rights or approval requirements concerning the general investment strategy within the agreed investment restrictions of the fund

• Unbinding investment ideas or recommendations from investors (however, note that the implementation of all or a significant majority of investors' unbinding ideas / recommendations may be seen as an indirect form of prohibited influence)

2. Documentation Obligations

To ensure that BaFin and the auditor can trace and verify that no prohibited investor influence has taken place, KVGs are expected to document any form of investor influence on investment decisions. Where a KVG has outsourced its portfolio management services to an Asset Manager, such outsourcing service provider must be contractually obligated to the same documentation obligation. This includes recording meetings, investment ideas, and any recommendations provided by investors.

3. Role of regulated investors

Regulated investors are expected to participate in the documentation process, such as by countersigning meeting minutes prepared by the KVG or the Asset Manager respectively.

Impact assessment

The distinction between permissible and impermissible investor influence has been nuanced, posing challenges for market participants in navigating regulatory expectations. While BaFin's draft guidance may increase administrative workload for both KVGs and Asset Managers, it offers valuable clarification on this matter.

The assessment of investor influence will still require a case-by-case approach. Asset Managers managing accounts/funds established by KVGs should anticipate heightened compliance demands from KVGs and prepare to implement procedures for evaluating and documenting investor requests in line with BaFin's expectations. This proactive approach will help Asset Managers align with the evolving regulatory landscape.

Additionally, the draft guidance is likely to foster greater consistency in market practices. Asset Managers can mitigate the risk of prohibited investor influence by ensuring that each investment is preceded by a comprehensive due diligence process. This thorough examination will serve as a safeguard against impermissible influence.

For further insights into the relationship between KVGs, Asset Managers and investors, please read our Master-KVG briefing.