On 4 April 2017, the Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht – BaFin) published its interpretation decision (the “Decision”) regarding information to be provided in the sales prospectus. BaFin’s decision addresses the latest discussion about “closet indexing”; which means that  the management of an investment fund is described as “active” in the sales prospectus although the portfolio held by the investment fund is closely related to the composition of a reference index and therefore rather appears to be a passive investment strategy. BaFin based its Decision on a survey conducted by the European Securities and Markets Authority (ESMA). As a result of the ESMA survey, BaFin found it inappropriate to intervene in the fee structure of the investment fund but requires enhanced transparency via additional information in the sales prospectus.

Based on section 165 (8) of the German capital investment code (Kapitalanlagegesetzbuch – KAGB) BaFin requires German equity funds which are committed by their investment terms and conditions to invest at least 51% of its assets in shares or otherwise depict the fund’s investment strategy with a focal point on shares, to disclose the following information in their sales prospectus:

• Information on whether the investment fund pursues an active investment management strategy – which is carried out via a discretionary share selection – or whether an index is to be replicated within the management framework of the investment fund.
• A description of the investment strategy whereby the capital management company must provide a justified explanation as to whether, and to what extent, the discretionary selection of shares made by it is carried out within the framework of active management. If a reference index is used, it is to be specified, and it must also explain whether and how methods and processes can lead to the over or undershoot of the reference index. In the event that no reference index is used for the management of the investment fund, the renouncement of this is must be explained. This can also be done in conjunction with the description of the discretionary share selection.
• Insofar as the management of the investment fund has, according to internal risk management guidelines, to adhere to a prospective strived maximum deviation from the reference index, the investor is to be informed on this in the sales prospectus. The designation and, where applicable, explanation of a concrete current set of figures must be made in the sales prospectus or on the website of the capital management company. If the designation is made on the website, the relevant internet reference is to be indicated to the investor in the sales prospectus.
• A suitable graphical comparison of the performance of the investment fund and the corresponding reference index, if any, must be included in the sales prospectus. The presentation is to be carried out as a chart or curve diagram for a period of the past ten years. If the investment fund has been in existence for less than 10 years, the respective shorter period should be chosen. If the investment fund has existed for less than one full year, it should be disclosed in the sales prospectus that sufficient data for providing investors with useful information on past performance of the investment fund are still lacking.

The above information must be included in the sales prospectus by 31 December 2017 at the latest.