ARUG II has brought about key changes for life insurers and other companies under BaFin’s supervision that invest in the capital market. These key changes, which entered into force on 1 January 2020, concern the definitions of the terms “institutional investor” and “asset manager” as well as new transparency and disclosure requirements in the German Stock Corporation Act (Aktiengesetz – AktG).
Transparency requirements under section 134b of the AktG
Under section 134b (1) of the AktG, institutional investors (see info box “Institutional investors”) and asset managers (see info box “Asset managers”) must publicly disclose an engagement policy for their investee companies which covers the following areas in particular: the exercise of shareholder rights, the monitoring of relevant matters concerning the investee companies, the conduct of dialogues with other governing bodies and stakeholders of the company, cooperation with other shareholders and the management of conflicts of interest. Institutional investors and asset managers must prepare a report every year on their engagement policy in which they provide a general description of voting behaviour, an explanation of the most significant votes and the use of the services of proxy advisors. They are also required to disclose how votes have been cast “unless the vote is insignificant due to the subject matter of the vote or to the size of the holding in the company” (section 134b (3) of the AktG). If institutional investors and asset managers fail to satisfy one or more of these statutory requirements, in full or in part, they must explain why in accordance with the “comply or explain” principle.
Under section 134a (1) sentence 1 no. 1 of the AktG, institutional investors are defined as:
a) companies authorised to carry on life insurance business within the meaning of section 8 (1) in conjunction with annex 1 nos. 19 to 24 of the German Insurance Supervision Act (Versicherungsaufsichtsgesetz – VAG),
b) companies authorised to carry on reinsurance business within the meaning of section 8 (1) and (4) of the VAG provided that these activities relate to life insurance requirements,
c) institutions for occupational retirement provision (IORPs) as referred to in sections 232 to 244d of the VAG.
Under section 134a (1) sentence 1 no. 2 of the AktG, asset managers are defined as:
a) financial services institutions authorised to manage portfolios within the meaning of section 1 (1a) sentence 2 no. 3 of the German Banking Act (Kreditwesengesetz – KWG),
b) asset management companies with an authorisation to conduct business in accordance with section 20 (1) of the German Investment Code (Kapitalanlagegesetzbuch – KAGB).
The institutional investors and asset managers that are subject to the new requirements must make the information on the engagement policy, the implementation report and the report on voting behaviour publicly available on their websites for at least three years from the date of publication and update the information at least once a year.
Disclosure requirements under section 134c of the AktG
The transparency requirements under section 134b of the AktG have been supplemented by the new disclosure requirements set out in section 134c of the AktG. These require institutional investors to disclose in the Federal Gazette or on their website how the main elements of their investment strategy are consistent with the profile and the duration of their liabilities and how they contribute to the medium- to long-term performance of their assets.
If an asset manager is acting on behalf of an institutional investor, they must report to the investor on how their investment strategy and the implementation thereof complies with the agreement between the asset manager and the institutional investor “and how it contributes to the medium- to long-term performance of the assets” (section 134c (4) sentence 1 of the AktG). The asset manager may also publish the report on its website instead of sending it to the institutional investor. The most important information to be provided – including portfolio turnover – is listed at the end of section 134c of the AktG. Unlike section 134b of the AktG, the public disclosure of this information is mandatory under section 134c of the AktG.
Cases in which the reporting and disclosure requirements overlap with existing requirements under supervisory law
The requirements under sections 134b and 134c of the AktG overlap in some areas with the reporting and disclosure requirements under supervisory law. Where this is the case, the new requirements are deemed to have been already fulfilled on the basis of the existing requirements under supervisory law. However, it is important to always check whether any data that has been gathered also needs to be published.
Insurance and pension fund supervision
Insurance undertakings are not currently subject to any supervisory requirements comparable with the provisions under section 134b of the AktG. However, the disclosure requirements under section 134c (1) and (2) of the AktG are covered, at least to some extent, by the Solvency and Financial Condition Report (SFCR) disclosures and the Regular Supervisory Reporting (RSR) requirements. Section 40 (2) sentence 4 of the VAG offers insurance undertakings the possibility to fulfil their disclosure requirements under section 134c (1) and (2) of the AktG by including the relevant information in their SFCR.
