In this comprehensive blog post, we will take an in-depth look at the German Investment Code (Kapitalanlagegesetzbuch, KAGB). We will explain the basic regulations for investment assets and investors, highlight current court rulings and amendments to the law and address frequently asked questions. The article is aimed at investors as well as advisers and other persons dealing with capital investments.

Introduction to the German Investment Code

The German Investment Code (Kapitalanlagegesetzbuch, KAGB) is a central set of regulations in German investment law. It came into force on 22 July 2013 and replaces the previously applicable Investment Act (InvG). The KAGB regulates the supervision of the business of investment funds and capital management companies. The Act is based on the European Alternative Investment Fund Managers Directive (AIFM Directive) and aims to create a uniform framework for the regulation of investment funds and their managers.

The regulations of the KAGB concern in particular:

  • Investment funds
  • Capital management companies
  • Investors
  • Distributors
  • Custodian banks

Investment assets under the KAGB

According to the KAGB, investment assets are collective capital investments which are provided by investors for collective investment in assets. Investment assets can be divided into two major groups:

  • Undertakings for Collective Investment in Transferable Securities (UCITS)
  • Alternative investment funds (AIF)

Undertakings for Collective Investment in Transferable Securities (UCITS)

UCITS are investment funds that invest in securities and are subject to certain European regulations. They are also referred to as UCITS (Undertakings for Collective Investment in Transferable Securities). UCITS may be marketed across borders provided they comply with the requirements of the UCITS Directive.

Alternative Investment Funds (AIF)

AIF are all investment assets that are not UCITS. They comprise a variety of investment forms, such as:

  • Real estate funds
  • Hedge funds
  • Private equity funds
  • Infrastructure funds
  • open-ended special AIFs

AIF are generally subject to stricter regulations than UCITS and may not be marketed across borders without further ado.

Capital management companies

Capital management companies (KVG) are companies that manage investment assets. They are responsible for the investment of fund assets and risk management. KVGs must be supervised and licensed by the Federal Financial Supervisory Authority (BaFin).

There are two types of KVG:

  • Internal KVG
  • External KVG

Internal KVGs

Internal KVGs are investment companies that manage their own investment assets. They are responsible for both investment decisions and risk management. Internal KVGs must have sufficient capital resources and meet certain organisational requirements.

External capital management companies

External KVGs manage the investment assets for other investment companies. They are responsible for investment decisions and risk management on behalf of the investment company. External KVGs must also be licensed by BaFin and meet certain organisational requirements.

Investors under the KAGB

Investors within the meaning of the KAGB are persons who acquire units in investment funds. The KAGB distinguishes between two types of investors:

  • Private investors
  • Professional investors

Private investors

Private investors are natural persons who acquire units in investment funds. They are subject to special protection mechanisms, such as information requirements and risk warnings. As a rule, private investors may only acquire units in UCITS, unless they meet certain requirements for the acquisition of units in AIF.

Professional investors

Professional investors are institutional investors, such as banks, insurance companies or pension funds. They are subject to less stringent regulations than private investors and may acquire units or shares in AIFs provided they meet certain requirements.

Regulations for the distribution of investment funds

The KAGB contains extensive regulations for the distribution of investment assets. These include, among others:

  • Information obligations
  • Prospectus requirements
  • Sales restrictions

Information requirements

The information duties in the KAGB serve to protect investors. They oblige capital management companies and distributors to provide investors with certain information. This includes, among other things:

  • Key investor information documents (KIID)
  • Sales prospectuses
  • Annual and semi-annual reports
  • Risk and cost information

Prospectus obligations

The prospectus requirements in the KAGB oblige capital management companies to prepare a sales prospectus for each investment fund they launch. The sales prospectus must contain all important information about the investment fund, such as:

  • Investment objectives and strategies
  • Risk profile
  • Costs and fees
  • Use of income
  • Information on the capital management company and custodian bank

The sales prospectus must be approved by BaFin and made available to investors prior to the purchase of units.

Distribution restrictions

The KAGB contains various sales restrictions that regulate the sale of units in investment funds. These include, among others:

  • Marketing restrictions for private investors: As a rule, private investors may only purchase units in UCITS unless they meet certain requirements for the purchase of units in AIF.
  • Marketing restrictions for professional investors: Professional investors may acquire units or shares of AIFs provided they meet certain conditions.
  • Cross-border marketing: As a rule, the marketing of investment assets across German borders is only permitted if the capital management company and the investment fund meet certain requirements.

Regulations for Custodian Banks

Custodian banks are credit institutions or securities firms that hold and monitor the fund assets of an investment fund. They have a central role in investment law and are subject to strict regulatory requirements. The KAGB contains the following regulations for custodian banks, among others:

  • Custody obligations: Custodian banks must keep fund assets separate from their own assets and protect them from loss or misuse.
  • Monitoring obligations: Custodian banks must monitor the investment decisions of the capital management companies and ensure that these are in accordance with the KAGB and the sales prospectus.
  • Reporting obligations: Custodian banks must submit regular reports to BaFin on the investment assets they hold in custody and the capital management companies.

Current court rulings and amendments to the law

Capital investment law is subject to constant change. Some current court rulings and legislative amendments affecting the KAGB are presented below:

Ruling of the Federal Supreme Court on information requirements: In a ruling of 12 March 2019 (Ref. XI ZR 768/17), the Federal Court of Justice (Bundesgerichtshof) decided that a bank distributing shares in investment funds must inform the investor, without being asked, about reimbursements it receives from the fund’s management fees.

Ruling of the Higher Regional Court of Frankfurt on prospectus liability: The Higher Regional Court of Frankfurt ruled in a ruling of 25 February 2021 (ref. 24 U 210/19) that an investor who has suffered a loss due to a faulty sales prospectus can claim damages from the capital management company.

Amendment of the law to implement the EU Regulation on cross-border distribution activities: In July 2021, the Act on the Implementation of the EU Regulation on Cross-Border Distribution Activities of Investment Funds (Distribution Regulation) was adopted. This adapted and simplified the regulations for the cross-border distribution of investment funds.

FAQs on the German Investment Code

This section answers some frequently asked questions about the KAGB:

Does the KAGB also apply to foreign investment funds?

Yes, in principle the KAGB also applies to foreign investment funds that are distributed in Germany. However, foreign investment funds may be subject to different regulations in some cases, particularly with regard to authorisation and distribution.

What are open-ended and closed-ended investment funds?

Open-ended investment funds are funds that accept new investors at any time and issue or redeem units. Closed-ended investment funds, on the other hand, only raise capital from investors for a certain period of time and no longer issue units once the capital has been raised. In the KAGB, closed-ended investment funds usually fall under the category of AIF.

What role does the European Securities and Markets Authority (ESMA) play in investment law?

ESMA is a European supervisory authority responsible for the supervision and regulation of financial markets in the European Union. It plays an important role in the design and implementation of regulations in investment law, especially with regard to cross-border distribution activities of investment assets.

Are there special tax features for investment funds?

Yes, special tax regulations apply to investment assets. These include, among other things, the taxation of income at fund level, the final withholding tax at investor level and the regulations on the advance lump sum. However, the special tax features of investment funds are not the subject of the KAGB, but are regulated in the Investment Tax Act (InvStG).

Overview of the German Investment Code

The German Investment Code (Kapitalanlagegesetzbuch, KAGB) is a central set of rules in German investment law that contains comprehensive regulations for investment funds, capital management companies, investors, sales agents and custodian banks. Knowledge of these regulations is of great importance for anyone involved in capital investments. This article provides a comprehensive overview of the essential aspects of the KAGB and helps to better understand and classify the complex set of regulations.