Bundesverband Alternative Investments e.V. (BAI)

EU legislation in the field of financial and securities markets legislation, including investment law, is done through the so-called Lamfalussy process, named after Alexandre Lamfalussy, and aims to simplify and speed up legislation. The procedure has 4 stages:

• Stage 1: Basic Directives and Regulations are adopted by the Council and the European Parliament.
• Level 2: The more technical details are laid down in the form of Implementing Directives and Regulations in so-called comitology committees (experts from the EU Commission and the Member States).
• Level 3: Common standards and guidelines for the uniform material implementation are developed by the National Competent Authorities (NCAs).
• In Level 4, the Commission reviews the implementation of the directives on the basis of comprehensive reports, which the Member States are obliged to submit.

AIFMD 2.0

The AIFMD 2.0 regulates managers of alternative investment funds and serves as the EU framework directive, supplemented by the important AIFMD Level II Regulation (Commission Delegated Regulation (EU) No. 231/2013 regarding exemptions, operating conditions, depositaries, leverage, transparency, and supervision).

The directive regulates managers of alternative investment funds that are not covered by the UCITS Directive. It applies to managers based in the EU as well as third-country managers who wish to market their funds within the EU. In Germany, the directive has been transposed into national law through the KAGB.

AIFMD Review:

The AIFMD underwent a comprehensive review as provided in Article 69 of the directive. The result of this review process was the amending directive to the AIFMD, known as AIFMD 2.0. It represents a comprehensive revision of the original AIFMD directive and the updated EU legal framework, containing several clear changes compared to the first directive.

• Liquidity Management: AIFMs are now required to demonstrate an appropriate liquidity management system to national supervisory authorities. Open-ended AIFs must implement at least two suitable "LMTs" (liquidity management tools) as outlined in Annex V of the directive. These risk management procedures are designed to ensure an adequate response to liquidity risks and are therefore subject to regular scenario analysis and detailed reporting obligations regarding the results of these analyses to both supervisory authorities and investors. These adjustments aim to enhance the stability of EU financial systems and improve investor protection by enabling AIFMs to better respond to market conditions and redemptions.

• Lending by AIFs: AIFMD 2.0 aims to open up additional financing opportunities for EU-based companies, particularly benefiting those unable to access traditional forms of financing. A key part of this concept includes the changes and associated requirements for AIFs that engage in lending, along with an effort to achieve EU-wide harmonization of these regulations. The goal is to increase the availability of financial resources for EU companies while ensuring enhanced investor protection through limits, specific procedures, and the aforementioned LMTs. For example, AIFMD 2.0 restricts an AIF’s ability to leverage depending on its organizational form, prohibits an "originate-to-distribute" strategy, and bars lending in cases of conflicts of interest, such as prohibiting loans to entities where there is a conflict of interest. Member states have the option to impose stricter regulations ("gold-plating") or to restrict or prohibit lending to consumers.

• Depositories and Reporting Requirements: Following the implementation of AIFMD 2.0, AIFs will be allowed to use depositories located in a different EU member state than the AIF itself. This aims to mitigate the cost risks arising from inefficient processes in EU countries with smaller financial markets, thereby enhancing intra-European competitiveness. However, this privilege comes with extensive and challenging requirements. The affected AIF and all associated entities must provide comprehensive disclosures to both their investors and the national central banks of the individual member states where the AIF is registered.

Additionally, technical and organizational aspects have been adjusted. For example, at least two natural persons who manage an AIFM’s operations full-time must reside in the EU, or for AIFs distributed to retail investors, one member of the AIF’s management must be non-executive and independent. ESG requirements have also been incorporated, which integrate with and refer to the existing SFDR requirements. This means AIFMs must consider sustainability criteria and document them in the relevant guidelines.

AIFMD 2.0 came into effect on April 15, 2024. Transposition into national law in Germany is still pending but must be completed by the legislature within 24 months.

Level I: Framework directive and framework regulations

AIFMD 2.0

Level II: Overview of executive acts

AIFMD Level II Regulation (EU) Nr. 231/2013 and list of other executive acts

Level III: Overview ESMA Updates Q&A and ESMA Guidelines

EMSA Q&A on AIFMD

ESMA Guidelines (Guidelines Tracker; Guidelines with regard to the AIFMD in lines 3 and following):

• Guidelines on reporting obligations under Articles 3(3)(d) and 24(1),(2) and (4) of the AIFMD
• Guidelines on the model MoU concerning consultation, cooperation and the exchange of information related to the supervision of AIFMD entities
• Key concepts of the AIFMD
• Guidelines on sound remuneration policies under the AIFMD
• Guidelines on Article 25 of Directive 2011/61/EU

With the ELTIF, EuVECA, and EuSEF regulations, specific legal acts for particular types of fund products (so-called product-regulated EU-AIFs) were created, which apply directly. These include the European Long-Term Investment Funds (ELTIF), the European Venture Capital Funds (EuVECA), and the European Social Entrepreneurship Funds (EuSEF).

