Marketing restrictions - Germany

Funds: It is possible to conduct cross-border active marketing/selling of AIFs or UCITS where:

• the firm can rely on an exemption to the licensing requirement (or if not, where the firm is appropriately licensed); and
• the appropriate filing has been submitted to market/pre-market the fund.

Investment Management & Advisory Services (IMAS): It is only possible to conduct cross-border active marketing/provision of IMAS (arranging, execution of orders on behalf of clients, investment advice and portfolio management) where an exemption applies or where the firm has the appropriate licence.

Key points in terms of the position in Germany are:

Reverse Enquiry: Responding to a reverse enquiry may be possible without triggering the above requirements where certain conditions are satisfied. The scope of what may be permitted in relation to a reverse enquiry from a Retail Investor is very narrow.

PPR: Marketing/selling an AIF is permitted in the following scenarios:

• Via A36/A42 to Professional Investors with the prior approval of the BaFin, although for the A42 route it can be challenging to meet the gold-plating requirements. These include certain equivalence criteria in relation to the non-EEA AIFM and the appointment of a depo-lite entity.
• It may also be possible to obtain prior approval of the BaFin to use the PPR in relation to Semi-Professional Investors, but full compliance with the German implementation of the AIFMD is required (including appointment of entity performing full depositary functions).
• A route is also available enabling an AIF to be approved for distribution to Retail Investors, although it can be challenging to satisfy all the associated criteria.

There is a third-country cross-border firm exemption route: Where the firm licensing requirement is triggered, firms who do not wish to set up a German presence and obtain a licence (and who are not EEA Passporting Entities) may apply to the BaFin to be exempt from the licensing requirement when conducting activities on a cross-border basis. This is only available where targeting Institutional Clients, except that for Swiss firms it is possible to apply to the BaFin in order to target all categories of investor.

Speedread: General marketing activities are likely permitted without triggering restrictions. Care should be taken not to refer to specific funds or services. There is an elevated risk of triggering restrictions where conducting product/service line awareness or activities referring to an investment strategy or particular characteristics. Also, note German rules on unfair and misleading marketing practices.

Are the following activities permitted without: (i) the OFI being licensed; and/or (ii) the Fund being authorised/notified?

The following activities are likely permitted without triggering fund notification and/or firm licensing requirements:

• brand awareness;
• distribution of business cards;
• speaking at a finance related event; and
• publishing articles.

Care should be taken that there is no mention of specific funds or services offered by the firm.

Product/service line awareness or activities referring to an investment strategy or particular characteristics may be permitted without triggering fund notification and/or firm licensing requirements. 

The fund/investment service should not be clearly identifiable or the strategy described should not be followed by only one fund of the firm. Provided capability marketing activities focus on the firm and do not mention the specific AIF, they should fall outside the scope of the pre-marketing regime.

Speedread: It may be possible to respond to a reverse enquiry without triggering notification/approval requirements at a fund level (i.e. in respect of the relevant UCITS or AIF) as well as the licensing requirements that apply at a firm level provided certain conditions are met.

However, with regard to Retail Investors, the BaFin may take the view that it is only possible for a firm to respond to a subscription order on a reverse enquiry basis and not to a request for further information.

Further, the CBDF Directive contains an 18-month restriction on relying on a reverse, where the reverse enquiry relates to the units/shares of an AIF that was pre-marketed or that was established as a result of pre-marketing. As implemented in Germany, reliance on reverse enquiry is permanently excluded in relation to investors that were recipients of the pre-marketing activities; the 18-month period applies (only) to all investors that were not approached.

AIFs and UCITS that have not been passported into Germany: Limited

It is necessary to consider whether the Conditions for Permitted Reverse Enquiry (Funds) apply. The conditions are more restrictive where the reverse enquiry comes from a Retail Investor. In respect of the firm level requirements, the Investment Services Reverse Enquiry Exemption may apply or it may also be possible to rely on one of the other exemptions to the Licensing Requirement - see Pre-Marketing and Active Marketing/Selling of Funds - Licensing Requirement below.

