BaFin greases the chain of investment intermediaries – marketing of funds possible with 34f license

The Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, “BaFin”) has confirmed the applicability of the exemption under section 2 para. 6 (1) n°8 of the German Banking Act (Kreditwesengesetz, “KWG”) to investment intermediaries within the meaning of section 34f of the German Commercial and Industrial Regulation Code (Gewerbeordnung, “GewO”) that transmit customer orders via a chain of investment intermediaries. The “small” license within the meaning of section 34f GewO suffices.

Background

Investment brokerage (Anlagevermittlung) is a financial service requiring a license under KWG. With respect to the marketing and distribution of fund units and fund shares, the “small” license defined in section 34f of the GewO suffices in terms of the exemption set out in section 2 para. 6 (1) n°8 of the KWG, provided that

• the entity provides exclusively investment advice and investment brokerage between customers (i.e. investors) and specific – exhaustively listed – undertakings (e.g. investment companies, banks, etc.),
• such financial services relate to specific – exhaustively listed – financial instruments (e.g. fund units or fund shares), and
• the entity obtains neither ownership nor possession of customer funds or shares.

Investment brokerage is defined as brokering of business involving the purchase and sale of financial instruments (cf. section 1 para. 1a (1) n°1, KWG). Providing brokering means, inter alia, transmission of the customer’s order as a messenger to the person whom the investor actually wants to do a deal with. By transmitting the customer’s order within a chain of investment intermediaries, each link in the chain falls within the scope of investment brokerage.

So far, the published BaFin guidance comprises the typical three-person relationship

Pursuant to the written BaFin guidance published in its notice regarding the exemption of investment intermediaries dated November 2017, the activity of investment brokerage “is rendered by transmitting the customer’s order related to the purchase or sale of financial instruments as a messenger. The exemption applies where such messenger activity is carried out between the customer (investor) and an undertaking within section 2 para. 6 (1) n°8 (i), KWG” (cf. point 1).

In this guidance, BaFin describes the basic idea thus: transmission takes place directly between the investor and the investment company. This is the typical three-person relationship comprising the investor, the intermediary and the investment company. The guidance is silent on whether multi-person distribution structures (i.e. chains of investment intermediaries) fall within the scope of the exemption.

Therefore, it is disputed amongst scholars whether the exemption covers situations where the intermediary is not the direct link between investor and investment company but transfers the customer’s order via another intermediary to the investment company. In practice, such chains of investment intermediaries are very common.

New statement by BaFin: the exemption also covers a multi-person relationship

In its statement dated February 16, 2018 (reference: GZ: EVG 1-QF 21000-2017/0188), BaFin confirmed the applicability of the exemption to multi-person relationships. In these cases, transmission between the investor and the investment company is via a second, third (etc.) intermediary:

“Section 2 para. 6 (1) n°8, KWG does not only cover the direct receipt and transmission of customer orders relating to the purchase or sale of finance instruments within the meaning of section 2 para. 6 (1) n 8, KWG, but also all service providers transmitting such a customer order via a chain of intermediaries to an undertaking – listed in section 2 para. 6 (1) n 8 lit. a)-e), KWG – the investor wants to do the deal with. As the activity of each intermediary within such a chain qualifies as investment brokerage within the meaning of section 2 para. 6 (1) n°8, KWG, each intermediary requires a license for its activity pursuant to section 34f, GewO.”

BaFin’s approach is consistent with the purpose of the law. The ratio legis of the exemption is not focused on how many distribution entities are involved between investor and investment company. Pursuant to the legislator’s intention, fund units and fund shares are extensively standardized and, in any case, regulated products. The mere transmission of a purchase order or sales order does not involve particular risks. Therefore, the transmitting entity is not carrying out a regulated activity within the scope of the KWG (cf. Bundestag-Drucksachen 13/7142, p. 71; 16/4028, p. 91).

Conclusion

The BaFin statement supplements the guidance notice regarding the exemption of investment intermediaries dated November 2017. We welcome the clarification made with regard to chains of investment intermediaries. The statement provides legal certainty for common market distribution structures.

This article is part of the Update Banking & Finance, which you can subscribe to here.