For ELTIFs, ESMA maintains an up-to-date register: ELTIF register

ELTIF 2.0:

The European Commission launched the consultation for the ELTIF review in the fall of 2020.

On January 10, 2024, the changes finally came into effect in the form of the so-called ELTIF 2.0 regulation. Specifically, the need for amendments in areas such as previous participation barriers for retail investors, restrictive requirements on investable assets and their diversification, the lack of relief for funds with institutional investors, and the prohibition of master-feeder structures were addressed. These innovations aim to make the previously rarely issued ELTIF more attractive.

The key changes can be summarized as follows:

• Expansion of the range of eligible assets for ELTIFs to include securitizations (debt securities, loans, mortgages), financial institutions, tangible assets without a minimum value, and clarification regarding the permissibility of investments in Green Bonds.
• Introduction of the use of fund-of-funds strategies, including master-feeder structures, allowing ELTIF investments in other ELTIFs, EuVECA, EuSEF, UCITS, and EU-AIFs with permitted investment objectives under the ELTIF regulation; reduction of minimum requirements regarding shareholdings in subsidiaries.
• Enhancement of the information accessible through the public central register on ELTIFs.
• Increase in the market capitalization requirements for portfolio companies to €1.5 billion (previously €500 million).
• Removal of restrictions on co-investments by ELTIF managers.
• Lowering the minimum investment threshold in eligible assets to 55% of capital (previously 70%).
• Reduction or complete removal of diversification requirements for ELTIFs marketed exclusively to professional investors.
• Introduction of the possibility of using increased leverage: for retail investors up to 50% of net asset value, for ELTIFs marketed solely to professional investors up to 100% (previously 30% for both).
• Facilitation of share redemptions from ELTIFs to promote a secondary market, with ESMA developing Regulatory Technical Standards (RTS) for this purpose.
• Abolition of liquidation upon investor request in case of failure to establish redemption conditions.
• Removal of suitability assessment for retail investors from the ELTIF regulation, with MiFID II suitability assessment required instead.
• Elimination of investment volume requirements for retail investors (previously a minimum of €10,000 but a maximum of 10% of the investment assets).
• Removal of the requirement for "suitable investment advice" and the operation of local facilities.

Level I: Framework-Directives und Regulations

ELTIF 2.0 reglation

EuVECA regulation

EuSEF regulation

Level II: Übersicht exekutiver Rechtsakte

ELTIF regulation: overview delegated acts

EuVECA regulation: overview delegated acts

EuSEF regulation: overview delegated acts

ELTIF 2.0: Regulatory technical standards

Level III: Overview ESMA Updates Q&A und ESMA Guidelines

Questions and Answers: Application of the EuSEF and EuVECA Regulations

BaFin FAQs about ELTIF 2.0

The UCITS Directive (Council Directive 85/611/EEC of 20 December 1985 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities) defines specific requirements for funds and their management companies.

The UCITS Directive also concerns product regulation. One focus here is the regulation of the permissible assets in which investments may be made. Detailed regulations on this subject are contained in the EU Commission's implementing Directive 2007/16/EC (the so-called Eligible Assets Directive). Changes such as the simplification of the notification procedure for cross-border distribution, the enabling of cross-border fund mergers and the introduction of a new concept of investor information with the basic information sheets (BIB), which replaced the previous simplified sales prospectus, led to a recast of the UCITS Directive as UCITS V Directive 2009/65/EC.

The UCITS Directive and its developments have been supplemented and expanded over the past few years through several updates. Some of the changes introduced by AIFMD 2.0 were also implemented in the UCITS Directive to harmonize the regulatory framework and facilitate the management of funds that encompass both UCITS and AIFs. For example, UCITS management companies are now required to select and incorporate detailed Liquidity Management Tools (“LMTs”) into their constitutional documents. This is intended to ensure that the funds are adequately prepared for liquidity risks and can effectively manage their redemption requirements.

Most recently, in May 2024, ESMA launched a consultation aimed at improving the directive concerning eligible assets (“Eligible Assets Directive”) and its clarity and consistency with other EU legal frameworks.