Firms should be aware of the 18-month restriction on responding to a reverse enquiry with respect to AIFs that have been pre-marketed in Germany. Reliance on reverse enquiry is permanently excluded in relation to investors that were recipients of the pre-marketing activities; the 18- month period applies (only) to all investors that were not approached.

Conditions for Permitted Reverse Enquiry (Funds): Local counsel recommend compliance with the following conditions when passive marketing to Professional Investors and Semi-Professional Investors:

• reverse enquiry must relate to a specific fund rather than an investment strategy. However, where an investor makes a general enquiry that leads to the set-up of a bespoke fund specially for such investor, that is likely to be a permitted reverse enquiry;
• there is no fixed limit on the number of reverse enquiries that may be acted upon. However, the more reverse enquiry is relied upon, the higher the risk;
• each separate transaction with a particular investor must be preceded by a separate reverse enquiry (unless there is an existing relationship with the investor); and
• written records to be maintained which evidence that the investor made the reverse enquiry and documents sent should be individualised for the particular investor.

Where the reverse enquiry is from a Retail Investor, extreme care should be taken as it is possible that the German interpretation of permitted reverse enquiries from Retail Investors in relation to funds is that they must be confined to pure reactions to subscription orders only. Retail Investors are also restricted from investing in a Single Hedge Fund, regardless of whether they make a reverse enquiry or not.

Passported AIFs, UCITS and Swiss “UCITS” Funds: Permitted

The activity should be permitted as the fund has been passported into Germany although in respect of the Licensing Requirement it will be necessary to consider whether Investment Services Reverse Enquiry Exemption is satisfied. Otherwise, the firm must have the required permissions or satisfy another exemption.

IMAS: Limited

The Investment Services Reverse Enquiry Exemption may apply or alternatively, it may be possible to rely on one of the exemptions to the Licensing Requirement - see Active Marketing/Provision of IMAS below.

Investment Services Reverse Enquiry Exemption: Applies where the service is rendered to an investor on its sole and unsolicited initiative. Local counsel note that while the BaFin has so far not intervened to restrict the right of German investors to request the services of a foreign firm at their own initiative, this position and practice may change in the future.

Counsel advise the following:

• the firm must be in a position to prove that the services were rendered on the initiative of the client, e.g. by e-mail chain according to which it is clear that the (potential or existing) client has approached the firm;
• a firm should not market a service unless the particular service was originally requested or initiated by the investor; and
• it is not sufficient to receive a general confirmation from an investor that it is happy to be contacted about future opportunities.

It should be noted that the scope of this reverse solicitation exemption is limited and reliance upon it is not a sustainable distribution model on which a business/marketing strategy should be based.

Please note that when a non-EEA firm relies on reverse enquiry and does not require a licence under German law, it does not have to observe any German conduct of business and organisational rules under the WpHG.

Firms will need to consider both fund and firm level requirements.

1. Fund Level Requirements

The requirements will depend on whether the fund is a UCITS or an AIF and whether marketing/selling via a marketing passport or the national private placement regime (PPR).

A. UCITS

Speedread: To actively market/sell a UCITS using the marketing passport route, it is necessary to make the relevant notification to the home Member State regulator and to comply with all associated requirements. It is only possible to pre-market a UCITS that has not been passported to investors in Germany where the UCITS is not yet launched or is not yet ready to be offered.

Note that Swiss funds which comply with the requirements of the UCITS directive as well as AIFMD may be passported into Germany on the same basis as UCITS funds.

In addition, the firm will need to be appropriately licensed to market/sell the UCITS although where the marketing activities do not relate to an existing or identifiable UCITS, no licensing requirements are triggered. See the Licensing Requirement below.