In the case of institutions for occupational retirement provision (IORPs), the provisions under sections 134b and 134c of the AktG can overlap with the Statement of Investment Policy Principles (SIPP) under Article 30 of Directive (EU) 2016/2341 (IORP II Directive), which have been transposed into national law in sections 234i and 239 (2) of the VAG.
IORPs may include information in their SIPP about their engagement policy or explain why they have not published such information in accordance with section 134b of the AktG. They also have the option to include a note in the SIPP to refer to a document containing this information. If the information provided in the SIPP is sufficiently detailed, the requirements under section 134c (1) and (2) of the AktG can be deemed fulfilled.
Even before ARUG II entered into force, asset management companies were already obliged, under section 3 (2) of the German Regulation on the Rules of Conduct and Organisational Rules Pursuant to the Investment Code (Kapitalanlage-Verhaltens- und -Organisationsverordnung – KAVerOV) and Article 37 of Delegated Regulation (EU) 231/2013 (AIFMD Level 2 Regulation), to develop strategies for the exercise of voting rights and to publicly disclose them on their websites or make them available to investors upon request. These strategies serve various purposes, such as preventing or managing any conflicts of interest and ensuring that asset management companies comply with the investment objectives and investment policy of the fund in question when exercising voting rights. The new requirements in the AktG are similar to the requirements under investment law.
It is essential, both under the new provisions in section 134b (1) of the AktG and under investment law requirements, that the asset management company acts in the interests of the fund and its investors. On the other hand, there are no requirements under supervisory law that are comparable with section 134c of the AktG.
Moreover, section 134c of the AktG may overlap with the disclosure requirements under the EU regulation on sustainability-related disclosures in the financial services sector (Regulation (EU) 2019/2088). Therefore, companies that include information on how they address sustainability risks in investment decisions in their reporting may have already fulfilled the new requirements.
No extension to BaFin’s supervisory duties
ARUG II does not specify any duties or competencies that are directly assigned to BaFin. BaFin is not obliged to actively monitor compliance with sections 134b and 134c of the AktG. Repeated or persistent violations of the AktG may indicate that the institution in question does not have a proper business organisation in place. Indications of this may be evident in discussions with auditors or in audit reports, for instance. BaFin analyses any relevant information in the course of its supervisory practice and takes measures where necessary. Furthermore, BaFin always uses violations of statutory requirements as an occasion to examine whether it has correctly assessed the risk ensuing from the company’s activities.
Investigation of administrative offences
The Federal Office of Justice (Bundesamt für Justiz – BfJ) is responsible for investigating administrative offences as a result of violations of the information and disclosure requirements under sections 134b et seq. of the AktG. Section 39 of the German Act on Breaches of Administrative Regulations (Gesetz über Ordnungswidrigkeiten – OWiG) defines which administrative authority has jurisdiction in the rare event that an administrative offence relates to both violations of sections 134b and 134c of the AktG and violations of the disclosure requirements under supervisory law.
Development of a stewardship code
In the field of research/academia, there are calls for a stewardship code to be developed (see info box “Stewardship Code”). However, BaFin sees no need to become involved in this as a supervisory authority.
A stewardship code sets out principles that institutional investors follow in their asset management activities and which they encourage the companies in their portfolios to also follow. The code is originally from the United Kingdom. There is no legal definition for the code either in Germany or the European Union.
ARUG II and the VAG pursue different objectives. BaFin’s focus under the VAG lies on protecting the interests of policyholders and therefore differs from that of the AktG. But no matter how desirable it would be to promote and improve the governance structures of the companies that supervised institutions invest in – this is not a primary goal for BaFin’s supervision. Interpreting the provisions of the AktG to this effect would overstretch BaFin’s legal mandate. The same holds true for the area of investment supervision.
The Federal Office of Justice (Bundesamt für Justiz – BfJ) has been given responsibility for monitoring compliance with the transparency and disclosure requirements under sections 134b and 134c of the AktG. BaFin for its part does not actively monitor compliance with the provisions of the AktG but still takes account of violations of the requirements as part of its regular supervisory activities.
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