Level I: Framework Directive

UCITS V Directive (consolidated version)

Level II

Implementing Directive 2010/43/EU as regards organisational requirements, conflicts of interest, conduct of business, risk management and content of the agreement between a depositary and a management company

Implementing Directive 2010/44/EU as regards certain provisions concerning fund mergers, master-feeder structures and notification procedure

CImplementing Directive 2007/16/EC on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS) as regards the clarification of certain definitions (so-called Eligible Assets Directive)

Level III

Questions and Answers: Application of the UCITS Directive

ESMA Guidelines (Guidelines Tracker; Guidelines with regard to the UCITS Directive in lines 66 and following):

• Guidelines on sound remuneration policies under the UCITS Directive (UCITS policies)
• Guidelines on risk measurement and the calculation of global exposure for certain types of structured UCITS
• Guidelines on ETFs and other UCITS issues
• Guidelines on performance fees in UCITS
• Guidelines on liquidity stress testing in UCITS and AIFs
• ESMA consults on Liquidty Management Tools for funds

As it is a Directive and not a Regulation, the contents and rules of the European AIFMD are only applicable after transposition into national law. The German Capital Investment Code (KAGB) makes use of the national scope for legal design by deviating from the AIFMD in numerous areas and by making some prescriptions stricter than those of the Directive itself (so-called gold-plating). As a codification of the entire German investment funds’ law, the KAGB not only regulates AIFMs, but also includes rules for UCITS and also regulates numerous types of AIFs. It is expected to be supplemented in the foreseeable future by the Financial Market Digitization Act (FinmadiG) to create regulations for dealing with crypto assets and other digital investment products.

Of particular importance and at the same time an example of gold-plating are the newly introduced reporting obligations and disclosure standards by the Sustainable Finance Disclosure Regulation (SFDR) and the requirements of the EU Taxonomy Regulation, which the German legislator has incorporated into the KAGB. Under certain conditions, fincancial market participants are now required to provide detailed information and disclose the sustainability characteristics of their products, as well as Principal Adverse Impacts (PAIs) in an annual statement. A specific German feature is that these reports must also be processed by an auditor.

Similarly, the German legislator will have to implement AIFMD 2.0. AIFMD 2.0 came into force on April 15, 2024, but its implementation into German law is still pending. It is therefore expected that the KAGB will be significantly amended by the German legislator within the next 24 months to incorporate the numerous innovations of AIFMD 2.0 into German law. In this regard, it is planned to extensively amend the Fund Market Strengthening Act (Draft Fund Market Strengthening Act, as of August 2024).

The following chart provides an overview of the KAGB's system and fund categories:

National law

KAGB (German Capital Investment Code) (in German only, there is no convenience translation of this voluminous code)

Legal ordinances of BMF or BaFin

Derivative Ordinance (DerivateV) (in German only, there is no convenience translation)

Capital Investment Audit Reports Ordinance (in German only, there is no convenience translation) Kapitalanlage-Prüfungsberichte-VO (KAPrüfbV)

Investment Accounting and Valuation Ordinance (Kapitalanlage-Rechnungslegungs- und BewertungsVO (KARBV)) (in German only, there is no convenience translation)

Investment Conduct and Organization Ordinance (Kapitalanlage-Verhaltens- und OrganisationsVO (KAVerOV)) (in German only, there is no convenience translation)

Ordinance on the electronic notification procedure (Verordnung zum elektronischen Anzeigeverfahren (EAKAV)) (in German only, there is no convenience translation)

Administrative practice of BaFin (in German only, there are no convenience translations)

Guidances Notices

Circulars

Interpretation decisions

FAQs

The Fondsstandortgesetz (FoStoG) implements changes mandated by european law from June 2019 in form of the EU regulation 2019/1160 amending the UCITS directive and the AIFM directive as well as regulation (EU) 2019/1156 on cross-border distribution ("Pre-Marketing") and changes to SFDR and EU-taxonomy. Additionally, more changes to the KAGB for the purposes of the de-bureaucratisaion and digitisation of supervision are carried out

The changes made by the FoStoG can be summarized as follows:

• VAT exemption for management of venture capital funds
• tax incentives for employee stockownership plans (ESOP)
• other changes to KAGB:
  • Pre-Marketing und distribution in accordance to european regulation; the draft clarifies that Reverse Solicitation (i.e. the initiative of acquisition of funds shares starting from investors instead of management) qualifies neither as distribution nor Pre-Markting
  • requirements and effects of revocation
  • additional product possibilites:
    • closed-end dompestic special AIFs as special assets
    • closed-end master-feeder structures
    • open-ended infrastructure investment funds
  • de-bureaucratisation and digitisation, especially in communication with BaFin

Fondsstandortgesetz (in German)
(Gesetz 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)

Pre-Marketing:

In line with the new EU-wide definition is Pre-Marketing - made short - the direct or indirect provision of information on investing strategies or investing concepts to potential professional investors based in the eu, to test their interest in a fund which is not yet launched or where a distribution announcement has not yet been made.

Pre-Marketing - FAQ (in German)
BAI, Juli 2021