Pre-Marketing UCITS before UCITS marketing passport notification: Permitted only if it does not relate to an existing or identifiable UCITS

Where the UCITS is not yet launched or is not yet ready to be offered (i.e. the fund constitutional documents still need to be negotiated), pre-marketing is permitted and the firm does not need to be licensed. This is based on BaFin’s Marketing FAQ. Note that marketing materials may refer to an investment strategy but only if such investment strategy could be implemented by more than one fund in the fund range offered by the firm and therefore a specific UCITS is not identifiable. If the strategy will be implemented by only one fund, then it is identifiable and will trigger the UCITS marketing passport notification requirement.

It is unclear whether the same rules also apply to the pre-marketing of Swiss “UCITS” funds into Germany.

Active marketing/selling via UCITS marketing passport: Permitted

Permitted to Professional Investors and Retail Investors in Germany subject to notification to home Member State regulator and preparation of the necessary documents including the KIID/KID. See sections 6.1(b)-(c) of the Memorandum for German-specific requirements, including in relation to applicable timeframes and fees. Facilities must be provided for Retail Investors, although there is no requirement for a local agent based in Germany. For firm level requirements, see the Licensing Requirement below.

The same requirements and process also apply to the passporting of Swiss “UCITS” funds into Germany.

Active marketing/selling a UCITS that has not been passported into Germany: Not permitted

Non-passported UCITS cannot be actively marketed/sold into Germany. To actively market/sell an existing/identifiable UCITS to investors in Germany, it is necessary to complete the UCITS notification process.

B. AIFMD Marketing Passport

Speedread: To actively market/sell an AIF using the marketing passport route, it is necessary to make the relevant notification to the home Member State regulator and to comply with all associated requirements. Premarketing is permitted but care is required to ensure activities stay within the scope of permitted pre-marketing and that the informal letter is submitted. An AIF that has been passported can be marketed/sold to SemiProfessional Investors, unless expressly excluded in the fund documentation.

In addition, the firm will need to be appropriately licensed to market/sell the AIF. See the Licensing Requirement below.

 Pre-Marketing AIF before AIFMD marketing passport notification: Permitted

Implementation of the CBDF Directive into German law is generally in line with the CBDF Directive, although the regime has been extended to apply to both Professional Investors and Semi-Professional Investors.

Care is required to structure activities within the scope of permitted pre-marketing. See the onscreen report for details of the types of documents which can be used to conduct pre-marketing, whether they can be in draft or final form and any required disclaimers. Within two weeks of any pre-marketing being conducted an informal letter must be sent by the EEA AIFM to its home Member State regulator.

Restrictions also apply to the firm conducting the pre-marketing – third parties must generally fall within the categories of EU-regulated firms prescribed by the CBDF Directive.

Active marketing/selling via AIFMD marketing passport: Permitted

EEA AIFs with EEA AIFMs may be actively marketed/sold to Professional Investors and Semi-Professional Investors subject to notification to home Member State regulator of the AIFM. Unless otherwise specified in the fund documentation, BaFin will assume that any notification is for marketing to Semi-Professional Investors as well as Professional Investors. See section 4.2 of the Memorandum for German-specific requirements which apply in order to market a passported AIF into Germany, including in relation to applicable timeframes and fees. Full compliance with the AIFMD is required.

If the AIFM intends to market to Semi-Professional Investors, it is required to submit a PRIIPs KID to the BaFin.

For firm level requirements, see the Licensing Requirement below.

C. PPR

Speedread: Where either the AIF or the AIFM is based outside the EEA, the AIFMD marketing passport is not available. Marketing/selling to Professional Investors is possible under the private placement regime (via either A36 or A42 as implemented in German law) and subject to compliance with the relevant requirements and following the receipt of approval from the BaFin. For non-EEA AIFMs using the A42 route it can be challenging to meet the gold-plating requirements. It may also be possible to obtain prior approval of the BaFin to use the PPR in relation to Semi-Professional Investors, but full compliance with the German implementation of the AIFMD is required.

Pre-marketing to Professional Investors and Semi-Professional Investors is permitted but care is required to ensure activities stay within the scope of permitted pre-marketing and that the informal letter is submitted.

