Adobe Stock/Jo Panuwat D
Erscheinung:15.12.2023 | Topic Consumer protection, Investment funds Indirect investments in special funds: BaFin has investor protection concerns about product designs that circumvent requirements
Many financial services providers are advertising opportunities to “invest like a professional”. Consumers can supposedly do this by investing indirectly in special funds referred to as special AIFs (Spezial-AIF). BaFin is keeping a close eye on these offers. If the risks are too great, BaFin is able to intervene and, in extreme cases, even ban products.
Issuers of securities and non-securities investment products are constantly on the search for new forms of investment. However, if retail investors are offered the opportunity to “invest like a professional”, they ought to be cautious. This is especially important if – rather than investing directly – they are invited to invest indirectly in funds that would otherwise only be accessible to professional investors (special AIFs). After all, there are good reasons that certain investment classes are reserved for specific types of investors.
What exactly is a special AIF?
Special AIFs are a type of alternative investment fund. According to the German Investment Code (Kapitalanlagegesetzbuch – KAGB), only professional and semi-professional investors are permitted to invest in special AIFs. This is because such investors have greater expertise and are usually required to invest at least €200,000.
Overview of types of investors
- Retail investors
- Professional investors (e.g. credit institutions, investment firms, insurance companies, supervised institutions and large companies)
- Semi-professional investors (e.g. wealthy private individuals with proven experience and expertise)
The statutory safeguard requirements for special AIFs are lower than those for public AIFs, which are open to any interested investors. Special AIFs, however, have a greater degree of design flexibility. One current trend, for example, is the combination of blockchain technology (i.e. tokenisation) with investments in venture capital, real estate or start-ups.
From the standpoint of supervisory law, a critical view should be taken of investments in special AIFs by retail investors. This is because management companies are in principle required to prevent special AIF shares from being marketed or transferred to such persons. This is governed by section 295 (1) sentence 3 and section 277 of the KAGB.
The statutory restrictions on access result from Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 on Alternative Investment Fund Managers and amending Directives 2003/41/EC and 2009/65/EC and Regulations (EC) No 1060/2009 and (EU) No 1095/2010 (AIFMD).
If retail investors are being offered opportunities to invest indirectly in special AIFs, such access restrictions are being circumvented. This is done under arrangements that formally adhere to the legal requirements. For instance, a share in a special AIF is not acquired by the retail investors themselves; rather, it is acquired by an issuer of investment products (see box below).
In particular, the intent and purpose of the restrictions are circumvented if, analogously to a direct investment, there is a one-to-one relationship between the performance of the indirect investment and the development of the special AIF.
Investor protection concerns: example case:Acquiring subordinated bearer bonds to invest in a residential project
It is planned to construct a residential housing project with a value of €10 million in Dresden. The project is being financed via an alternative investment fund (AIF) that pools money from multiple investors into one shared investment. Each investor has to invest at least €1 million in order to participate in the project. Moreover, they must be qualified as a (semi )professional investor.
In this example, one investor plans to invest not their own money but rather money gathered from retail investors and pooled together for this purpose. It is thus intended to enable retail investors to participate in the gains of the special AIF by investing only a small amount.
The investor therefore issues, for example, subordinated bearer bonds with a variable interest rate that changes according to the success of the investment in the special AIF. If the bond issuer becomes insolvent, the claims of other creditors and credit institutions will be satisfied before any claims of the holders of the subordinated bearer bonds.
If the special AIF generates profits or if it is sold or liquidated at a profit at a later date, the retail investors will participate via payments of interest on the bearer bonds. The claims of the investors are therefore directly dependent on the success or failure of the special AIF.
Special AIFs: complicated and non-transparent
Indirect investments in special AIFs are complex as they are a multi-level investment in a professional asset class. Investments in special AIFs are not based on rules that are generally applicable; rather, they are subject to conditions that are negotiated on a case-by-case basis. By necessity, the information materials provided to investors do not contain all the details about the investment and are instead limited to basic data. This means that the conditions are not sufficiently transparent for retail investors.
Indirect investments exposed to greater risk of loss than direct investments
Issuers sometimes advertise with the claim that indirect investments are less risky than their direct counterparts. This, however, is not the case. While investors often supposedly participate in profits from the investment on a one-to-one basis, profit levels are lower due to the intermediary company and the layered investment design. Moreover, indirect investments are exposed to an even greater risk of loss than direct investments. Investors bear the risks from two sequentially linked investments because both the investment itself and the investment project have to prove successful.
Dr Thorsten Pötzsch, Chief Executive Director of Securities Supervision/Asset Management at BaFin:
“Access restrictions for certain investment classes have been specifically put in place to protect consumers. Special funds (special AIFs) are generally not suitable for retail investors. Financial products are not allowed to be designed in such a way that they bypass marketing requirements for investor protection. If any financial instruments give rise to significant investor protection concerns, BaFin can carry out a product intervention to ban them”.
What is BaFin doing?
If BaFin has grounds for investor protection concerns, it initiates a product intervention procedure. BaFin then assesses whether the concerns are of sufficient significance. This largely depends on the specific design of the financial instrument. In extreme cases, BaFin can prohibit the marketing, distribution and sale of products to retail investors. If BaFin issues a product intervention measure, it publishes an announcement on its website. The legal basis for product intervention is provided by Article 42 of the European Markets in Financial Instruments Regulation (MiFIR) in conjunction with section 15 of the German Securities Trading Act (Wertpapierhandelsgesetz – WpHG).
Product interventions are nevertheless a tool of last resort. In practice, it is often sufficient for BaFin to communicate its concerns to the relevant financial services providers. In most cases, they will then adjust the product concerned or stop offering it.
Background information:Product intervention at BaFin
Product intervention is a possibility that results from the German Retail Investor Protection Act (Kleinanlegerschutzgesetz) of 2015. This law assigned the task of collective consumer protection to BaFin.
Drafted by
Susanne Tresper
Division WA 35 – Product intervention
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