“Urgent, but not important”: this is how the Eisenhower principle describes the tasks that decision-makers should delegate to employees. Duties prescribed by capital markets law are not likely to fall into this category, however. Such duties are, in fact, very important for management board members of listed companies; a breach thereof would not otherwise prompt BaFin to impose a fine. Though violations of this nature occur again and again, it would also be possible to prevent them – with proper compliance. This article explains the duties under capital markets law, the amount of the fines, who the representatives of the management board are and, in particular, how management board members can properly delegate responsibilities to avoid being liable themselves.

What are the duties prescribed by capital markets law?

Listed companies are required to fulfil numerous duties under capital markets law. These duties are stipulated, for example, in the German Securities Trading Act (Wertpapierhandelsgesetz – WpHG), the German Securities Prospectus Act (Wertpapierprospektgesetz – WpPG), the Market Abuse Regulation (MAR) and the Second European Markets in Financial Instruments Directive (MiFID II).

An example scenario: investment company A acquires an 8.5% shareholding in C AG and notifies its acquisition of the shares to C AG within one trading day. Since C AG is listed on the MDAX, section 40 (1) sentence 1 of the WpHG requires the company’s management board to disclose this information “without undue delay”, but within three trading days at the latest. However, the employee responsible has fallen ill, and C AG is not able to fulfil its obligation until eight trading days later. It then turns out that the Investor Relations department, designated the competent department in the company’s schedule of responsibilities, does not have clear representation arrangements in place; consequently, no one takes action in a timely manner.

Exactly who is required to fulfil the duties?

The duties are incumbent on the legal person itself. In the example described above, this means C AG. But because a German public limited company (AG) has its own legal personality yet de facto does not itself have the power to act, section 9 (1) no. 1 of the German Act on Breaches of Administrative Regulations (Ordnungswidrigkeitengesetz – OWiG) stipulates that the management board of an AG is that company’s “statutory representative”. The management board is thus responsible for ensuring that the AG fulfils its duties under capital markets law.

Do management board members and companies run the risk of being fined?

Yes. Since 2016, the First and Second German Acts Amending Financial Markets Regulations (Erstes und Zweites Finanzmarktnovellierungsgesetz – 1st and 2nd FiMaNoG) have significantly increased the upper limits of fines for administrative offences under the WpHG.

This trend is also evidenced by the figures. In 2016, BaFin’s Securities Supervision Directorate concluded 106 proceedings by imposing administrative fines, thus imposing a total of EUR 2.57 million in fines. In 2020, the fines imposed by BaFin totalled EUR 8.5 million – for 172 proceedings resulting in a fine (see graphic “Proceedings concluded with an administrative fine in 2020”).

While the penalty rate for 2019 was 24 percent, it increased to 59 percent in 2020. This was because BaFin, after successfully reducing the number of proceedings pending from 682 to 517 in 2019 by discontinuing those involving minor instances of non-compliance for discretionary reasons, then focused on investigating penalty-relevant matters in 2020.

The largest individual administrative fine imposed in 2020, amounting to EUR 1.275 million, was due to a breach of the ad hoc disclosure requirement. Since the entry into force of the new regulations of the 1st and 2nd FiMaNoG, BaFin has been issuing announcements on its website concerning the fines imposed for contraventions of prohibitions and requirements in the area of securities supervision. At the outset of 2021, there were still 332 proceedings pending that could also end with a fine.

Figure 1: Proceedings concluded with an administrative fine in 2020

(c) BaFin

Are management board members required to fulfil all their duties personally?

No, the management board can delegate its duties under capital markets law to a representative (see info box “Statutory representative v. agreed representative”). In legal terms, agreed representatives can themselves fulfil the duties required instead of the actual addressees of the legal requirements (see info box “Section 9 of the OWiG: acting for another”).

The law mentions situations of representation that entail a transfer of duties from the company’s statutory representative to another representative. If this other representative assumes duties of the management board, it is considered a transfer of the capacity of the addressee of the legal requirements. The person commissioned thus becomes the addressee.

When are operations managers and managers of operational units deemed other representatives?

