Amendments to the KAGB pursuant to the Fund Risk Limitation Act

On March 5, 2026, the Bundestag passed the Fund Risk Limitation Act (hereinafter “FRiG”) in the version amended by the Finance Committee. The FRiG will enter into force in its essential parts on April 16, 2026.

The FRiG serves to implement various EU directives and, in particular, makes far-reaching amendments to the German Capital Investment Code (hereinafter “KAGB”). A particular focus of the FRiG in this context is the introduction of requirements for lending by AIFs and the mandatory selection of, in principle, two “liquidity management instruments” for open-ended investment funds.

However, beyond merely implementing new EU requirements, the FRiG also introduces additional amendments to the KAGB that are, at least in part, welcome from the perspective of the investment industry. These include, in particular, the long-awaited introduction of closed-end funds in contractual form in the public fund sector – a development the industry has long advocated for – and the newly introduced dilatory defense under Section 93 (3a) of the KAGB, as amended.

Selected amendments to the KAGB resulting from the FRiG are outlined below.   

Stricter requirements for KVG managing directors; Section 23 No. 2a KAGB (as amended)

Pursuant to Section 23 No. 2a of the KAGB (as amended) a capital management company must be denied authorization if there are facts indicating that the two required managing directors are not employed on a full-time basis (i. e., at least 40 hours per week) by the respective capital management company. Furthermore, the two required KVG managing directors must in the future be resident in the European Union.

In practice, KVG managing directors have often worked for and been employed by other companies – particularly group companies – and continue to do so. This necessarily required the affected managing director to divide their working hours among these entities. Even though the issue of the availability of KVG managing directors – at least in cases of very heavy workloads – has been discussed by the Federal Financial Supervisory Authority (hereinafter “BaFin”) in its supervisory practice in the past, the mandatory requirement of full-time employment for KVG managing directors is new.

However, the legislative rationale for the FRiG leaves a small loophole regarding the full-time requirement. According to this, in corporate group structures, it may occur in practice that there is partial overlap in the identities of the managing directors. The example cited here is a situation where, for instance, two capital management companies belong to a corporate group. According to the legislative rationale for the FRiG, such a scenario may continue to be considered permissible following a review of the individual case. Outside of group-related situations, however, the legislative rationale for the FRiG does not provide for the possibility of a deviating decision on a case-by-case basis.

Whether a third or additional managing director must then also be employed on a full-time basis cannot be unequivocally determined from Section 23 No. 2a of the KAGB (as amended). In discussions with industry associations, BaFin has expressed the view that in situations where there are more than two managing directors, departments may also be managed on a part-time basis. The combined workload of all managing directors must amount to two full-time equivalents (i. e., a cumulative total of 80 hours per week).

Furthermore, according to BaFin statements, grandfathering provisions are to apply to those capital management companies that do not have two managing directors residing in the EU prior to the entry into force of the FRiG on April 16, 2026. However, should changes occur in the management after April 16, 2026, the new requirements regarding the residence of the managing directors must be observed.

Lending by AIF Capital Management Companies; Section 29a et seq. KAGB (as amended)

In particular, the newly added Section 29a KAGB (as amended) and Section 29b KAGB (as amended) serve to establish uniform regulations within the EU for AIFs and their capital management companies that grant loans. In this context, the focus is, among other things, on maximum credit limits for certain borrowers such as financial firms (see Section 29a (3) KAGB, as amended) and the prohibition on granting loans to certain market participants, such as the AIF’s depositary (see Section 29a (7) KAGB, as amended).

However, certain provisions of the KAGB regarding the regulation of lending apply only to the category of “lending AIFs” newly introduced into the KAGB. “Lending AIFs” are, pursuant to Section 1(19) No. 24d of the KAGB (as amended), AIFs whose investment strategy consists primarily of granting loans or whose granted loans reach a nominal value amounting to at least 50 % of the AIF’s net asset value. Not every AIF that grants loans is therefore automatically a “lending AIF” within the meaning of the KAGB.

