The liability risks of the sales department in this area already differ according to the customer (investor-oriented advice), the capital investment (object-oriented advice) or the risk involved (advice after object examination and risk analysis). In addition, a plethora of potential pitfalls to be aware of.
The latest rulings of the Federal Court of Justice (BGH) force the disclosure of commission or fee to the customer: This concerns closed investments from 15 percent internal commission or 16 percent as the sum of internal and external commission. What does it mean if the investor was not informed about this and other points at all or in a way that cannot be proven?
Then the investor can separate later to loads of the mediator and/or advisor from its participation (back completion) and require besides escaped investment interest (payment of damages). Basically, the investor can thus shift his investment risk to the intermediary or advisor. However, he will only make use of this option if the plant does not run as expected.
For the intermediary or advisor, the argument of the lack of information about negative press coverage can then be added. This controversial sin of omission can also lead to reversal: It is perceived as unfair that no one really knows which media will later be used as “required reading” by the courts.
In principle, the intermediary does not owe the customer advice, but only information. For example, about risks, which the customer can find in the investment prospectus. However, it is always a prerequisite that the customer has had sufficient time to study the prospectus.
From the point of view of the courts, one to two weeks are necessary between the delivery of the prospectus and the signing of the application: Who does not consider this time span, risks that the customer can separate later to the debit of the mediator from the investment.
However: in practice, the intermediary is the exception.
This is because the very act of providing advice from the customer’s point of view makes the intermediary a consultant in status – quite automatically and without any special contractual agreement. This applies accordingly if the intermediary appears to the outside world as an “economic advisor, financial planner, consultant, etc.”:
Already the company name, the telephone book entry, the website or the stationery can lead to the far stricter duties of the adviser. In terms of content, it should be noted that the advisor not only owes information, but also an evaluation of the investment object (e.g.: Does the object suit the customer). He may only make a recommendation after he has comprehensively checked the product features on the basis of the prospectus (which is usually all he has at his disposal) and compared them with the individual circumstances and wishes of the investor.
Experience shows that many intermediaries, unaware of this, end up in the much more onerous role of investment adviser in terms of liability. Dragged into court, this can lead to the destruction of the agent’s existence if the plaintiff is successful. Therefore, intermediaries are advised to work with a liability-limiting corporation such as a limited liability company.
However, this alone is not enough. In addition, there must be a suitable distribution of the roles of manager and shareholder as well as a functioning liability management system.
However, this protective function already fails if the advisor relies on “personal trust” and appears to the investor as a specialist or expert. Then there is a transition via the “personal trust” to unlimited personal liability.
Liability for pecuniary loss
In order to protect private assets, the investment adviser should examine the possibilities of “asset protection” for himself in good time. In addition to organisational precautions (including an appropriate alignment of ownership), the company will first and foremost have to take out a sufficiently high level of financial loss liability insurance (VSH) for managing directors and employees. The amount of liability should be based on the maximum possible extent of liability.
Usually, VSH cover is only available for closed-end investments if the closed-end fund investments are sold with a prospectus that has been examined by an auditor without any objections (IdW Guidelines S 4).
In it, the auditor (WP) confirms that the prospectus contains true, complete and clear statements about the investment up to the audit date. All major contracts have been sighted. A review of the creditworthiness of the initiators and guarantors was carried out in such a way that an investor can form an accurate picture of the capital investment on the basis of the information in the prospectus.
The auditor reviewing the prospectus, who is himself covered by a VSH policy, is liable for his statements. The only question is the VSH amount, which, given the maximum limit of four million euros, is unlikely to be sufficient for an investment offer with a total investment volume of more than two million euros. If the prospectus and/or the prospectus opinion are incorrect, the investor will point to the intermediary or advisor.
The courts require that plausibility be tested. The auditor’s report must be available to the investor (and of course also to the intermediary or advisor) as “his copy” before the declaration of accession is concluded. He must have taken note of the contents in good time. Otherwise, it has no effect either for the investor or for the adviser or intermediary.
This also raises the question of whether the VSH of the investment adviser is liable if an auditor’s opinion was prepared in good time for the start of sales, but this was not delivered to the investor or was not delivered in good time before the investor joined the company.
A popular tool used by investment intermediaries are the so-called “liability release declarations” which the initiator issues to his sales partners. If the sales partner has fulfilled certain conditions, the initiator wants to step into the liability.
But what happens if the fund shares develop so massively that this leads to the insolvency or bankruptcy of the initiator and the fund? Then these indemnity declarations are completely worthless. Cases such as Falk, GEW, Phoenix or Securenta/-Göttinger Group have shown this in recent years. In this case, the advisor must fulfil his main duties, which the Federal Court of Justice and case law describe as checking the plausibility of the prospectus.
Because of these primary duties, every investment advisor must work with comprehensive knowledge in the legal, tax and economic areas. Of course, the advisor may limit its liability through specific client agreements. However, this must be legally effective.
Thus, all aspects of risk management up to and including the waiver of advice must be put to the test. It would be too late to start the examination only in the case of liability. It must never be overlooked that numerous lawyers, professors, auditors in the foreground or background of sales have helped with product sales with “favorable opinions and advertising statements”.
The rule with such “expert statements”: There is no adequate VSH coverage for it. In economic matters, the advisor is left to his own devices despite the liquidity and earnings forecasts presented in the prospectus. A particularly inglorious role is often played by the software programs provided for individual calculations, which rarely calculate correctly and are all based on more or less uncertain future values.
According to case law, the following also belong to the catalogue of obligations when selling closed investments: information about the total loss risk and information about the lack of fungibility (at most a narrow secondary market for liquidation before expiry).
by Dr. Johannes Fiala and Dipl-Kfm. Edmund J. Ranosch
by courtesy of
www.performance-online.de (published in Performance, issue 01+02/2008, pages 92-93)
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About the author
Dr. Johannes Fiala has been working for more than 25 years as a lawyer and attorney with his own law firm in Munich. He is intensively involved in real estate, financial law, tax and insurance law. The numerous stages of his professional career enable him to provide his clients with comprehensive advice and to act as a lawyer in the event of disputes.
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