An Overview of German Legislative Initiatives Impacting Asset Managers and Financial Service Providers in Germany and Abroad

June 30, 2021

In this OnPoint we will look at some of the upcoming German legislative initiatives that will impact asset managers and financial services providers in Germany and abroad. We will cover the following items:

  • Fund Domicile Act
  • Electronic Securities Act
  • Implementation of the EU Investment Firms Directive
  • Supply Chain Act
  • BaFin reform – Financial Market Integrity Strengthening Act
  • Draft Implementation of the EU Digitalisation Directive

Fund Domicile Act1

The Fund Domicile Act is the most significant upcoming piece of German legislation, and most of the provisions will come into force on 1 July 2021. The Fund Domicile Act transposes into German law regulatory and tax provisions that are set out in EU Directive 2019/11602 on the cross-border distribution of collective investment undertakings. It also introduces several new legislative concepts and tools to increase Germany’s appeal as a funds domicile and to increase German competitiveness compared to other fund jurisdictions.

One major aspect of the Fund Domicile Act is the implementation of the new pre-marketing regime for alternative investment funds (AIFs) as a way of advertising fund strategies to professional investors as distinct from actually marketing those strategies. The implications of the new pre-marketing regime will be covered in detail in a separate OnPoint. The Fund Domicile Act also implements other provisions relating to cross-border marketing activities, mainly in relation to UCITS.

The Fund Domicile Act introduces a second, noteworthy amendment, which is relevant for all asset managers and financial service providers. The German legislature (at a late stage in the legislative process) introduced the possibility for German domiciled institutional funds to invest up to 20% of their assets into crypto-assets. This is expected to enhance Germany’s position as a crypto-assets domicile for institutional investors and boost the crypto-assets industry in Germany as a whole.
To increase Germany’s appeal as a fund domicile of choice, the German legislator also introduced several new tools and features for German fund managers, for example:

  • More flexibility for real estate fund managers in terms of granting loans to holding companies and subsidiaries.
  • Re-introduction of infrastructure funds in the German fund regime meaning it will, once again, be possible to set up infrastructure retail funds as German fund vehicles.
  • Introduction of master feeder fund structures as closed-ended funds - not only open-ended as is currently the case.
  • Introduction of a new fund category, the so-called “Funds for Development”, which aims to raise capital to actively support development policy goals.
  • Amendments to various German tax provisions. For instance, VAT exemptions were extended to apply to further fund types, including venture capital funds, and certain tax reliefs were introduced for employee stock option programs, along with other amendments.
  • Further digitalisation of the supervision of funds, AIFMs and UCITS ManCos was introduced - switching to IT based filing and application procedures.

Electronic Securities Act3

The Electronic Securities Act entered into force on 10 June 2021. The core element of the Electronic Securities Act is to enable the issuance of digital securities without the need for those securities to be evidenced by a certificate. It will be possible for future securities to be issued using distributed ledger technology (DLT) – for example, blockchain technology or any other technology. The issuance will take place via electronic securities registers, which will be kept in the form of crypto security registers.

Another interesting aspect of the Electronic Securities Act is that the crypto security registers will not necessarily be maintained by Clearstream as a central securities depository, rather it will be possible for them to be maintained by the securities issuers themselves, provided that the BaFin has granted those issuers the requisite permission. For the time being, the provisions of the Electronic Securities Act apply only to debt securities.

However, having initially postponed the introduction of crypto fund units in the draft of the Electronic Securities Act, in a last-minute change, the lawmakers included a provision which will serve as the legal basis for the application of the regime to fund units. This means that in the future it should be possible to create electronic fund units that will be registered in a decentralized register. The German regulator has been very active in issuing specific guidance notes, and guidance in general, regarding crypto-assets, and has gained a reputation internationally as being a regulator who understands both crypto-assets and distributed ledger technologies.

Implementation of the Investment Firms Directive – Directive (EU) 2019/20344

On 26 June 2021 the German Investment Institution Act5, which regulates investment firms, entered into force, implementing the EU Investment Firms Directive into German law. The German Investment Institution Act will rearrange the supervisory regime that is applicable to investment firms. Prior to the implementation of the German Investment Institution Act, investment firms were subject to the provisions of the German Banking Act - with banks and investment firms being largely subject to the same rules. It was sometimes burdensome for investment firms to ensure compliance on a day-to-day basis with the rules because the rules were not specifically designed for the different risk profiles of investment firms. In particular, the regulatory standards of the German Banking Act did not consider the particular business models of small and medium-sized firms, which have only a low level of interconnection with other market participants.

The implementation of the German Investment Institution Act has a major impact in Germany as it creates a new separate law specifically for investment firms, although in substance its rules are similar to the provisions of the German Banking Act.

The new German Investment Institution Act also contains a passport procedure, which is based on Articles 34 and 35 of Directive 2014/65/EU - MiFID. This passport procedure will affect foreign investment managers who intend to provide services into Germany on a cross-border basis or who intend to establish a branch in Germany.

Supply Chain Act

The Supply Chain Act6 is an initiative related to environmental, social, and governmental matters – which are high priorities in Germany and a focus of the German regulator and legislator.