For example, the provision of Section 30 (3a) of the KAGB, as amended, applies only to lending AIFs. Accordingly, an AIF capital management company must ensure that the lending AIFs it manages are closed-end funds. Notwithstanding this, a lending AIF may be an open-ended fund provided that the AIF capital management company managing it can demonstrate to BaFin that the AIF’s liquidity risk management system is consistent with the investment strategy and redemption policy of the AIF capital management company.

Furthermore, with regard to open-ended lending AIFs, a leverage cap of 175 % applies pursuant to Section 29a (5) of the KAGB (as amended), and for closed-end AIFs, a cap of 300 % of the ratio of the AIF’s risk – calculated using the so-called “commitment method” – to its net asset value. 

Pursuant to Section 29b (1) of the KAGB , as amended, capital management companies must make withholdings if a loan granted by an AIF is subsequently transferred to third parties. Accordingly, an AIF capital management company must ensure that an AIF it manages withholds 5 % of the nominal value of the relevant loans. This percentage is retained until maturity for loans with a term of up to eight years. For other loans, the aforementioned percentage must be retained for at least eight years. Exceptions to this are regulated in Section 29b (2) of the KAGB (as amended), such as in connection with the dissolution of a fund.

The granting of loans by AIFs to consumers within the meaning of Section 13 of the German Civil Code (BGB) is generally prohibited by the newly added Section 16a of the KAGB (as amended), as was already the case under the provision of Section 285 (2) No. 2 of the KAGB (as previously in force), which was repealed by the FRiG.

In this context, the FRiG also expands the definition of collective asset management in Section 1 (19) No. 24 of the KAGB to include the granting of loans by AIFs and the management of securitization special-purpose entities.

For the application of the provisions of Section 29a of the KAGB (as amended) and Section 30 (3a) of the KAGB (as amended) to existing funds that grant loans, the transitional provision of Section 367 of the KAGB (as amended) must be observed. For example, in the case of lending AIFs that were established before April 15, 2024, and that do not raise additional capital after April 15, 2024, it is assumed that they comply with the maximum leverage limits pursuant to Section 29a (5) of the KAGB, as amended.

Selection of Liquidity Management Instruments for Open-Ended Investment Funds; Section 30a KAGB (as amended)

The FRiG provides for the insertion of Section 30a KAGB (as amended) into the KAGB, which concerns the selection of liquidity management instruments (hereinafter also “LMTs”) for the management of open-ended investment funds. Accordingly, a capital management company must select at least two suitable LMTs from a specified list for each open-ended investment fund it manages. Notwithstanding this, in the case of money market funds, it is possible to select only one suitable LMT; see Section 30a (3) of the KAGB, as amended. 

According to the statutory definition in Section 1 (19) No. 25a of the KAGB (as amended), LMTs include (i) the suspension of unit issuance, subscriptions, repurchases and redemptions (ii) redemption restrictions (iii) the extension of redemption periods (iv) the redemption fee (v) swing pricing (vi) dual pricing, (vii) a dilution protection fee, (viii) distribution of assets in kind, and (ix) the spin-off of illiquid investments.

Consequently, all open-ended investment funds – including existing funds – must have at least two operational LMTs in place by April 16, 2026, and must also stipulate this in their investment terms and conditions.

Section 366 (1) of the KAGB, as amended, provides for certain exemptions regarding the necessary adjustment of the investment terms for existing funds. In this regard, for UCITS or domestic open-ended public AIFs, the application for approval of the amended investment terms may, in addition to editorial changes, include only those changes to the investment terms that are necessary to comply with the requirements of the version of the KAGB effective as of April 16, 2026. In this case, certain requirements for amending the investment terms do not apply, meaning, for example, that investors do not have to be offered the option to redeem their shares in this context.