A route is also available enabling an AIF to be approved for distribution to Retail Investors, although it can be challenging to satisfy all the associated criteria.

In addition, the firm will need to be appropriately licensed to market/sell the AIF. See the Licensing Requirement below.

Pre-Marketing AIF before notification to use PPR: Permitted

The same requirements as set out under Pre-Marketing AIF before AIFMD marketing passport notification above apply although note that an informal letter must be sent to the BaFin where there is a non-EEA AIFM or the home state regulator of the AIFM where it is located in the EEA within two weeks of any pre-marketing being conducted.

Active marketing/selling via PPR to Professional and Semi-Professional Investors: Permitted following registration with the BaFin

Permitted to Professional Investors and Semi-Professional Investors following registration with the BaFin provided the relevant requirements deriving from the AIFMD are met as well as any additional German-specific criteria. In all cases it will be necessary for the AIFM to demonstrate that all necessary arrangements have been made in order to ensure that the AIF cannot be marketed to Retail Investors (see section 4.1(a) of the Memorandum for details of types of steps that are required).The AIFM is also required to make certain commitments as to how it will liaise with the BaFin following the registration.

The German-specific requirements that need to be satisfied in order to successfully register to use the PPR depend on whether the fact pattern involves:

• a non-EEA AIFM (in which case the Article 42 Gold-plating Requirements need to be considered); or
• an EEA AIFM (in which case the registration will be according the requirements applicable to A36 and include the requirement to provide an attestation from the EEA AIFM’s competent authority).

Where the activity will be directed to Semi-Professional Investors, full compliance with the German implementation of the AIFMD is required (including appointment of an entity performing full depositary functions).

Article 42 Gold-plating Requirements:

• the AIFM must have appointed a depositary-lite entity;
• the non-EEA AIFM must satisfy the Characterising Criteria of an AIFM; and
• the AIFM’s supervisory authority (and the AIF's, where different) must have entered into an MoU with the BaFin and such authority must have the right to conduct audits within the AIFM.

Characterising Criteria of an AIFM:

Although there is no clear guidance on this by BaFin, it may be assumed that (at a minimum) the characterising criteria of an AIFM under the AIFMD have to be met by the non-EEA AIFM. Hence such AIFM must be supervised with at least some similar structures to those of an AIFM subject to the AIFMD (with regard to investor protection etc.). According to local counsel, it is likely that BaFin’s view on the above would be very strict and that this provision would be interpreted narrowly.

See sections 4.1(a) and 7.1 of the Memorandum for more details on the routes referred to above, including in relation to applicable timeframes and fees.

For firm level requirements, see the Licensing Requirement below.

Active marketing/selling via PPR to Retail Investors: Permitted (other than Single Hedge Funds) following registration with the BaFin

AIFs (except for Single Hedge Funds) can be marketed/sold to Retail Investors following registration with the BaFin. See section 6.2(e) of the Memorandum for details, including in relation to applicable timeframes and fees. Facilities must be provided in the German language, although there is no requirement for such local agent to be based in Germany. However, it is necessary to appoint a German representative to fulfil certain compliance duties (i.e. support the AIFM in adhering to the local German law). It is also necessary to comply with PRIIPs requirements for a KID where an AIF is marketed to Retail Investors. For firm level requirements, see the Licensing Requirement below.

Single Hedge Fund:

Means an open-ended AIF which according to its fund rules employs at least one of the following techniques:

• use of leverage on a substantial basis (as further defined in Art. 4 para. 1 (v) of the AIFMD and Art. 111 of the AIFMD Regulation); or
• short selling transactions with regard to the AIF’s assets.

2. Licensing Requirement

Speedread: The firm will need to obtain a local licence, be an EEA Passporting Entity or appoint a local intermediary to market/sell the fund, unless an exemption applies.

For pre-marketing of an AIF, this requires the firm to fall within the categories of EU-regulated firms prescribed by the CBDF Directive, or as extended in Germany to non-EEA AIFMs.