In March 2021, the German cabinet agreed on a draft of the Supply Chain Act, introducing increased corporate due diligence in supply chains. The draft law requires businesses that have their head office, principal place of business, administrative headquarters, or registered office in Germany to ensure compliance with human rights and that there are no abuses of human rights throughout their entire supply chain. The companies are required to implement due diligence procedures and complaint and dissention mechanisms which enable persons who are directly affected by economic activities in the company's own business area or by economic activities of a direct supplier or whose protected legal position may be violated, as well as persons who have knowledge of the possible violation of a protected legal position or an environmental obligation, to point out human rights and environmental risks or violations.

The Supply Chain Act has a phased entry into force. From 1 January 2023 larger companies with a work force of at least 3,000 people will be required to comply with the obligations set out in the Supply Chain Act. It will start to apply to smaller companies with a work force of at least 1,000 people at a later date.

The term ‘supply chain’ is very broad and is intended to include financial services. However, the actual impact that the Supply Chain Act will have on financial services providers, investment funds, and asset managers is not yet clear.

BaFin reform – Financial Market Integrity Strengthening Act7

The Financial Market Integrity Strengthening Act has been introduced as a reaction to the recent balance sheet manipulations scandal in Germany. There were many calls for reforms of the German financial regulator BaFin, and the scandal had an impact on BaFin’s leadership. In response, the Federal Ministry of Finance issued a draft bill for a Financial Market Integrity Strengthening Act which passed into law, and which is effective as of 1 July 2021.

The aim of the Financial Market Integrity Strengthening Act is to prevent future balance sheet manipulations and fraudulent activities, by enabling the supervisory authority to act more efficiently, to work in a better, more structured manner and to supervise financial and capital market participants more effectively.

The Ministry of Finance also released a Seven Points Plan as accompanying measures in connection with the Financial Market Integrity Strengthening Act, which contains the following specific proposals for reform:

  1. The supervision of complex companies should be more focused and should encompass all business areas within the BaFin’s supervisory remit, not just one department taking responsibility for one issue.
  2. Establishment of a new, forensically trained task force to be set up so that BaFin can conduct ad hoc and special audits on its own in the future and, if necessary, in cooperation with the public prosecutor's office on site.
  3. Reform of the current balance sheet control procedure.
  4. Improved processing of information received from whistleblowers.
  5. Giving BaFin a more active role in terms of consumer protection.
  6. Granting more powers to the new BaFin president. 
  7. Increased digitalisation, driven forward by IT based supervision. Consequently, the BaFin’s IT capabilities must be strengthened to enable it to process the increased amount of data.

Draft Implementation of the EU Digitalisation Directive – EU Directive 2019/11518

A draft implementation act9 has been proposed by the legislator to transpose the EU Digitalisation Directive into German law. The overall purpose of the EU Digitalisation Directive is to simplify the formation of companies and the establishment of branches across borders throughout Europe, using digital tools and processes to make the procedures more efficient in terms of cost and time.

The implementation of the EU Digitalisation Directive into German law includes several new provisions, in particular the introduction of online procedures for:

  • the formation of German limited liability companies (GmbH);
  • registering applications for corporations and branches; 
  • the filing and disclosure of documents and information in the commercial and company registers; and 
  • the cross-border exchange of information via the European system of interconnected registers. It will also simplify the process for establishing and registering German branches of EU based asset managers that passport their services into Germany through German branches.

To conclude, the recent developments will require both German and overseas asset managers and financial services providers to review and revisit their current operations to ensure that they comply with the new laws, if applicable, and to see if they can benefit from the new proposals, particularly those in the field of digitalisation.

1) Full title of the German Act: Gesetzes zur Stärkung des Fondsstandorts Deutschland und zur Umsetzung der Richtlinie (EU) 2019/1160 zur Änderung der Richtlinien 2009/65/EG und 2011/61/EU im Hinblick auf den grenzüberschreitenden Vertrieb von Organismen für gemeinsame Anlagen (Fondsstandortgesetz – FoStoG)
2) Directive (EU) 2019/1160 of the European Parliament and of the Council of 20 June 2019 amending Directives 2009/65/EC and 2011/61/EU with regard to cross-border distribution of collective investment undertakings.
3) Gesetz zur Einführung von elektronischen Wertpapieren – eWPG
4) Directive (EU) 2019/2034 of the European Parliament and of the Council of 27 November 2019 on the prudential supervision of investment firms and amending Directives 2002/87/EC, 2009/65/EC, 2011/61/EU, 2013/36/EU, 2014/59/EU and 2014/65/EU.
5) Full title of the German Act: Gesetz zur Umsetzung der Richtlinie (EU) 2019/2034 über die Beaufsichtigung von Wertpapierinstituten
6) Full title of the German Act: Gesetz über die unternehmerischen Sorgfaltspflichten in Lieferketten
7) Full title of the German Act: Gesetz zur Stärkung der Finanzmarktintegrität (Finanzmarktintegritätsstärkungsgesetz – FISG)
8) Directive (EU) 2019/1151 of the European Parliament and of the Council of 20 June 2019 amending Directive (EU) 2017/1132 as regards the use of digital tools and processes in company law.
9) Gesetz zur Umsetzung der Digitalisierungsrichtlinie (DiRUG)

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