The investment terms and the information pursuant to Section 307 (1) and (2) of the KAGB for domestic open-ended special AIFs must also be adapted to the version of the KAGB effective as of April 16, 2026, by April 16, 2026. From a thematic perspective, this will focus in particular on the possibilities and conditions for the use of the selected liquidity management instruments.

According to BaFin statements, the implementation of detailed strategies and procedures for the activation and deactivation of the selected liquidity management instruments pursuant to Section 30a (2) sentence 2 of the KAGB (as amended) implies that the management company must inform investors of such activation or deactivation (e. g., via a website).

Right of defense under Section 93 (3a) of the KAGB (as amended)

A new paragraph 3a is inserted into Section 93 of the KAGB, granting capital management companies a temporary right to refuse performance in the management of funds in contractual form. Pursuant to Section 93 (3a) of the KAGB (as amended), the capital management company in question may refuse to fulfill obligations arising from legal transactions conducted on behalf of the investors of a fund in contractual form for as long and to the extent that the capital management company cannot satisfy its obligations from the fund in contractual form. Although attempts have regularly been made to date to negotiate a corresponding right of defense for the capital management company in individual contracts, this could not be enforced in all cases in practice.

The new defense option under Section 93 (3a) of the KAGB (as amended) is structured as a so-called “dilatory defense,” which only temporarily suspends the enforcement of the claim and leaves the existence of the claim unaffected. The defense can therefore only be raised as long as the special fund’s liquidity is actually insufficient, for example, because the sale of a property has not yet been completed.

From its character as a dilatory defense, it follows in legal doctrine that this defense must be raised by the capital management company at least by implication and, for example, will not be considered ex officio by the adjudicating court in a lawsuit. If a capital management company successfully invokes the defense under Section 93 (3a) of the KAGB (as amended) in a lawsuit, the claim is dismissed only as currently unfounded and may be brought again once the defense no longer applies – i. e., once the fund in contractual form regains its solvency.

Furthermore, a payment made in ignorance of the dilatory defense under Section 93 (3a) of the KAGB (as amended) cannot be reclaimed under Section 813 of the BGB because it is not a permanent defense. Before making such a payment, a capital management company is therefore advised to actively examine whether the defense under Section 93 (3a) of the KAGB (as amended) can be raised. Once payment has been made, the capital management company is barred from seeking reimbursement on the grounds of the fund’s illiquidity.

However, under Section 93 (3a) of the KAGB (as amended), this defense has no deferral effect and no impact on the occurrence of default or on the realization of collateral that the capital management company has provided for a liability of the fund in contractual form. For example, the defense under Section 93 (3a) of the KAGB, as amended, does not prevent the accrual of default interest pursuant to Section 288 of the BGB.

According to the legislative history of the FRiG, the new provision of Section 93 (3a) of the KAGB, as amended, is intended to achieve equal treatment of creditors of funds in contractual form without legal personality with creditors of investment companies. Under current law, there is a difference in the liability of capital management companies depending on whether the funds they manage are investment companies with legal personality or funds in contractual form without legal personality. In the case of investment companies, the capital management company is not liable with its own assets, whereas in the case of funds in contractual form, under current law, the capital management company is liable with its own assets if the liabilities cannot be covered by the claim for reimbursement of expenses under Section 93 (3) of the KAGB against the special fund. In particular, this difference in the liability regime had frequently led, in the area of special AIFs, to the investment company being preferred over the fund in contractual form during fund setup.

Section 93 (3a) of the KAGB, as amended, is also intended to facilitate the financing of  funds in contractual form, as banks can thereby treat the special fund as the debtor for the purposes of the European Capital Requirements Regulation (CRR), which typically has significantly better capital adequacy than the capital management company.