EEA Passporting Entity: Permitted

For active marketing/selling, where the firm is the UCITS ManCo or AIFM of the fund, marketing should fall within the UCITS ManCo/AIFM’s authorisation. To conduct related activities (e.g. provision of investment advice) it will need to check if it has the necessary permissions and passport these into Germany.

Other Firm: Workable where falls within scope of an exemption

Active marketing/selling of a fund will be caught by the Licensing Requirement and the firm will need to:

Speedread: The firm will need to obtain a local licence, be an EEA Passporting Entity or appoint a local intermediary to market/provide the IMAS, unless an exemption applies.

EEA Passporting Entity: Permitted

Other Firm: Workable where falls within scope of an exemption

Active marketing/selling of IMAS will be caught by the Licensing Requirement and the firm will need to:

• hold a German MiFID II licence (which requires a local presence); or
• rely on an exemption. See Licensing Requirement above for details of the exemptions.

For the position on intermediaries, see Additional Considerations below.

The analysis in this section is also applicable to the marketing/provision of IMAS in relation to a single investor vehicle, a segregated managed account or a family office undertaking. Marketing/selling of these vehicles will not be caught by the AIFMD if they are structured to fall outside the definition of an AIF.

Intermediaries

It is generally not necessary to use an intermediary in Germany, however it is quite common to use intermediaries for distribution to Retail Investors. These distributors are either regulated investment services firms or distributors. Note that the interposition of an intermediary does not help avoid the Licensing Requirement if, by involving an intermediary, the firm still targets German clients with whom it wishes to enter into an agreement.

Fly-in meetings

Fly-in meetings are permitted where the firm is acting in compliance with the licensing/other requirements set out above.

Prospectus Regulation (PR3)

PR3 applies to interests in a closed-ended fund (or single investor vehicle) that constitute "transferable securities". An approved prospectus is required unless an exemption applies. See section 9 of the Memorandum for applicable exemptions.

Form and content requirements including disclaimers

See section 8.1(c) and the Appendices of the Memorandum for form and content requirements and disclaimers. In particular, the CBDF Regulation introduced certain requirements for marketing communications made by fund managers of UCITS and AIFs, regardless of the targeted investor. See the onscreen report for more information.

EEA Passporting Entity

A MiFID Investment Firm, CRD Credit Institution, UCITS ManCo or EEA AIFM authorised in another EEA Member State with appropriately scoped permissions and which has exercised its right to passport into the jurisdiction on the basis of its home Member State authorisation.

Institutional Clients - Includes:

• the German federal government, federal states, local authorities and their institutions;
• credit and financial services institutions within the meaning of sec. 1 (1) and (1a) of the KWG, including investment companies within the meaning of the KAGB;
• private and public insurance companies; and/or
• incorporated enterprises within the meaning of sec. 267 (2) and (3) of the German Commercial Code, i.e. semi-large and large enterprises.

Professional Investors

Means a "professional client" as defined in Annex II of MiFID II. Includes:

• investment firms, credit institutions, insurance companies and other institutional investors that are authorised or regulated,
• large undertakings meeting two of the following criteria: (i) Balance sheet total: EUR 20 million; (ii) Net turnover: EUR 40 million; or (iii) own funds: EUR 2 million, and
• national and regional governments, public bodies that manage debt, central banks, and international and supranational institutions.

Please refer to section 4.1 of the European Framework Document for a fuller description of the types of investor who may fall within this definition.

Retail Investors

Means an investor which is not a Professional Investor (and in certain contexts, also not Semi-Professional Investors).

Semi-Professional Investors

Means an investor which: (i) invests at least EUR 10 million into a particular fund; (ii) invests at least EUR 200,000 into a particular fund and fulfils certain requirements regarding expertise, experience and knowledge and acceptance of risks; (iii) is an employee or director of an AIFM managing the AIF in which the employee or director wishes to invest; or (iv) is a public body or public law foundation or certain companies in which the German state has a share.