An operations manager or a manager of an operational unit is deemed another representative and thus the addressee of the legal requirements if the owner of the business has commissioned them to manage the business in whole or in part. If a legal person is the owner of the business, it acts through its bodies – thus, in the case of an AG, through the management board. It is sufficient if commissioning arrangements are effectively in place. For example, the question of whether the commissioning has been set down in writing – i.e. whether the legal act is valid – is immaterial.

An operations manager can only be a commissioned person and an addressee of the legal requirements if they independently fulfil the business owner’s tasks on their own responsibility. It can be assumed that they have such autonomy if, of their own accord and without consulting their superiors, they can take the measures that are necessary to prevent statutory violations or contraventions.

To be deemed other representatives, managers of operational units must head a business unit that involves a certain degree of independence and significance. In terms of duties under capital markets law, this could mean the head of the compliance department, for example.

When is someone else deemed to have been otherwise commissioned by the management board?

The management board must expressly commission the person that is to be otherwise entrusted with certain responsibilities and clearly convey the nature and scope of the tasks delegated. This is to prevent the person otherwise commissioned from inadvertently assuming the business owner’s duties and accidentally becoming subject to liability in the event of a statutory violation. Like an operations manager, the person otherwise commissioned must also be able to act autonomously when carrying out the delegated tasks. The management board may also distribute its duties among several employees.

Who is liable if something goes wrong?

Under section 9 (2) of the OWiG, substitutes are merely additional addressees of the legal requirements. This means that if the agreed representative commits a contravention, BaFin can also continue to take action against the management board. It goes without saying that the management board will retain sole responsibility if it has not delegated its duties in line with the law.

However, the commissioning of an agreed representative is intended to exonerate the business owner’s statutory representative. The statutory representative thus cannot be expected to prevent any and every contravention. If a statutory representative takes the necessary supervisory measures in an appropriate manner, they will normally not be held liable if the agreed representative commits a contravention. The risk of a penalty for the management board could thus be ruled out.

In the event of fault on the part of the management board in delegating duties, or if the substitute contravenes statutory provisions, BaFin may impose a regulatory fine against an association of persons (Verbandsgeldbuße) in accordance with section 30 (4) of the OWiG. The fine is then issued against the company itself. In such a case, BaFin does not initiate proceedings against the company’s leadership.

How can the management board protect itself from personal liability when delegating duties?

Based on section 130 of the OWiG, liability is excluded in cases where a contravention is committed but the company could not have prevented it, or made it much more difficult, by exercising proper supervision. For no matter how perfect a compliance organisation is, it cannot prevent commissioned persons or other staff from ever violating applicable law. If a violation occurs, the company must demonstrate that it has taken the appropriate measures and that the commissioned person’s prohibited conduct is therefore not attributable to the management board.

If the management board successfully exonerates itself on five levels, it will not be required to pay a fine. At level 1, the management board must carefully select staff and supervisors. At level 2, the management board is obliged to ensure the appropriate organisation and separation of duties. This also entails the obligation to draw up deputisation schedules to ensure that absences due to illness or holiday are covered. At level 3, the staff must be briefed in appropriate detail regarding their tasks and duties. At level 4, the management board must adequately supervise and monitor the staff, e.g. by means of spot checks. Inexperienced or unreliable employees are to be supervised more closely than those who have already demonstrated their trustworthiness. Finally, at level 5, there is an obligation to take action in the event of a violation.

Assuming the management board fails to demonstrate all this, is there still a way to mitigate an administrative fine?

It is left to the discretion of the prosecuting authorities whether or not to discontinue administrative offence proceedings. BaFin, for example, takes into consideration whether the company in question has improved its compliance organisation since the last violation and whether, on its own initiative, the company has modified its internal processes to make comparable regulatory offences at least significantly more difficult in the future. If, after due assessment of the circumstances, a discontinuation of the proceedings is not an option, BaFin may, for the purposes of mitigating the fine, take into account any progress made in efforts to establish or improve the compliance organisation. The amount of the fine must be high enough, however, to serve as a warning to the company acting in contravention of the law.

Are there any advantages if a company voluntarily notifies its own contravention to BaFin?

A voluntary self-report may result in a reduction of the fine by up to 30 percent. Such a reduction can be granted only if BaFin first becomes aware of the matter in question when it is notified.