Winding-up by the Capital Management Company upon termination of the management of a fund in contractual form; Section 99 (1) of the KAGB (as amended)

Under Section 99 (1) of the KAGB (previous version), capital management companies are entitled to terminate the management of a fund in contractual form by giving six months’ notice through publication in the Federal Gazette and additionally in the annual report or semi-annual report. For special funds, a shorter notice period may also be agreed upon in the investment terms and conditions. Following termination, the fund in contractual form must be liquidated by the custodian in accordance with the current legal situation.

Section 99 (1) of the KAGB is being significantly amended by the FRiG. Under the new provisions, the requirement to observe a specified notice period is eliminated. From the date of notification of termination (or, in the case of special AIFs, from the date of notification to investors), the capital management company – and no longer the depositary – will be obligated to liquidate the fund in contractual form. The capital management company’s obligation to manage the fund in contractual form does not end until the capital management company has fully liquidated the fund in contractual form. Furthermore, it is clarified that investment limits no longer need to be observed during liquidation, which is consistent with current management practice.

The above provisions apply mutatis mutandis to closed-end investment limited partnerships pursuant to Section 154 (1) sentence 5 of the KAGB.

Contract amendment mechanism pursuant to Section 163 (5) of the KAGB, as amended

A new paragraph 5 is inserted into Section 163 of the KAGB, which concerns the approval of investment terms for open-ended public investment funds. Under Section 163 (5) of the KAGB (as amended), existing contracts (such as investor agreements) between the capital management company and the investors will be automatically adjusted to reflect changes to the investment terms approved after the conclusion of the contract and which have become part of the contract, provided that such changes to the investment terms are necessary to implement new mandatory legal or regulatory requirements. This is currently likely to apply in particular to the liquidity management instruments required as of April 16, 2026. 

According to the legislative rationale, this special provision is intended to enable the unbureaucratic and legally certain adaptation of existing contracts to new statutory or regulatory requirements. If the capital management company plans other changes to its investment terms that are not necessary to comply with statutory or regulatory requirements, the general provisions of contract law regarding contract amendments apply to such changes. For such changes to become part of the contract, an amendment agreement must be concluded with the investors or an existing contract amendment clause must be utilized.

The capital management company is merely required to inform investors of the automatic contract amendment pursuant to Section 163 (5) of the KAGB (as amended), without any specific information medium or deadline being prescribed by law in this regard.

Expansion of investment opportunities from closed-end public AIFs to open-end AIFs, Section 261 (1) No. 5 and No. 6 of the KAGB (as amended) 

Section 261 (1) No. 5 and No. 6 of the previous version of the KAGB provided that closed-end public AIFs with a fund-of-funds strategy could invest in other closed-end AIFs. Investment in open-end AIFs was not permitted. From a liquidity management perspective, this was difficult to justify given the fundamental possibility of redeeming shares in open-end AIFs.

Section 261 (1) No. 5 and No. 6 of the KAGB (as amended) contain no restriction to closed-end AIFs. Closed-end public funds-of-funds may therefore also invest in open-end AIFs in the future. According to the legislative rationale for the FRiG, this is intended to increase the competitiveness of German closed-end public AIFs. This will not reduce the level of investor protection, as open-ended AIFs are also regulated and supervised products. We agree with this assessment.

Conclusion

From the industry’s perspective, the FRiG introduces several welcome changes to the KAGB. These include, in particular, the long-awaited introduction of closed-end funds in contractual form for the public fund sector. In particular, in conjunction with the newly introduced dilatory defense under Section 93 (3a) of the KAGB (as amended), capital management companies should assess whether they wish to consider launching funds in the form of closed-end funds in contractual form in the future.

The new automatic statutory contract amendment mechanism under Section 163 (5) of the KAGB (as amended) also simplifies the process of incorporating statutory or regulatory changes into contractual documents and is very much welcomed by the industry.

On the other hand, it cannot be denied that the FRiG will also entail additional bureaucratic burdens for the industry. For example, the requirement for at least two full-time KVG managing directors will not make recruiting staff any easier for smaller capital management companies – especially in times of a shortage of qualified managers.