On March 14, 2025, the German Federal Financial Supervisory Authority (BaFin) published a draft guidance notice for consultation on the subject of the influence of investors in investment funds permitted under supervisory law.
The guidance notice explains whether and to what extent the investors of an investment fund, which may also include banks and insurers supervised by BaFin, may influence the investment decisions of an alternative investment fund manager (AIFM) for the account of the investment fund.
BaFin will accept comments to the consultation until March 31, 2025.
This briefing provides an overview of important statements in the guidance notice and our assessment of them. As the guidance notice is currently being consulted, there may (and in our view must) be changes in the course of the further procedure.
BaFin concludes from the statutory responsibility of the AIFM to comply with the provisions of the German Investment Code (KAGB) that a ‘third-party management’ (Fremdverwaltung) of the investment fund by an AIFM is required. In contrast, management of the investment funds by the investors instead of the AIFM would constitute ‘self-management’ (Eigenverwaltung), which is not permitted under supervisory law.
Investors exceed the permissible limit of self-management if they exert excessive influence on the AIFM’s investment and divestment decisions on behalf of investment funds.
These explanations apply to both sub-threshold and fully-licensed AIFMs.
In our view, the use of the terms third-party management and self-management in connection with regulatory responsibility for an investment fund has been discussed in the recent past primarily in the context of two issues, both of which, however, revolve around the interpretation of the term ‘investment fund’:
Due to the particular importance of portfolio management for the remit of an AIFM, BaFin considers the performance of portfolio management by investors to be inadmissible. BaFin emphasizes that the provision of portfolio management by the AIFM is a basis for the granting of a license under the KAGB. The issue raised by BaFin is therefore of direct relevance to the existence of the license itself.
BaFin defines portfolio management within the meaning of the KAGB in particular as the acquisition and disposal of assets for the account of the investor collective and thus the investment funds. This definition by BaFin focuses on investment and divestment decisions, but is not limited to this.
BaFin concludes from all of this that the final decision on which assets are acquired or sold for an investment fund must be made by the AIFM or its (commissioned) portfolio managers and not by the investors.If this line is crossed, this constitutes undue influence by investors under supervisory law.
BaFin illustrates this demarcation using the following examples:
Instructions from investors in relation to individual assets
Instructions from investors to the AIFM or portfolio managers are inadmissible, as the final decision in this respect no longer lies with the AIFM or the portfolio managers. In our opinion, this is understandable.
Veto and consent rights by investors
It is incomprehensible that BaFin equates veto rights and consent rights by investors in relation to individual assets in its legal assessment and regards both mechanisms as an expression of an inadmissible final decision-making power of investors.
If BaFin were to base its administrative practice on this in future, this would be a new development for the fund world. Up to now, in our view, investor committees with veto rights or consent rights have also been permissible from BaFin’s perspective.
The new administrative practice would also contradict its administrative practice on the scope of decision-making for financial portfolio managers under the German Banking Act or the German Investment Firm Act. This is because, according to previous administrative practice for financial portfolio managers, clients of a financial portfolio manager can certainly require co-decision powers, provided these are limited to veto rights. In the case of a veto right, the financial portfolio manager can make a legally binding investment decision as long as and insofar as the client does not expressly exercise their right to object. In contrast, the consent right alone is regarded as detrimental to the financial portfolio manager’s scope for decision-making. This is because, in the case of a consent right, an investment decision could only be effectively implemented after the client has expressly consented.
The version of the new guidance notice currently being consulted could, incomprehensibly, also lead to restrictions on the involvement of an investor committee (Limited Partner Advisory Committee, LPAC), insofar as this committee decides on the contractual permissibility of the investment in cases of conflicts of interest. As a body for deciding on conflicts of interest and thus as a legally appropriate means for an AIFM to meet its own requirements for conflict of interest management, such a restriction would be neither expedient nor legally justified.
In our opinion, it should not be lost sight of in the discussion that, irrespective of the investors’ co-decision powers, it is ultimately always the AIFM itself that would make a corresponding investment decision. For example, if investors give their consent, the AIFM can adopt and implement the investment decision, but is not obliged to do so.
However, BaFin at least correctly recognizes that veto rights or consent rights by investors in investor committees are permissible if they relate to the abstract determination of the investment strategy within the framework of the contractually agreed investment guidelines, e.g., in connection with the question of whether or not a special fund should be able to invest in certain types of securities, regions, sectors, etc. The associated influence on the strategic orientation of the investment fund leaves the final decision-making authority with the AIFM or the portfolio manager.
‘Investment ideas’ or ‘recommendations’ from investors
In BaFin’s opinion, non-binding investment ideas or recommendations from investors are permissible, as the ultimate decision-making authority of the AIFM or the portfolio manager is not called into question here either. This seems reasonable to us.
However, BaFin makes an important restriction by requiring that such an idea or recommendation must not in fact constitute an indirect instruction. The presence of an indirect instruction should be evaluated based on the specific circumstances of each case:
BaFin requires that the AIFM and the portfolio manager document any form of influence exerted by investors on investment decisions for the account of investment funds from the publication of the guidance notice on the BaFin website. This is intended to ensure traceability for BaFin and the auditor. At the same time, it is intended to create awareness of the issue and increase the inhibition threshold for unauthorized transactions.
Irrespective of their admissibility under supervisory law, instructions, the exercise of veto rights and consent rights and the submission of investment recommendations or investment ideas by investors must therefore be documented and investment committee meetings must be minuted..
These obligations must also be taken into account in the event of outsourcing.
BaFin expects the supervised investors, e.g. banks and insurance companies, to cooperate accordingly in the documentation by the AIFM with regard to the scope of influence.
Market participants still have until March 31, 2025, to submit their comments on the consultation. We are happy to receive and process any feedback. Individual statements made by BaFin in the guidance notice may still change as a result of the comments.
Nevertheless, market participants are well advised to identify the potentially problematic constellations of investor influence now. In future, greater attention should also be paid to the appropriate level of documentation, both in their own processes and in outsourced portfolio management processes.