KAGG

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Gesetz über Kapitalanlagegesellschaften (KAGG) (German for Investment Company Act) is a law designed to protect investors, and is the statutory basis for the German investment fund market. KAGG is criticized for not being adaptive to Modern Portfolio Management techniques and for driving much of the German mutual Fund market to Luxembourg, where the laws are less restrictive. KAGG will be phased out fully by 2007 and replaced by the Investment Modernization Act (Investmentmodernisierungsgesetz) - effective January 1, 2004.

For now, though, KAGG regulates a number of legal aspects, such as licensing requirements, the organizational structure, the possible funds operated by the investment management company, the function and purpose of custodians, permitted investments, investment restrictions, valuation, accounting, auditing and publication requirements, and the taxation of German funds. The state supervision of the rules codified in the Investment Company Act is exercised by the federal financial supervisory authority (BaFin), a legal compliance supervision. The supervisory authority is not allowed to intervene with the business decision of an investment management company, as long as these are in conformity with the existing laws and regulations. Since its implementation in 1957, the KAGG was (de lege ferenda) subject to number of important amendments which in general extended the investment opportunities for investment funds. As a precursor to the Investment Modernization Act, an amendment -- the 4th financial market improvement act in 2002 -- was enacted to allow real estate funds to invest internationally.

A special feature of the governance structure is that an investment management company requires a supervisory board regardless of its legal form. By law, the duty of the supervisory board is expresis verbis to ensure the interests of the fund’s unit holders. In addition, a German investment management company must appoint one depositary bank for each of its investment funds. The depositary bank must be licensed to act as a depositary bank and is subject to state supervision. In performing its functions, the depositary bank must act independently of the investment management company. The selection, as well as all subsequent changes of the depositary bank, must be approved by the BAFin. An important function of such a custodian is to safekeep the assets of the investment fund. The assets of the investment fund are kept in segregated bank or security accounts at the depositary bank. Dispositions in the fund assets by the investment management company are subject to the approval by the depositary bank. Therefore, the involvement of the depositary bank prevents the investment management company from using the asset of the investment funds for its own account. Other important functions of the depositary bank is to determine the net asset value and to act as a transfer agent regarding the issue and redemption of fund units.

[edit] Other German laws governing investment funds

In addition to the Investment Company Act, investment funds are also subject to a number of other laws. For example, the promotion of foreign investment funds in Germany is due to the German Foreign Investment Act ("Auslandsinvestmentgesetz"). This law was introduced in 1969 in response to the collapse of the Investors Overseas Services (IOS), where thousands of investors lost their money. According to this law, the public marketing of foreign investment funds in Germany requires a notification of the BAFin. With respect to the notification process, one must distinguish between foreign funds situated in EU member states or states which are party of the European Economic Area, which set up the Directive 85/611/EEC (UCITS-funds), and other foreign funds (non UCITS-funds). While UCITS funds are subject to a simplified notification procedure, all other foreign funds publicly marketed in Germany must comply with more rigorous requirements for permission to sell investment funds in Germany. UCITS-funds must invest in bonds and/or equities that are quoted on the stock exchange. Hence, within the different mutual fund types of the KAGG, only security based funds are currently consistent with the UCITS-directive.